Chap16-Standard Costing FOH

Slide
16
Standard Costing: 16-1
Factory Overhead
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

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16
Standard Costs for 16-2
Factory Overhead
Variable Fixed
Overhead Overhead
Energy costs Factory managers’

Indirect materials salaries
Indirect labor Plant and equipment
Equipment repair depreciation
and maintenance Plant security guards
Insurance and property
taxes for factory
building and equipment
Slide
16
Standard Costs for 16-3
Factory Overhead
We will use a
general model
similar to labor
and material to
calculate overhead
variances.

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16
A General Model for Variable 16-4
Overhead Variance Analysis
Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual OH Rate Standard OH Rate Standard OH Rate
Spending Efficiency
Variance Variance
The total variance is the flexible budget variance.

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16

× × ×
Spending Efficiency
Variance Variance
Standard Overhead rate is the amount that
should have been paid for the resources
acquired.

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16

× × ×
Spending Efficiency
Variance Variance
Standard quantity is the quantity
allowed for the actual good output.

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16

× × ×
Spending Efficiency
Variance Variance
AQ(AR
Materials price- SR)
variance SR(AQ
Materials - SQ)
quantity variance
Labor rate variance Labor efficiency variance
AQ =Variable
Actual overhead
Quantity SR = Standard
Variable overheadRate
AR =spending
Actual Rate
variance SQ = Standard
efficiency Quantity
variance

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16
Establishing the Standard Cost 16-8
for Variable Factory Overhead

 Determine the behavioral patterns of variable
factory overhead costs.
 Select one or more appropriate activity measures
for applying variable factory overhead to cost
objects such as products, services, or divisions.
 Ascertain the intended level of operation and
estimate the total variable factory overhead and the
corresponding total amount of the selected activity
measure.
 Compute the standard variable factory overhead
rate.
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16
Determining a Standard Variable 16-9
Factory Overhead Rate
 Decide the level of operation.

 Determine total variable factory
overhead for the operation.
 Select an activity base for variable
factory overhead and determine the
amount for the operation.
 Divide the amount in 2 by the
amount in 3 to arrive at the
standard variable overhead rate.

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16-10
16 Variable Factory Overhead

Variances Example
Do you remember the

Hanson Inc. example
from Chapter 15 that
we used for material
and labor?
Let’s revisit Hanson
for factory overhead
analysis.
Slide
16-11

Variances Example Jerf
Hanson Inc. applies variable factory overhead

on the basis of direct labor hours. Hanson
has the following variable factory overhead
standard to manufacture one Jerf:
1.5 standard hours of labor per Jerf at a variable
overhead rate of $3.00 per direct labor hour.
Last month 1,550 hours were worked to make

1,000 Jerfs, and $5,115 was spent for variable
factory overhead.
Slide
16-12

Variances Question 1 Jerf
What was Hanson’s actual rate (AR)

for variable factory overhead rate
for the month?
a. $3.00 per hour.

b. $3.19 per hour.
c. $3.30 per hour.
d. $4.50 per hour.
Slide
16-13

What was Hanson’s actual rate (AR)

for variable factory overhead rate
for the month?
a. $3.00 per hour.

b. $3.19 per hour.
AR = $5,115 ÷ 1,550 hours
c. $3.30 per hour. AR = $3.30 per hour
d. $4.50 per hour.
Slide
16-14

Hanson’s spending variance (SV)

for variable factory overhead for
the month was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
Slide
16-15

Hanson’s spending variance (SV)

the month was:
b. $400 favorable.
SV = AH(AR - SR)
SV = 1,550 hrs($3.30 - $3.00)
d. $300 favorable. SV = $465 unfavorable
Slide
16-16

Hanson’s efficiency variance (EV)

the month was:
b. $435 favorable.
d. $150 favorable.
Slide
16-17


the month was:
EV = SR(AH - SH)
EV = $3.00(1,550 hrs - 1,500 hrs)
EV = $150 unfavorable
b. $435 favorable.
d. $150 favorable.
Slide
16-18


the month was:
EV = SR(AH - SH)
EV = $3.00(1,550 hrs - 1,500 hrs)
EV = $150 unfavorable
b. $435 favorable.
c. 1,000 units × 1.5 hrs per unit
$150 unfavorable.
d. $150 favorable.
Slide
16-19

Variances – Summary Jerf
Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours
× × ×
$3.30 per hour $3.00 per hour $3.00 per hour
$5,115 $4,650 $4,500
Spending variance Efficiency variance

$465 unfavorable $150 unfavorable
Slide
16-20
16 Interpretation and Implications of

Variable Factory Overhead Variances
Spending Variance Efficiency Variance
A function of the
Results from paying more selected activity
or less than expected for measure.
overhead items such as
It does not reflect
supplies and utilities. overhead control.

