LEARNING OBJECTIVE: • Compute the variable manufacturing overhead

rate and efficiency variances.• Explain how direct materials standard and direct

labor standards are set.• Compute the direct materials price and quantity

variances and explain their significance.• Compute the direct labor rate and efficiency

variance and explain their significance.

Using Standard Cost-Variable Manufacturing Overhead VariancesBy: G.E ZAFRANATENEO-MBA REGIS PROGRAM 2011-12

Using Standard Costing:• Standard costing means assigning the expected,

budgeted costs to the goods manufactured, the goods in inventory, and the goods sold. In other words, the amounts assigned are the costs that should occur when manufacturing products.

• The actual costs are then compared to the standard costs and any differences are reported as variances. Since the standard costs are often tied to the company's annual profit plan, a variance is also an indicator that the actual profit will be different from the planned amount.

-

-

Following Definition:• Standard Cost- detailed listing of the standard

amounts of inputs and their cost that are required to produce a unit of a specific product

• Standard Cost per Unit- standard quantity allowed of an input per unit of a specific product, multiplied by the standard price of the input

• Standard hours allowed- the time that should been taken to complete the period’s output. It is computed by multiplying the actual number of units produced by the standard hours per unit.

-

• Standard hour per unit-the amount of direct labor time that should be required to complete a single unit of product .

• Standard price per unit- the price that should be paid for an output.

• Standard rate per hour- the labor rate that should be incurred per hour of labor time.

• Variable overhead efficiency variance- the difference between the actual level of activity (direct labor-hours, machine-hours, or some other base) and the standard activity allowed, multiplied by the variable part of the predetermined overhead rate.

• Variable overhead variance-the difference between the actual variable overhead cost incurred during a period and the standard cost that should have been incurred base on the actual activity of the period.

-

Compute the variable manufacturing overhead spending and efficiency variances.

INPUTS (1)Std. Qty or Hr

(2)Std Price or

RateStd. Cost

1 x 2

Direct Materials 1kg 60.25 60.25

Direct Labor P/kg 1kg 17.18 17.18

Vqriqble Mfg Overhead (VMO) .54 10 5.4

TOTAL STANDARD COST/UNIT 82.83

KENPO FOODS has the following direct variable manufacturing overhead labor standard for its Siomai

production.

.9 standard hour per kg siomai at P82.43 per hour

Last month, employees actually worked 240 hours to make 266.40kg siomai. Actual variable manufacturing

overhead for the month was P19,783.20

VMO=82.43 per kg (8.hrs x 30 days)

VMO=19,783.20

Variable Manufacturing Overhead Variances Example

EXHIBIT 11-7Variance Analysis-Variance Manufacturing Overhead

Actual hours Actual Hours Standard Hours Of Input, of Input, Allowed for Actual Output At the Actual Rate at the Standard Rate at the Standard Rate (AH x AR) (AH x SR) (SH x SR) 240 hrs x P9 per hr 240 hrs x P10 per hr 239.76 hrs* x 10 per hr = P2160 =P2400 = P2397.6

Rate variance, P240 F Efficiency variance, P2.4 F

Total variance, P237.6 F

_________*266.40 kg x .90 hr per kg = 239.76F = Favorable ; U = Unfavorable

Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate

240 hours 240 hours 239.76 hours × × × P83 per hour P82.43 per hour P82.43 per hour

= P19, 920 = P19,783.20 = P19, 763.42

Spending varianceP136.8 unfavorable

Efficiency varianceP19.78 favorable

P19,920 240 hours = P83 per hour

Variable Manufacturing Overhead Variances Summary

Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate

240 hours 240 hours 239.76hours × × × P83 per hour $4.00 per hour $4.00 per hour

= P19,920 = P96,000 = P94,000

Spending varianceP136.8 unfavorable

Efficiency varianceP19.78 favorable

.90 hour per kg siomai 266.40 kg of siomai = 239.76

hours

Variable Manufacturing Overhead Variances Summary

Variable Manufacturing Overhead Variances: Using Factored Equations

Variable manufacturing overhead spending varianceVMSV = AH (AR - SR) = 240 (P83 per hour – P82.43 per hour) = 240 hours (P.57 per hour) = P136.8 unfavorable

Variable manufacturing overhead efficiency varianceVMEV = SR (AH - SH) = P82.43 per hour (240 hours – 239.76 hours) = P82.43 per hour (.24 hours) = P19.78 unfavorable

Variance Analysis andManagement by Exception

How do I knowwhich variances to

investigate?

Larger variances, in dollar amount or as a

percentage of the standard, are

investigated first.

A Statistical Control Chart

1 2 3 4 5 6 7 8 9

Variance Measurements

Favorable Limit

Unfavorable Limit

• • •• •

••

••

Warning signals for investigation

Desired Value

Exhibit9-9

Advantages of Standard Costs

Management byexception

Advantages

Promotes economy and efficiency

Simplifiedbookkeeping

Enhances responsibility

accounting

PotentialProblems

Emphasis onnegative may

impact morale.

Emphasizing standardsmay exclude other

important objectives.

Favorablevariances may

be misinterpreted.

Continuous improvement maybe more important

than meeting standards.

Standard costreports may

not be timely.

Invalid assumptionsabout the relationship

between laborcost and output.

Potential Problems with Standard Costs

-