8-1

Flexible Budgets, Standard

Costs, and
Variance Analysis
Chapter 8

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

Copyright2016byMcGrawHillEducation.Allrightsreserved.
 8-2

Variance Analysis Cycle

 8-3

Learning Objective 8-1

Prepare a flexible
budget.
 8-4

Characteristics of Flexible
Budgets
Hmm! Comparing
static planning budgets
Planning with actual costs
budgets is like comparing
apples and oranges.
are prepared
for
a single,
Performance
evaluation is difficult
planned
when actual
level activity
of activity.
differs from the
planned level of
activity.
 8-5

Characteristics of Flexible
Budgets
May be prepared for any activity
level in the relevant range.

Show costs that should have been

incurred at the actual level of
activity, enabling apples to apples
cost comparisons.

Help managers control costs.

Improve performance evaluation.

Lets look at Larrys Lawn Service.
 8-6

Deficiencies of the Static Planning

Budget

Larrys
Larrys Lawn
Lawn Service
Service provides
provides lawn
lawn care
care inin aa planned
planned
community
community wherewhere allall lawns
lawns are
are approximately
approximately the the same
same size.
size.
At
At the
the end
end ofof May,
May, Larry
Larry prepared
prepared his his June
June budget
budget based
based on on
mowing
mowing 500 500 lawns.
lawns. Since
Since all
all of
of the
the lawns
lawns are
are similar
similar in
in size,
size,
Larry
Larry felt
felt that
that the
the number
number of of lawns
lawns mowed
mowed in in aa month
month would
would
be
be the
the best
best way
way toto measure
measure overall
overall activity
activity for
for his
his business.
business.

Larrys Budget
 8-7

Deficiencies of the Static Planning

Budget
Larrys Planning Budget

Mixed
Costs
Variable
Costs
Fixed
Costs
 8-8

Deficiencies of the Static Planning

Budget
Larrys Actual Results
 8-9

Deficiencies of the Static Planning

Budget
Larrys Actual Results Compared with the Planning Budget
 8-10

Deficiencies of the Static Planning

Budget
Larrys Actual Results Compared with the Planning Budget
F = Favorable variance that occurs when actual
revenue is greater than budgeted revenue.

U = Unfavorable variance that occurs when

actual costs are greater than budgeted costs.

F = Favorable variance that occurs when

actual costs are less than budgeted costs.
 8-11

Deficiencies of the Static Planning

Budget
Larrys Actual Results Compared with the Planning Budget

Since these variances are unfavorable, has

Larry done a poor job controlling costs?

Since these variances are favorable, has

Larry done a good job controlling costs?
 8-12

Deficiencies of the Static Planning

Budget

I dont think I Actual activity is above

can answer the planned activity.
questions using
a static budget. So, shouldnt the variable
costs be higher if actual
activity is higher?
 8-13

Deficiencies of the Static Planning

Budget
The
The relevant
relevant question
question is
is .. .. ..
How
How much
much of
of the
the cost
cost variances
variances
are
are due
due to
to higher
higher activity
activity and
and how
how
much
much are
are due
due to
to cost
cost control?
control?
To
To answer
answer the
the question,
question,
we
we must
must
the
the budget
budget toto the
the
actual
actual level
level of
of activity.
activity.
 8-14

How a Flexible Budget

Works
To a budget, we need to know
that:
Total variable costs change
in direct proportion to
b le
changes in activity. aria
V
Total fixed costs remain Fixed
unchanged within the
relevant range.
 8-15

How a Flexible Budget

Works

Lets prepare a
budget
for Larrys Lawn
Service.
 8-16

Preparing a Flexible Budget

Larrys Flexible Budget
 8-17

Quick Check
What
What should
should thethe total
total wages
wages and
and salaries
salaries cost
cost
be
be in
in aa flexible
flexible budget
budget forfor 600
600 lawns?
lawns?
a.
a. $18,000.
$18,000.
b.
b. $20,000.
$20,000.
c.
c. $23,000.
$23,000.
d.
d. $25,000.
$25,000.
 8-18

Quick Check
What
What should
should the be
be the
the total
the total
total wages
total
wages wages
and
andand
wages salaries
and salaries
salaries cost
salaries
cost
cost
be
cost
be in
ininaaaflexible
in flexible
aflexible budget
flexible budget
budget
budget forfor
for 600
for 600
600 lawns?
600 lawns?
lawns?
lawns?
a.
a. $18,000.
$18,000
$18,000
$18,000.
b.
b. $20,000.
$20,000.
c.
c. $23,000.
$23,000.
d.
d. $25,000.
$25,000.

