ACCT 2020 1st Edition Lecture 17 Outline of Last Lecture I Flexible Budgets II Variances III Application of Concepts IV Flexible Budgets V Examples Outline of Current Lecture I Computing Variances II Breaking Down Spending Variances III Fixed Manufacturing Overhead Variances Current Lecture I Computing Variances Many companies use a standard cost system COVERED IN THE APENDIX Determine in advance what the standard cost should be for any product they make Apply costs to inventory to determine costs Instead of tracking direct hours or materials companies just use the standards to apply the cost How do we come up for the standard costs 1 Standard Cost of Material per unit of finished good FG These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best Used as a supplement to your own notes not as a substitute Standard quantity SQ per unit of FG x Standard Price SP per unit of Raw Material o Ex Feet of wood per table x Cost of wood per foot 2 Standard Cost of Material per unit of FG Standard Hours SH of Direct Labor per FG x Standard Rate SR per hour 3 Variable Manufacturing Overhead M OH per unit of FG SH or DLH or MHrs x Variable portion of the Predetermined OH Rate POHR o Whatever the allocation base is used in the POHR that is multiplied by the variable portion of the M OH o POHR Total Est Vari M OH Total Est Fixed M OH Total Estimated Activity in allocation base Flexible budget Vs Actual Budgets Spending Variances o Might have a spending variance because we used more material or maybe because raw material was different o We are going to split these variances into the changes due to QUANITY and PRICE II Breaking Down Spending Variances Quantity in the previous equations we are just taking the amount of the resource and multiplying it by the standard price of the resource With the quantity variances we want to tell the difference caused by efficiency These variances tell how well a resource has been used Did we use more direct materials than we should have 1 Material Quantity Variance Actual Quantity Used x SP Standard Quantity x SP Same as SP Actual Quantity Standard Quantity Negative Favorable Variance Positive Unfavorable Variance 2 Labor Efficiency Variance AH x SR SH x SR SR AH SH Negative Favorable Variance Positive Unfavorable Variance 3 Variable MOH Efficiency Variance AH or DLH or MHrs x SR SH or DLH or MHrs x SR Same as SR AH SH Negative Favorable Variance Positive Unfavorable Variance Price or rate variances how well acquisition prices of resources were controlled 1 Material Price Variance Actual Quantity purchases x Actual Price AQ x SP Same as AQ AP SP 2 Labor Rate Variance Actual hours x Actual Rate AH x SR Same as AH AR SR 3 Variable Manufacturing Overhead Rate Variance AH x AR AH x SR Same as AH AR SR AH x AR given usually as actual variable Manufacturing overhead III Fixed Manufacturing Overhead Variances 1 Budget Variance Actual fixed M OH Budgeted Fixed M OH Positive Unfavorable 2 Volume Variance Budgeted Fixed M OH Fixed M OH applied to Work in Progress Simply take the fixed component of the Fixed M OH rate fixed OH hour and multiply by the denominator hours MHrs DLH etc standard hours allowed for actual output Positive Outcome Unfavorable If we actually worked less Direct Labor than we could have worked more hours Volume variance helps us understand if we fully utilized that fixed overhead If you end up with denominator hours being greater than the hours should have worked than it will be unfavorable