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16-21
16 Fixed Overhead Variances
Now let’s turn

our attention
to fixed
overhead.

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16
Determining a Standard Variable 16-22
Factory Overhead Rate

 Determine the total budgeted fixed factory
overhead for level of operation.
 Select an activity measure or measures for
applying fixed factory overhead.
 Calculate the denominator quantity for the
selected activity measure at the planned level of
operations.
 Divide the amount in Step 1 by the amount in
Step 3 to determine the standard fixed factory
overhead rate.

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16-23
16
Fixed Overhead Variances
Fixed factory overhead costs are assigned

to products and services using a standard
fixed overhead rate (FR):
Assigned Overhead = FR × Standard Quantity
Budgeted total fixed overhead costs

FR =
Denominator quantity for activity measure

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16-24
16
Fixed Overhead Variances
Actual Fixed Fixed Fixed

Overhead Overhead Overhead
Incurred Budget Applied
SH × FR
Spending Volume
Variance Variance
FR = Standard Fixed Overhead Rate

SH = Standard Hours Allowed

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16
Fixed Overhead 16-25
Variances – Example Jerf
Hanson Inc.’s budgeted fixed overhead is

$9,000 for the month. The budgeted activity
measure for the month is 3,000 units.
Actual production is 3,200 units and actual
fixed overhead is $8,450 for the month.
Compute the fixed overhead spending and
volume variances.
First, calculate
$9,000 budgetedthe fixed
fixed overhead rate.
overhead
FR = = $3.00 per unit
3,000 budgeted units
Slide
16

$8,450 $9,000
Spending variance
$550 favorable

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16

3,200 units
×
$3.00 per unit
$8,450 $9,000 $9,600
Spending variance Volume variance

$550 favorable $600 favorable

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16
Interpretation of Fixed Factory 16-28
Overhead Variances
Spending Variance Volume Variance
Results from paying more Results from the inability

or less than expected for to operate at the activity
overhead items. budgeted for the period.

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16-29
16 Fixed Factory Overhead Variances
Let’s look at a graph

showing fixed
overhead variances.
We will use
Hanson’s numbers
from the previous
example.

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16
Fixed Factory Overhead 16-30
Cost 3,200 units × $3.00 fixed overhead rate

$600
Favorable $9,600 applied fixed OH
Volume
Variance {
$9,000 budgeted fixed OH
$550
Favorable
{
$8,450 actual fixed OH
Spending
Variance
Volume
3,000 Units 3,200 Units
Budgeted Activity
Slide
16
Overhead Volume Variance

A measure of
facility use
Volume
Variance
Results when standard quantity

differ from budgeted quantity
Unfavorable when standard Favorable when standard

quantity < budgeted quantity quantity > budgeted quantity
Slide
16

A measure of
facility use
Has no significance
Volume
for cost control
Variance
Explainable by and
controllable
Results only through
when standard quantity
differ fromactivity
budgeted quantity
Unfavorable when standard Favorable when standard

quantity < budgeted quantity quantity > budgeted quantity
Slide
16-33
16 Factors Contributing to a Fixed

Overhead Spending Variance
 Ineffective budget
procedures
 Inadequate
control of costs
 Misclassification
of cost items

Slide
16-34
16 Factors Contributing to a Fixed

 Management
decisions
 Unexpected
changes in
market demand
 Unforeseen
problems in
manufacturing
operations

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16
Three-Way Analysis of Factory 16-35
Overhead Variances
Variable OH Fixed OH Variable OH Fixed OH

Spending Spending Efficiency Volume
Variance Variance Variance Variance
Total OH Variable OH Fixed OH

Spending Efficiency Volume
Variance Variance Variance

Slide
16-36
Let’s return to
Hanson Inc to
observe three-way
analysis of factory
overhead variances.