Total wages and salaries cost

= $5,000 + ($30 per lawn 600 lawns)
$5,000 + $18,000 = $23,000
 8-19

Learning Objective 8-2

Prepare a report
showing revenue
and spending
variances.
 8-20

Revenue and Spending

Variances Flexible budget
Actual revenue
revenue

The difference is a revenue

variance.

Actual cost Flexible budget cost

The difference is a spending

variance.
 8-21

Computing Revenue and

Spending Variances

Lets use budgeting

concepts to compute revenue and
spending variances for Larrys Lawn
Service.
 8-22

Revenue and Spending

Variances
Larrys Flexible Budget Compared with the Actual Results
Revenue Variance
$1,750 favorable
 8-23

Revenue and Spending

Variances
Larrys Flexible Budget Compared with the Actual Results
Spending Variances
$1,950 unfavorable total
 8-24

Learning Objective 8-3

Prepare a flexible
budget with more
than one cost driver.
 8-25

Flexible Budgets with Multiple Cost

Drivers

More than one cost

driver may be needed to
adequately explain all of
the costs in an organization.

The cost formulas used

to prepare a flexible
budget can be adjusted
to recognize multiple
cost drivers.
 8-26

Flexible Budgets with Multiple Cost

Drivers

Because
Because thethe time
time required
required for
for edging
edging and
and trimming
trimming isis
different
different for
for different
different lawns,
lawns, Larry
Larry decided
decided toto add
add an
an
additional
additional cost
cost driver
driver (hours)
(hours) for
for the
the additional
additional time
time
required
required for
for edging
edging and
and trimming.
trimming.

Larrys New Budget

 8-27

Flexible Budgets with Multiple Cost

Drivers
Larrys Budget Based on More than One Cost Driver
 8-28

Flexible
Budget

Machine-hours (q) 26,000

Utilities ($20,600 + $0.10q) $23,200

Maintenance ($40,000 + $1.60q) 81,600

Supplies ($0.30q) 7,800

Indirect labor ($130,000 + $0.70q) 148,200

 8-29

Actual Flexible Spending

Results Budget Variances

Machine-hours (q) 26,000 26,000

Utilities ($20,600 + $0.10q) $24,200 $23,200 $1,000 U

Maintenance ($40,000 + 78,100 81,600 3,500 F

$1.60q)

Supplies ($0.30q) 8,400 7,800 600 U

149,600 148,200 1,400 U

Indirect labor ($130,000 +
$0.70q)

Depreciation ($70,000) 71,500 70,000 1,500 U

Total $331,80 $330,80 $1,000 U

 8-30

Standard Costs
Standards are benchmarks or norms for
measuring performance. In managerial accounting,
two types of standards are commonly used.

Quantity standards Price standards

specify how much of an specify how much
input should be used to should be paid for
make a product or each unit of the
provide a service. input.

Examples: Firestone, Sears, McDonalds, hospitals,

construction, and manufacturing companies.
 8-31

Setting Direct Materials

Standards
Standard Quantity Standard Price
per Unit per Unit

Final, delivered
Summarized in cost of materials,
a Bill of Materials net of discounts
 8-32

Setting Direct Labor

Standards
Standard Hours Standard Rate
per Unit per Hour

Use time and Often a single

motion studies for rate is used that reflects
each labor operation the mix of wages earned
 8-33

Setting Variable Manufacturing

Overhead Standards
Quantity Price
Standard Standard

The quantity is The rate is the

the activity in the variable portion of the
allocation base for predetermined overhead
predetermined overhead. rate.
 8-34

The Standard Cost Card

A standard cost card for one unit
of product might look like this:
A B AxB
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. $ 4.00 per lb. $ 12.00
Direct labor 2.5 hours 14.00 per hour 35.00
Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost $ 54.50
 8-35

Using Standards in Flexible Budgets

Standard costs per unit for direct materials,

direct labor, and variable manufacturing
overhead can be used to compute activity
and spending variances.

