I. Computing VariancesII. Breaking Down Spending VariancesIII. Fixed Manufacturing Overhead VariancesACCT 2020 1st Edition Lecture 17Outline of Last Lecture I. Flexible BudgetsII. VariancesIII. Application of ConceptsIV. Flexible BudgetsV. ExamplesOutline of Current LectureI. Computing VariancesII. Breaking Down Spending VariancesIII. Fixed Manufacturing Overhead VariancesCurrent LectureI. 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 Materialo Ex. Feet of wood per table x Cost of wood per foot2. Standard Cost of Material per unit of FG- Standard Hours (SH) of Direct Labor per FG x Standard Rate (SR) per hour3. 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.OHTotal Estimated Activity in allocation base- Flexible budget Vs. Actual Budgets  Spending Varianceso 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 Variance2. Labor Efficiency Variance- = (AH x SR) – (SH x SR) = SR (AH – SH) - Negative # = Favorable Variance / Positive # = Unfavorable Variance3. 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 overheadIII. Fixed Manufacturing Overhead Variances1. Budget Variance- Actual fixed M.OH – Budgeted Fixed M.OH- Positive = Unfavorable2. 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