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16
Three-Way Analysis of Factory 16-37
Overhead Variances
$465 U $550 F $150 U $600 F
Total OH Variable OH Fixed OH

Spending Efficiency Volume
Variance Variance Variance
$85 F $150 U $600 F

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16
Two-Way Analysis of Factory 16-38
Overhead Variances

Total OH Fixed OH
Controllable Volume
Variance Variance

Slide
16-39
Now, let’s use the

same numbers from
Hanson Inc to
illustrate two-way
analysis of factory
overhead variances.

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16
Two-Way Analysis of Factory 16-40
Overhead Variances
$465 U $550 F $150 U $600 F
Total OH Fixed OH
Controlling Volume
Variance Variance
$65 U $600 F

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16-41
16 Disposition of Variances
1. Dispose of the variance 2. Prorate variances to:

in the period it occurs in – work in process
the income statement. – finished goods
– cost of goods sold
First, we will look at this method using Hanson Inc’s results

for the month of June with this additional data:
Sales at the standard price $100,000

Cost of goods sold at standard cost $ 60,000
Selling price variance $ 7,000 favorable
Selling and administrative expenses $ 41,000
Slide
16-42
Recall Hanson’s manufacturing cost

variances from our previous work:
Hanson Inc
Manufacturing Cost Variances
For the Month Ending June 30, 2001
From Chapter 15
Material price variance $ 170 F
Material usage variance 800 U
Labor rate variance 310 U
Labor efficiency variance 600 U
From Chapter 16
Variable factory overhead spending variance 465 U
Variable factory overhead efficiency variance 150 U
Fixed factory overhead spending variance 550 F
Fixed factory overhead volume variance 600 F
Total manufacturing cost variance $ 1,005 U

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16-43

Slide
16-44
1. Dispose of the variance 2. Prorate variances to:

in the period it occurs in – work in process
the income statement. – finished goods
– cost of goods sold
We will now look at the second

method using this additional data:
Finished goods ending inventory $ 20,000

Work-in-process ending inventory $ 20,000
Slide
16-45
The selling price variance is added or subtracted

from sales at standard in the income statement.

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16-46
16 Standard Cost in Service Industries
 Jobs with repetitive

tasks lend themselves
to efficiency measures.
 Computing
nonmanufacturing
efficiency variances
requires some
assumed relationship
between input and
output activity.
Examples Examples
Slide
16-47
16 Standard Cost in Service Industries

Slide
16
Standard costs in the New 16-48
Manufacturing Environment
New Manufacturing Environment
Total Managing
Continuous
Quality Activities,
Improvement
Control not Costs
Flexible budgets used for overhead

variance analysis are prepared using multiple
cost drivers and activity-based
costing concepts.
Slide
16
 Activity-based costing utilizes multiple
activity measures and multiple variable
overhead rates.
 For each activity center, we will have a
separate spending and efficiency variance.
 Consider the following activity-based
standards for Hanson Inc.
Continue

Slide
16
The total variable overhead rate here is the same as

calculated earlier using a single variable overhead rate of
$3.00 per direct labor hour × 1.5 direct labor hours per unit.
Slide
16-51
16 Investigation of Variances
Larger variances, in
How do I know which dollar amount or as
variances to a percentage of the
investigate? standard, are
investigated first.

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16
Investigation of Variances: 16-52
Causes and Controllability

Random variances
are variances
beyond the
control of
A prediction error is a
management,
deviation from
either technically
standard because of
or financially.
an inaccurate
estimation of the
amounts of variables
used in the standard-
setting process.

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16
Investigation of Variances: 16-53
Causes and Controllability

Measurement errors An implementation error
are incorrect numbers is a deviation from the
caused by improper or standard that occurs
inaccurate accounting during operations as a
systems or procedures. result of operators’ errors.
A modeling error is a deviation from

standard because of failure to include
one or more important relevant
variables or inclusion of wrong or
irrelevant variables in the standard-
setting process.
Slide
16-54
16 Statistical Control Charts
Control
Charts
Display variations in a Distinguish between

process and help to random variations
analyze the variations and variations that
over time. should be investigated.
Provide a warning signal when variations

are beyond a specified level.
Slide
16-55
Upper Control Limit – UCL
Desired Value – DV
Lower Control Limit – LCL
1 2 3 4 5 6 7 8 9
Observations

Slide
16-56

Warning signals for investigation
• • UCL
• • •
• • DV
• LCL
•
1 2 3 4 5 6 7 8 9
Observations

Slide
16-57
16
MIX AND YIELD VARIANCE
• Combine materials and various classes of direct labor
The goal:
1. To combine the materials in a way that produces
the desired quality in the most cost beneficial
manner.
2. To find the most effective and efficient selection
of workers to perform specific tasks.

