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31 Variance Analysis Tools for Enterprise Performance Evaluation 4.7 Journal Entries for Direct Labor Variances
If Blue Rail desires to capture labor variances in their general ledger accounting system, the entry
might look something like this:
8-31-XX 183,600 Labor Efficiency Variance * Work in Process Inventory 41,400 Labor Rate Variance 50,000 Wages Payable 175,000 To increase work in process for the standard
direct labor costs, and record the related
efficiency and rate variances Once again, debits reflect unfavorable variances, and vice versa. Such variance amounts are
generally reported as decreases (unfavorable) or increases (favorable) in income, with the standard
cost going to the Work in Process Inventory account. The following diagram shows the impact
within the general ledger accounts. 4.8 Factory Overhead Variances
Remember that manufacturing costs consist of direct material, direct labor, and factory overhead.
You have just seen how variances are computed for direct material and direct labor. Similar
variance analysis should be performed to evaluate spending and utilization for factory overhead.
But, overhead variances are a bit more challenging to calculate and evaluate. As a result the
techniques for factory overhead evaluation vary considerably from company to company (and
textbook to textbook). If you progress to advanced managerial accounting courses, you will likely
learn about a variety of alternative techniques. For now, let’s focus on one comprehensive approach. Download free ebooks at bookboon.com
32 Variance Analysis Tools for Enterprise Performance Evaluation 4.9 Variable Versus Fixed Overhead Please click the advert To begin, recall that overhead has both variable and fixed components (unlike direct labor and direct
material that are exclusively variable in nature). The variable components may consist of items like
indirect material, indirect labor, and factory supplies. Fixed factory overhead might include rent,
depreciation, insurance, maintenance, and so forth. Because variable and fixed costs behave in a
completely different fashion, it stands to reason that proper evaluation of variances between
expected and actual overhead costs must take into account the intrinsic cost behavior. As a result,
variance analysis for overhead is split between variances related to variable overhead and variances
related to fixed overhead. With us you can
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33 Variance Analysis Tools for Enterprise Performance Evaluation 4.10 Variances Relating to Variable Factory Overhead
The cost behavior for variable factory overhead is not unlike direct material and direct labor, and the
variance analysis is quite similar. The goal will be to account for the total “actual” variable
overhead by applying: (1) the “standard” amount to work in process, and (2) the “difference” to
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