Spending variances become

more useful by breaking them
down into price and quantity
variances.
 8-36

A General Model for Variance

Analysis

Variance Analysis

Price Variance Quantity Variance

Difference between Difference between

actual quantity and
actual price and standard quantity
standard price
 8-37

Price and Quantity

Standards
Price and quantity standards are
determined separately for two reasons:

1. Different managers are usually responsible for buying

and using inputs. For example, the purchasing
manager is responsible for raw material purchase
prices and the production manager is responsible for
the quantity of raw material used.

2. The buying and using activities occur at different times.

Raw material purchases may be held in inventory for a
period of time before being used in production.
 8-38

A General Model for Variance

Analysis

Variance Analysis

Price Variance Quantity Variance

Materials price variance Materials quantity variance

Labor rate variance Labor efficiency variance
VOH rate variance VOH efficiency variance
 8-39

A General Model for Variance

Analysis

(1) (2) (3)

Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ AP) (AQ SP) (SQ SP)

Price Variance Quantity Variance

(2) (1) (3) (2)

Spending Variance
(3) (1)
 8-40

A General Model for Variance

Analysis
Actual quantity is the amount of direct materials, direct
labor, and variable manufacturing overhead actually used.
(The quantities pertain to input items.)
(1) (2) (3)
Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ AP) (AQ SP) (SQ SP)

Price Variance Quantity Variance

(2) (1) (3) (2)

Spending Variance
(3) (1)
 8-41

A General Model for Variance

Analysis
Standard quantity is the standard quantity allowed
for the actual output of the period.

(1) (2) (3)

Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ AP) (AQ SP) (SQ SP)

Price Variance Quantity Variance

(2) (1) (3) (2)

Spending Variance
(3) (1)
 8-42

A General Model for Variance

Analysis
Actual price is the amount actually
paid for the input used.

(1) (2) (3)

Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ AP) (AQ SP) (SQ SP)

Price Variance Quantity Variance

(2) (1) (3) (2)

Spending Variance
(3) (1)
 8-43

A General Model for Variance

Analysis
Standard price is the amount that should
have been paid for the input used.

(1) (2) (3)

Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ AP) (AQ SP) (SQ SP)

Price Variance Quantity Variance

(2) (1) (3) (2)

Spending Variance
(3) (1)
 8-44

Learning Objective 8-4

Compute the direct

materials price and
quantity variances
and explain their
significance.
 8-45

Materials Variances An
Example
Glacier Peak Outfitters has the
following direct materials standard
for the fiberfill in its mountain parka.
0.1 kg. of fiberfill per parka at $5.00
per kg.
Last month 210 kgs. of fiberfill were
purchased and used to make 2,000
parkas.
The materials cost a total of $1,029.
 8-46

Materials Variances An
Example
Glacier Peak Outfitters has the
following direct materials standard
for the fiberfill in its mountain parka.
0.1 kg. of fiberfill per parka(SQ=
0.1x2000) at $5.00 per kg (SP).
Last month 210 kgs (AQ). of fiberfill
were purchased and used to make
2,000 parkas.
The materials cost a total of
$1,029(APxAQ)
 8-47

Materials Variances
Summary
Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.