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16-58
16
Mix Is the possible combination of materials or

labor.
Mix Is used to calculate mix and yield variances.

Standard

Slide
16-59
16
Material
price Shows the peso effect of paying prices that
variance differ from the RM standard.
Material Measures the effects substituting a nonstandard

mix mix of materials during the process.
variance
The difference between the actual total quantity
Material
of input and the standard total quanitity allowed
yield based on output.
variance
Slide
16-60
16
Material Material Material

mix
variance
+ yield
variance
= quantity
variance

Slide
16-61
16
The Fish Place is used to illustrate the computation of

price/rate, mix, and yield variance. The company recently began
packaging a frozen 1-pound Gumbo-combo that contains
processed crab, shrimp, and oysters. To some extent, one
ingredient can be substituted for the other. In addition, it is
assumed that the company uses two direct labor categories (A and
B). There is a labor rate differential between these two categories.
Exhibit 1 provides standard and actual information for the
company for December 2009.
Assume that The Fish Place used 8,020 total pounds of
ingredients to make 40 lots of Gumbo-combo. The standard
quantity to produce this quantity of Gumbo-combo is 8,000 total
pounds of ingredients.
Slide
Exhibit 1 16-62
16
Standard and actual information for December 2008
Material standards for one lot (200 1-pound packages)

Crab 60 pounds @ P7.20 per7.20
pound
per pound 432.00
Shrimp 90 pounds @ P5.50 per4.50
pound
per pound 405.00
Oysters 50 pounds @ P5.00 per5.00
pound
per pound 250.00
Total 200 pounds 1,087.00
Labor standards for one lot (200 1-pound packages)

Category A workers 20 hours 10.50 per hour 210.00
Category B workers 10 hours 14.30 per hour 143.00
Total 30 hours 353.00
Actual production and cost data for December:

Production 40 lots
Materials-
Crab Purchased and used 2,285.70 pounds at P7.50 per pound
Shrimp Purchased and used 3,649.10 pounds at P4.40 per pound
Oysters Purchased and used 2,085.20 pounds at P4.95 per pound
Total 8,020.00
Labor-
Category A workers 903 hours 10.50 per hour 9,481.50
Category B workers 387 hours 14.35 per hour 5,553.45
Total 1,290 hours 15,034.95

Slide
16-63
16
Actual Mix Actual Mix Standard Mix Standard Mix

X X X X
Actual Quantity Actual Quantity Actual Quantity Standard Quantity
x x x x
Actual price Standard price Standard price Standard price
Material Price Variance Material Yield Variance
Material Mix Variance

Slide
Exhibit 1 16-64
16
pound
per pound 432.00
pound
per pound 405.00
pound
per pound 250.00


Production 40 lots
Materials-
Crab Purchased and used 2,285.70 pounds at P7.50 per pound
Shrimp Purchased and used 3,649.10 pounds at P4.40 per pound
Oysters Purchased and used 2,085.20 pounds at P4.95 per pound
Total 8,020.00
Labor-
Total 1,290 hours 15,034.95

Slide
Exhibit 1 16-65
16
pound2,285.7 pounds/
per pound 432.00
pound
per pound 405.00
pound 8,020 pounds
per pound 250.00
=28.50%

Production 40 lots
Materials- Percentage
Crab Purchased and used 28.50% 2,286 pounds at P7.50 per pound
Shrimp Purchased and used 45.50% 3,649 pounds at P14.40 per pound
Oysters Purchased and used 26.00% 2,085 pounds at P14.85 per pound
Total 100.00% 8,020
Labor-
Total 1,290 hours 15,034.95

Slide
Exhibit 1 16-66
16 (1) Toal actual (mix,quantity, and prices)
Crab
Crab 2,285.7
60 pounds @ P7.20 per7.20
pounds
poundper pound
@ P 7.50 432.00
= 17,142.75
Shrimp
Oysters
Shrimp 3,649.1
pounds
pound
pound
per pound
per pound
@ P 4.40 = 16,056.04
405.00
250.00
Total 200 poundsOyster 2,085.2 pounds @ P 4.951,087.00
= 10,321.74
Total
Labor standards for one lot (200 1-pound packages) 43,520.53

