Chapter10part2

Chapter10part2 - Chapter 10 Chapter Part II Overhead Rates...

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Unformatted text preview: Chapter 10 Chapter Part II Overhead Rates and Overhead Analysis Analysis Recall that overhead costs are assigned to products and services using a predetermined overhead rate (POHR): Assigned Overhead = POHR × Standard Activity POHR = Overhead from the flexible budget for the denominator level of activity Denominator level of activity Overhead Rates and Overhead Overhead Analysis Analysis The predetermined overhead rate can be broken down into fixed and variable components. The variable component is useful for preparing and analyzing variable overhead variances. The fixed component is useful for preparing and analyzing fixed overhead variances. Normal versus Standard Cost Systems Systems In a normal cost system, overhead is applied to work in process based on the actual number of hours worked in the period. In a standard cost system, overhead is applied to work in process based on the standard hours allowed for the output of the period. Fixed Overhead Variances Actual Fixed Overhead Fixed Overhead Fixed Overhead Incurred Budget DH × FR Applied SH × FR Budget Variance Volume Variance FR = Standard Fixed Overhead Rate SH = Standard Hours Allowed DH = Denominator Hours Volume Variance – A Closer Look Volume Volume Variance Results when standard hours allowed for actual output differs from the denominator activity. Unfavorable when standard hours < denominator hours Favorable when standard hours > denominator hours Fixed Overhead Variances Cost $600 Favorable Volume Variance { $550 { Favorable Budget Variance 3,200 machine hours × $3.00 fixed overhead rate $9,600 applied fixed OH $9,000 budgeted fixed OH $8,450 actual fixed OH ad rhe cts u ve o od ed o pr Fix d t lie p ap 3,000 Hours Expected Activity Activity 3,200 Standard Hours Overhead Variances and Underor Overapplied Overhead Cost or In a standard cost system: Unfavorable variances are equivalent to underapplied overhead. Favorable variances are equivalent to overapplied overhead. The sum of the overhead variances equals the under- or overapplied overhead cost for a period. Theoretical vs. Practical Theoretical Capacity Capacity Theoretical capacity is the volume of capacity if all available production time is used and no waste occurs. (i.e.. operations conducted 24 hours per day, 7 days per week, 365 days per year, with no downtime) Practical capacity represents what could be produced with operations at theoretical capacity less unavoidable downtime. Further Analysis of Materials Variances: Mix and Yield Variances: When the production process requires the input of more than one material, the material quantity variance (MQV) can be further broken down into mix variance and yield variance. Mix and Yield Variances Mix Actual Quantity × Standard Price Actual Quantity @ Std. Mix (M) × Standard Price Mix Variance Standard Quantity × Standard Price Yield Variance Material Quantity Variance SP(AQ - M) AQ = Actual Quantity SP = Standard Price SP(M - SQ) M = AQ @ Std. Mix SQ = Standard Quantity Example of Mix and Yield Variances Variances One unit of finished goods requires the following input mix: 2 kgs of A with a standard price of $1.50/kg 3 kgs of B with a standard price of $2.50/kg The standard mix is thus 2A:3B During the period, 150 units of finished goods were produced using 350 kgs of A and 450 kgs of B. 35 Mix and Yield Variances Mix Mix Variance: SP(AQ ­ M) Material A: $1.50 x [350 – 2/5 (350 + 450)] = $45 U Material B: $2.50 x [450 – 3/5 (350 + 450)] = $75 F Yield Variance: SP(M ­ SQ) Material A: $1.50 x [2/5 (350 + 450) – 150(2)] = $30 U Material B: $2.50 x [3/5 (350 + 450) – 150 (3)] = $75 U Material Quantity Variance: SP(AQ ­ SQ) Material A: $1.50 x [350 – 150(2)] = $75 U Material B: $2.50 x [450 – 150 (3)] = $­0­ U Material Mix and Yield Variances Variances 80 60 40 20 Mix Yield Quantity 0 -20 -40 -60 -80 A B Appendix 10B Appendix Journal Entries to Record Journal Variances Variances We will use information form the Glacier Peak Outfitters example earlier in the chapter to illustrate journal entries for standard cost variances. Recall the following: Material Material AQ × AP = $1,029 AQ × AP = $1,029 AQ × SP = $1,050 AQ × SP = $1,050 SQ × SP = $1,000 SQ × SP = $1,000 MPV = $21 F MPV = $21 F MQV = $50 U MQV = $50 U Labour Labour AH × AR = $26,250 AH × AR = $26,250 AH × SR = $25,000 AH × SR = $25,000 SH × SR = $24,000 SH × SR = $24,000 LRV = $1,250 U LRV = $1,250 U LEV = $1,000 U LEV = $1,000 U Now let’s prepare the entries to record the labour and material variances. Appendix 10A Journal Entries to Record Journal Variances Variances GENERAL JOURNAL Date Description Raw Materials Post. Ref. Page 4 Debit Credit 1,050 Materials Price Variance 21 Accounts Payable 1,029 To record the purchase of material Work in Process Materials Quantity Variance Raw materials To record the use of material 1,000 50 1,050 Appendix 10A Journal Entries to Record Journal Variances Variances GENERAL JOURNAL Date Description Work in Process Post. Ref. Page 4 Debit Credit 24,000 Labour Rate Variance 1,250 Labour Efficiency variance 1,000 W ages Payable 26,250 To record direct labour Variable manufacturing overhead variances are usually not recorded in the accounts separately, but are determined as part of the general analysis of overhead that is covered in the next chapter. Cost Flows in a Standard Cost System System Inventories are recorded at standard cost. Inventories are recorded at standard cost. Variances are recorded as follows: Variances are recorded as follows: Favorable variances are credits, representing Favorable variances are credits, representing savings in production costs. savings in production costs. Unfavorable variances are debits, representing Unfavorable variances are debits, representing excess production costs. excess production costs. Standard cost variances are usually closed to cost of Standard cost variances are usually closed to cost of goods sold. goods sold. Favorable variances decrease cost of goods sold. Favorable variances decrease cost of goods sold. Unfavorable variances increase cost of goods sold. Unfavorable variances increase cost of goods sold. ...
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This note was uploaded on 12/31/2011 for the course ACCT 441 taught by Professor Johnvermeer during the Spring '08 term at Humber.

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