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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 Spring '08
 JohnVermeer
 Cost Accounting, Variance, Trigraph

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