Production 40 lots
Crab Purchased and used 28.50% 2,285.7 pounds at P7.50 per pound
Shrimp Purchased and used 45.50% 3,649.1 pounds at P4.40 per pound
Oysters Purchased and used 26.00% 2,085.2 pounds at P4.95 per pound
Total 100.00% 8,020
Labor-
Total 1,290 hours 15,034.95

Slide
16-67
16

X X X X
x x x x

Slide
16-68
16
Actual Mix
X
Actual Quantity Actual Mix Standard Mix Standard Mix
x X X X
Actual price Actual Quantity Actual Quantity Standard Quantity
= x x x
P43,520.53 Standard price Standard price Standard price

Slide
Exhibit 1 16-69
16
pound
per pound 432.00
pound
per pound 405.00
pound
per pound 250.00


(2) Actual mixProduction
and quanityt;40
standard
lots prices:
Crab
Materials-2,285.7 pounds @ P 7.20 = 16,457.04
Percentage
Crab
Shrimp Purchased
3,649.1 pounds @andP used
4.50 = 28.50%
16,420.95 2,285.7 pounds at P7.50 per pound
Oyster
Oysters 2,085.2 pounds @and
Purchased P used
5.00 = 10,426.00
26.00% 2,085.2 pounds at P4.95 per pound
Total Total 100.00%
43,303.99 8,020
Labor-
Total 1,290 hours 15,034.95

Slide
16-70
16
Actual Mix
X
Actual Quantity Actual Mix Standard Mix Standard Mix
x X X X
Actual price Actual Quantity Actual Quantity Standard Quantity
= x x x
P43,520.53 Standard price Standard price Standard price

Slide
16-71
16
Actual Mix Actual Mix

X X
Actual Quantity Actual Quantity Standard Mix Standard Mix
x x X X
Actual price Standard price Actual Quantity Standard Quantity
= = x x
P43,520.53 P43,303.99 Standard price Standard price

P216.54 U

Slide
Exhibit 1 16-72
16
pound
per pound 432.00
pound
per pound 405.00
pound
per pound 250.00


Production 40 lots
Crab Purchased and used 28.50% 2,285.7 pounds at P7.50 per pound
Oysters Purchased and used 26.00% 2,085.2 pounds at P4.95 per pound
Total 100.00% 8,020
Labor-
Total 1,290 hours 15,034.95

Slide
Exhibit 1 16-73
16
60 /200
= Crab
Shrimp
pound
per pound
pound
per pound
432.00
405.00
30% Oysters 50 pounds @ P5.00 per5.00
pound
per pound 250.00

(3) Standard mix and quanityt; standard prices:
Crab Production
30%x 8,04020 lots pounds @ P 7.20 = 17,323.20
ShrimpMaterials-
Crab45%x 8,0Purchased
20 pounds @and
P used
4.50 = Percentage
16,240.28.50%
50 2,285.7 pounds at P7.50 per pound
OysterOysters
25%x 8,0Purchased
20 pounds @and
P used
5.00 = 10,025.26.00%
Total 100.00% 8,020
Total Labor- 43,588.70
Total 1,290 hours 15,034.95

Slide
16-74
16
Actual Mix Actual Mix

X X
Actual Quantity Actual Quantity Standard Mix Standard Mix
x x X X
Actual price Standard price Actual Quantity Standard Quantity
= = x x
P43,520.53 P43,303.99 Standard price Standard price

P216.54 U

Slide
16-75
16
Actual Mix Actual Mix Standard Mix

X X X
Actual Quantity Actual Quantity Actual Quantity Standard Mix
x x x X
Actual price Standard price Standard price Standard Quantity
= = = x
P43,520.53 P43,303.99 P43,588.70 Standard price

P216.54 U
P284.71 F

Slide
16-76
16
MIX AND YIELD VRIANCE
The Fish Place is used to illustrate the computation of

price/rate, mix, and yield variance. The company recently began
packaging a frozen 1-pound Gumbo-combo that contains
processed crab, shrimp, and oysters. To some extent, one
ingredient can be substituted for the other. In addition, it is
assumed that the company uses two direct labor categories (A and
B). There is a labor rate differential between these two categories.
Exhibit 1 provides standard and actual information for the
company for December 2008.
Assume that The Fish Place used 8,020 total pounds of
ingredients to make 40 lots of Gumbo-combo. The standard
quantity necessary to produce this quantity is 8,000 total pounds
of ingredients.
Slide
Exhibit 1 16-77
16
60 /200
= Crab
Shrimp
pound
per pound
pound
per pound
432.00
405.00
pound
per pound 250.00