$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable
 8-48

Materials Variances
Summary
Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
2,000 parkas
0.1 kg per parka
$4.90 per kg. = 200 per
$5.00 kgskg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable
 8-49

Materials Variances
Summary
Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
$1,029 210 kgs
$4.90 per kg. $5.00 per
= $4.90 per kg
kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable
 8-50

Materials Variances:
Using the Factored Equations
Materials price variance
MPV = (AQ AP) (AQ SP)
= AQ(AP SP)
= 210 kgs ($4.90/kg $5.00/kg)
= 210 kgs ( $0.10/kg) = $21 F
Materials quantity variance
MQV = (AQ SP) (SQ SP)
= SP(AQ SQ)
= $5.00/kg (210 kgs (0.1 kg/parka 2,000
parkas))
= $5.00/kg (210 kgs 200 kgs)
= $5.00/kg (10 kgs) = $50 U
 8-51

Responsibility for Materials

Variances
Materials Quantity Variance Materials Price Variance

Production Manager Purchasing Manager

The standard price is used to compute the quantity variance

so that the production manager is not held responsible for
the purchasing managers performance.
 8-52

Responsibility for Materials

Variances
Your poor scheduling
I am not responsible for sometimes requires me to
this unfavorable materials rush order materials at a
quantity variance. higher price, causing
You purchased cheap unfavorable price variances.
material, so my people
had to use more of it.
Purchasing Manager
Production Manager
 8-53

Quick Check

Hanson Inc. has the following direct

materials standard to manufacture one
Zippy:
1.5 pounds per Zippy(SQ=1.5x1000) at
$4.00 per pound(AP)
Last week, 1,700 pounds (AQ) of
materials were purchased and used to
make 1,000 Zippies. The materials cost
a total of $6,630 (APxAQ).
 8-54

Quick Check

How many pounds of materials

should Hanson have used to make
1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds.
 8-55

Quick Check

How many pounds of materials

should Hanson have used to make
1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
The standard quantity is:
1,000 1.5 pounds per Zippy.
c. 1,200 pounds.
d. 1,000 pounds.
 8-56

Quick Check

Hansons materials quantity

variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
 8-57

Quick Check

Hansons materials quantity

variance (MQV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
d. $800 favorable.
MQV = $800 unfavorable
 8-58

Quick Check

Hansons materials price variance

(MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
 8-59

Quick Check

Hansons materials price variance

(MPV)
for the week was:
a. $170 unfavorable.
b. $170 favorable.
MPV = AQ(AP - SP)
c. $800 unfavorable.
MPV = 1,700 lbs. ($3.90 - 4.00)
MPV = $170 Favorable
d. $800 favorable.
 8-60

Quick Check

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price

1,700 lbs. 1,700 lbs. 1,500 lbs.

$3.90 per lb. $4.00 per lb. $4.00 per lb.
= $6,630 = $ 6,800 = $6,000

Price variance Quantity variance

$170 favorable $800 unfavorable
 8-61

Quick Check
Recall that the standard quantity for 1,000 Zippies
is 1,000 1.5 pounds per Zippy = 1,500 pounds.

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price

1,700 lbs. 1,700 lbs. 1,500 lbs.

$3.90 per lb. $4.00 per lb. $4.00 per lb.
= $6,630 = $ 6,800 = $6,000

Price variance Quantity variance

$170 favorable $800 unfavorable
 8-62

Learning Objective 8-5

Compute the direct

labor rate and
efficiency variances
and explain
their significance.
 8-63

Labor Variances An
Example
Glacier Peak Outfitters has the
following direct labor standard for its
mountain parka.
1.2 standard hours per parka at
$10.00 per hour
Last month, employees actually
worked 2,500 hours at a total labor
cost of $26,250 to make 2,000 parkas.
 8-64

Labor Variances An
Example
Glacier Peak Outfitters has the
following direct labor standard for its
mountain parka.
1.2 standard hours per parka at
$10.00 (SR) per hour
(SH=1.2x2000)
Last month, employees actually
worked 2,500 (AH)hours at a total
labor cost of $26,250(AHxAR) to make
 8-65

Labor Variances Summary

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours

$10.50 per hour $10.00 per hour $10.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavorable $1,000 unfavorable
 8-66

Labor Variances Summary

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
1.2 hours per parka
2,000
$10.50 per hour parkas = 2,400
$10.00 per hours
hour $10.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavorable $1,000 unfavorable
 8-67

Labor Variances Summary

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
2,500 hours
$26,250
$10.50 per hour $10.00 per hour
= $10.50 per hour $10.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavorable $1,000 unfavorable
 8-68