(3) Standard mix and quanityt; standard prices:
Crab Production
30%x 8,04020 lots pounds @ P 7.20 = 17,323.20
ShrimpMaterials-
Crab45%x 8,0Purchased
20 pounds @and
P used
4.50 = Percentage
16,240.28.50%
OysterOysters
25%x 8,0Purchased
20 pounds @and
P used
5.00 = 10,025.26.00%
Total 100.00% 8,020
Total 1,290 hours 15,034.95

Slide
Exhibit 1 16-78
16
60 /200
= Crab
Shrimp
pound
per pound
pound
per pound
432.00
405.00
pound
per pound 250.00

(4) Total Standard data (mix and quanityt; standard prices):
Crab Production
30%x 8,00040poundslots @ P 7.20 = 17,280.00
ShrimpMaterials-
Crab 45%x 8,000Purchased
pounds @ Pand used 4.50 = Percentage
16,228.50%
00.00 2,285.7 pounds at P7.50 per pound
OysterOysters
25%x 8,000Purchased
pounds @ Pand used 5.00 = 10,026.00%
00.00 2,085.2 pounds at P4.95 per pound
Total 100.00% 8,020
Total 1,290 hours 15,034.95

Slide
16-79
16
Actual Mix Actual Mix Standard Mix

X X X
Actual Quantity Actual Quantity Actual Quantity Standard Mix
x x x X
Actual price Standard price Standard price Standard Quantity
= = = x
P43,520.53 P43,303.99 P43,588.70 Standard price

P216.54 U
P284.71 F

Slide
16-80
16

X X X X
x x x x
= = = =
P43,520.53 P43,303.99 P43,588.70 P43,480.00

P216.54 U P108.70 U
P284.71 F

Slide
16-81
16

X X X X
x x x x
= = = =
P43,520.53 P43,303.99 P43,588.70 P43,480.00

P216.54 U Material Mix Variance P108.70 U
P284.71 F
Total Material Variance

McGraw-Hill/Irwin P40.53 U © The McGraw-Hill Companies, Inc., 2002
Slide
16-82
16
 Actual mix, hours, rates = 15,034.95  Labor rate variance = 15,034.95 –

15,015.60 = 19.35
 Actual mix, hours, standard rates
= 15,015.60  Labor mix variance = 15,015.60 –
15,179.00 = 163.40
 Standard mix, actual hours, standard
rates = 15,179.00  Labor yield variance = 15,179.00 –
14,120.00 = 1,059.00
 Standard mix, hours, rates =
14,120.00

Slide
16-83
16 STANDARD COST SYSTEM JOURNAL

ENTRIES
SP x AQ
(purchased)
F – Credit; U –Debit
(AP-SP) x AQp
(1) Raw Material Invenory SP x AQ P XXX.xx
Materials Purchase Price Variance P XXX.xx
Accounts Payable XXX.xx
To record the acquisition of raw materials.

Slide
16-84

ENTRIES
SP x SQ
(AQu-SQ) x SP
(2) Work in Process Inventory SP x P XXX.xx
AQ
Material Quanity Variance (Used) P XXX.xx
Raw Materials Inventory XXX.xx
To record the issuance of raw materials.

Slide
16-85

ENTRIES
SP x SQ
F – Credit;
(AR-SR) x AH U –Debit
(3) Work in Process Inventory
SP x(AH-SH)
AQ P XXX.xx
x SR
DL Rate Variance (Used) P XXX.xx
DL Efficiency Variance XXX.xx
Wage Payable XXX.xx
To record the incurrence of direct labor.

Slide
16-86

ENTRIES
AVOH
AFOH
AOH
(4) Variable Manufacturing Overhead P XXX.xx
Fixed Manufacturing Overhead XXX.xx
Various accounts P XXX.xx
To record the actual overhead cost.

Slide
16-87

ENTRIES
SOH
SFOH
SVOH
(5) Work in Process Inventory P XXX.xx
Fixed Manufacturing Overhead P XXX.xx
Variable Manufacturing Overhead XXX.xx
To record the actual overhead cost.