Labor Variances: Using the

Factored Equations
Labor rate variance
LRV = (AH AR) (AH SR)
= AH (AR SR)
= 2,500 hours ($10.50 per hour $10.00 per
hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavorable
Labor efficiency variance
LEV = (AH SR) (SH SR)
= SR (AH SH)
= $10.00 per hour (2,500 hours 2,400 hours)
= $10.00 per hour (100 hours)
 8-69

Responsibility for Labor

Variances
Production managers are Mix of skill levels
usually held accountable assigned to work tasks.
for labor variances
because they can
Level of employee
influence the:
motivation.

Quality of production
supervision.

Quality of training
provided to employees.
Production Manager
 8-70

Responsibility for Labor

Variances
I think it took more time
to process the
I am not responsible for materials because the
the unfavorable labor Maintenance
efficiency variance! Department has poorly
maintained your
You purchased cheap
equipment.
material, so it took more
time to process it.
 8-71

Quick Check

Hanson Inc. has the following direct labor

standard to manufacture one Zippy:
1.5 standard hours per Zippy at
$12.00 per direct labor hour
Last week, 1,550 direct labor hours were
worked at a total labor cost of $18,910
to make 1,000 Zippies.
 8-72

Quick Check

Hanson Inc. has the following direct labor

standard to manufacture one Zippy:
1.5 standard hours (SH= 1.5x1000) per Zippy at
$12.00 per direct labor hour(SR)
Last week, 1,550 direct labor hours (AH) were
worked at a total labor cost of $18,910(AHxAR)
to make 1,000 Zippies.
 8-73

Quick Check

Hansons labor rate variance (LRV) for the

week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
 8-74

Quick Check

Hansons labor rate variance (LRV) for the

week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
LRV = AH(AR - SR)
d. $300 favorable.LRV = 1,550 hrs($12.20 - $12.00)
LRV = $310 unfavorable
 8-75

Quick Check

Hansons labor efficiency variance (LEV)

for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
 8-76

Quick Check

Hansons labor efficiency variance (LEV)

for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
 8-77

Quick Check

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours

$12.20 per hour $12.00 per hour $12.00 per hour
= $18,910 = $18,600 = $18,000

Rate variance Efficiency variance

$310 unfavorable $600 unfavorable
 8-78

Learning Objective 8-6

Compute the
variable
manufacturing
overhead rate and
efficiency variances
and explain their
significance.
Variable Manufacturing
8-79

Overhead Variances An
Example
Glacier Peak Outfitters has the following
direct variable manufacturing overhead
labor standard for its mountain parka.
1.2 standard hours per parka at
$4.00 per hour
Last month, employees actually worked
2,500 hours to make 2,000 parkas.
Actual variable manufacturing overhead
for the month was $10,500.
 Variable Manufacturing
8-80

Overhead Variances An
Example
Glacier Peak Outfitters has the following
direct variable manufacturing overhead
labor standard for its mountain parka.
1.2 standard hours (SH= 1.2x2000)
per parka at $4.00 per hour (SR)
Last month, employees actually worked
2,500 (AH)hours to make 2,000 parkas.
Actual variable manufacturing overhead
for the month was $10,500 (ARx AH).
 Variable Manufacturing
8-81

Overhead Variances
Summary
Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours

$4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600

Rate variance Efficiency variance

$500 unfavorable $400 unfavorable
 Variable Manufacturing
8-82

Overhead Variances
Summary
Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours

1.2 hours per parka 2,000
$4.20 per hour parkas$4.00 per hour
= 2,400 hours $4.00 per hour
= $10,500 = $10,000 = $9,600

Rate variance Efficiency variance

$500 unfavorable $400 unfavorable
 Variable Manufacturing
8-83

Overhead Variances
Summary
Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
$10,500 2,500 hours
$4.20 per hour $4.00 perper
= $4.20 hour
hour $4.00 per hour
= $10,500 = $10,000 = $9,600