Slide
16-88

ENTRIES
(AVOH-BVOH)
(BVOH-AVOH)
(6) Variable Manufacturing Overhead P XXX.xx
Variable Overhead Spending Variance P XXX.xx
Variable Overhead Efficiency Variance XXX.xx
To close the variable overhead account and recognized the

variable overhead variances for the month.

Slide
16-89

ENTRIES
(AFOH-BFOH)
(BFOH-AFOH)
(7) Fixed Manufacturing Overhead P XXX.xx
Fixed Overhead Spending Variance P XXX.xx
Volume Variance XXX.xx
To close the fixed overhead account and recognized the

fixed overhead variances for the month.

Slide
16-90
16 OH variance analysis
Two-Way Analysis
AFOH
Actual FOH P XX.xx
Actual VOH XX.xx P XX.xx
BUSH Controllable variance or

Budgeted FOH P XX.xx Budget Variance
Budgeted VOH (VRxSH) XX.xx P XX.xx
SHSR Uncontrollable variance or

Applied FOH (FRx SH) P XX.xx Volume variance
Applied VOH (VRx SH) XX.xx P XX.xx
Total OH Variance

Slide
16-91
AFOH
Actual FOH P 8,480.00
Actual VOH 50,784.00 P 59,264.00
BUSH Controllable variance

Budgeted FOH P 10,000.00 (5,336.00)
Budgeted VOH (14x3,900) 54,600.00 P 64,600.00
SHSR Volume variance

Applied FOH (24x400 ) P 9,600.00 400.00
Applied VOH (14x 3,900) 54,600.00 P 64,200.00
Total OH variance
(4,936.00)

Slide
16-92
Three-Way Analysis
AFOH
Actual FOH P XX.xx
Actual VOH XX.xx P XX.xx
BAH Spending variance

Budgeted FOH P XX.xx
Budgeted VOH (VRxAH) XX.xx P XX.xx
AHSR
BFOH P XX.xx Efficiency variance

Applied FOH (FRx SH) P XX.xx
Total OH Variance

Slide
16-93
AFOH
Actual FOH P 8,480.00
Actual VOH 50,784.00 P 59,264.00
BAH Spending variance

Budgeted FOH P 10,000.00 (2,256.00)
Budgeted VOAH (14x3,680) 51,520.00 P 61,520.00
AHSR BFOH P 10,000.00 Efficiency variance

Applied VOH (14x 3,900) 54,600.00 P 64,600.00 (3,080.00)

Applied FOH (24x 400) P 9,600.00 400.00
Applied VOH (14x 3,900) 54,600.00 P 64,200.00
Total OH Variance
(4,936.00)

Chap16-Standard Costing FOH

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McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Energy costs Factory managers’

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Overhead Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

The total variance is the flexible budget variance.

Overhead Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Overhead Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Overhead Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

for Variable Factory Overhead

Factory Overhead Rate

 Decide the level of operation.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

16 Variable Factory Overhead

Do you remember the

16 Variable Factory Overhead

Hanson Inc. applies variable factory overhead

Last month 1,550 hours were worked to make

16 Variable Factory Overhead

What was Hanson’s actual rate (AR)

a. $3.00 per hour.

16 Variable Factory Overhead

What was Hanson’s actual rate (AR)

a. $3.00 per hour.

16 Variable Factory Overhead

Hanson’s spending variance (SV)

16 Variable Factory Overhead

Hanson’s spending variance (SV)

16 Variable Factory Overhead

Hanson’s efficiency variance (EV)

16 Variable Factory Overhead

Hanson’s efficiency variance (EV)

16 Variable Factory Overhead

Hanson’s efficiency variance (EV)

16 Variable Factory Overhead

Actual Hours Actual Hours Standard Hours

Spending variance Efficiency variance

16 Interpretation and Implications of

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

16 Fixed Overhead Variances

Now let’s turn

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Factory Overhead Rate

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Fixed factory overhead costs are assigned

Assigned Overhead = FR × Standard Quantity

Budgeted total fixed overhead costs

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Actual Fixed Fixed Fixed

FR = Standard Fixed Overhead Rate

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Variances – Example Jerf

Hanson Inc.’s budgeted fixed overhead is

Variances – Example Jerf

Actual Fixed Fixed Fixed

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Variances – Example Jerf