Rate variance Efficiency variance

$500 unfavorable $400 unfavorable
 8-84

Variable Manufacturing Overhead

Variances: Using Factored Equations
Variable manufacturing overhead rate variance
VMRV = (AH AR) (AH SR)
= AH (AR SR)
= 2,500 hours ($4.20 per hour $4.00 per hour)
= 2,500 hours ($0.20 per hour)
= $500 unfavorable
Variable manufacturing overhead efficiency
variance
VMEV = (AH SR) (SH SR)
= SR (AH SH)
= $4.00 per hour (2,500 hours 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavorable
 8-85

Quick Check

Hanson Inc. has the following variable

manufacturing overhead standard to
manufacture one Zippy:
1.5 standard hours per Zippy at
$3.00 per direct labor hour
Last week, 1,550 hours were worked to make
1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.
 8-86

Quick Check

Hanson Inc. has the following variable

manufacturing overhead standard to
manufacture one Zippy:
1.5 standard hours (SH= 1.5x1000)per Zippy at
$3.00 per direct labor hour (SR)
Last week, 1,550 hours (AH) were worked to make
1,000 Zippies, and $5,115 (AHxAR)was spent for
variable manufacturing overhead.
 8-87

Quick Check

Hansons rate variance (VMRV) for variable

manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
 8-88

Quick Check

Hansons rate variance (VMRV) for variable

manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.VMRV = AH(AR - SR)
VMRV = 1,550 hrs($3.30 - $3.00)
d. $300 favorable. VMRV = $465 unfavorable
 8-89

Quick Check

Hansons efficiency variance (VMEV) for

variable manufacturing overhead for the week
was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
 8-90

Quick Check

Hansons efficiency variance (VMEV) for

variable manufacturing overhead for the week
was:
a. $435 unfavorable.
b. $435 favorable.
1,000 units 1.5 hrs per unit
c. $150 unfavorable.
d. $150 favorable.
VMEV = SR(AH - SH)
VMEV = $3.00(1,550 hrs - 1,500 hrs)
VMEV = $150 unfavorable
 8-91

Quick Check

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours

$3.30 per hour $3.00 per hour $3.00 per hour
= $5,115 = $4,650 = $4,500

Rate variance Efficiency variance

$465 unfavorable $150 unfavorable
 8-92

Materials VariancesAn Important

Subtlety
The quantity variance is computed
only on the quantity used in
production.
The price variance is computed on the
entire quantity purchased.
 8-93

Materials VariancesAn Important

Subtlety

Glacier Peak Outfitters has the

following direct materials standard for
the fiberfill in its mountain parka.
0.1 kg. of fiberfill per parka at
$5.00 per kg.
Last month 210 kgs. of fiberfill were
purchased at a cost of $1,029. Glacier
used 200 kgs. to make 2,000 parkas.
 8-94

Materials VariancesAn Important

Subtlety

Glacier Peak Outfitters has the

following direct materials standard for
the fiberfill in its mountain parka.
0.1 kg (SQ=0.1x2000). of fiberfill
per parka at $5.00 per kg(SP).
Last month 210 kgs (AQ). of fiberfill
were purchased at a cost of
$1,029(APxAQ). Glacier used 200 kgs.
(AQ)to make 2,000 parkas.
 8-95

Materials VariancesAn Important

Subtlety
Materials Quantity Variance
Actual Quantity Actual Quantity Actual Quantity
Purchased Purchased Used Standard Quantity

Actual Price Standard Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs. 200 kgs.

$4.90 per kg. $5.00 per kg. . $5.00 per kg. $5.00 per
kg.
= $1,029 = $1,050 = $1,000 = $1,000

Price variance Quantity variance

$21 favorable $0
 8-96

Materials VariancesAn Important

Subtlety
Materials Price Variance
Actual Quantity Actual Quantity Actual Quantity
Purchased Purchased Used Standard Quantity

Actual Price Standard Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs. 200 kgs.

$4.90 per kg. $5.00 per kg. . $5.00 per kg. $5.00 per
kg.
= $1,029 = $1,050 = $1,000 = $1,000

Price variance Quantity variance

$21 favorable $0
 8-97

8-4;8-5; 8-6
8-19A
8-20A