variance overhead

Report
Using Standard Cost-Variable Manufacturing
Overhead Variances
By: G.E ZAFRAN
ATENEO-MBA REGIS PROGRAM 2011-12
LEARNING OBJECTIVE:
• Compute the variable manufacturing overhead
rate and efficiency variances.
• Explain how direct materials standard and direct
labor standards are set.
• Compute the direct materials price and quantity
variances and explain their significance.
• Compute the direct labor rate and efficiency
variance and explain their significance.
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Using Standard Costing:
• Standard costing means assigning the expected,
budgeted costs to the goods manufactured, the
goods in inventory, and the goods sold. In other
words, the amounts assigned are the costs that
should occur when manufacturing products.
• The actual costs are then compared to the standard
costs and any differences are reported as variances.
Since the standard costs are often tied to the
company's annual profit plan, a variance is also an
indicator that the actual profit will be different from
the planned amount.
-
Following Definition:
• Standard Cost- detailed listing of the standard
amounts of inputs and their cost that are
required to produce a unit of a specific product
• Standard Cost per Unit- standard quantity
allowed of an input per unit of a specific product,
multiplied by the standard price of the input
• Standard hours allowed- the time that should
been taken to complete the period’s output. It is
computed by multiplying the actual number of
units produced by the standard hours per unit.
•
•
•
•
•
Standard hour per unit-the amount of direct labor time
that should be required to complete a single unit of
product .
Standard price per unit- the price that should be paid for
an output.
Standard rate per hour- the labor rate that should be
incurred per hour of labor time.
Variable overhead efficiency variance- the difference
between the actual level of activity (direct labor-hours,
machine-hours, or some other base) and the standard
activity allowed, multiplied by the variable part of the
predetermined overhead rate.
Variable overhead variance-the difference between the
actual variable overhead cost incurred during a period
and the standard cost that should have been incurred
base on the actual activity of the period.
-
Compute the variable manufacturing
overhead spending and efficiency variances.
INPUTS
(1)
Std. Qty or Hr
(2)
Std Price or
Rate
Std. Cost
1x2
Direct Materials
1kg
60.25
60.25
Direct Labor P/kg
1kg
17.18
17.18
Vqriqble Mfg Overhead (VMO)
.54
10
5.4
TOTAL STANDARD COST/UNIT
82.83
Variable Manufacturing Overhead
Variances Example
KENPO FOODS has the following direct variable
manufacturing overhead labor standard for its
Siomai production.
.9 standard hour per kg siomai at P82.43 per hour
Last month, employees actually worked 240 hours
to make 266.40kg siomai. Actual variable
manufacturing overhead for the month was
P19,783.20
VMO=82.43 per kg (8.hrs x 30 days)
VMO=19,783.20
EXHIBIT 11-7
Variance Analysis-Variance Manufacturing Overhead
Actual hours
Of Input,
At the Actual Rate
(AH x AR)
240 hrs x P9 per hr
= P2160
Actual Hours
of Input,
at the Standard Rate
(AH x SR)
240 hrs x P10 per hr
=P2400
Rate variance, P240 F
Efficiency variance, P2.4 F
Total variance, P237.6 F
_________
*266.40 kg x .90 hr per kg = 239.76
F = Favorable ; U = Unfavorable
Standard Hours
Allowed for Actual Output
at the Standard Rate
(SH x SR)
239.76 hrs* x 10 per hr
= P2397.6
Variable Manufacturing Overhead
Variances Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
240 hours
×
P83 per hour
240 hours
×
P82.43 per hour
= P19, 920
Standard Hours
×
Standard Rate
239.76 hours
×
P82.43 per hour
= P19,783.20
= P19, 763.42
P19,920  240 hours =
P83 per hour
Spending variance
P136.8 unfavorable
Efficiency variance
P19.78 favorable
Variable Manufacturing Overhead
Variances Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
Standard Hours
×
Standard Rate
240 hours
240 hours
239.76hours
×
× per kg siomai  ×
.90 hour
P83 per hour 266.40
$4.00
persiomai
hour = 239.76
$4.00 per hour
kg of
hours
= P19,920
= P96,000
= P94,000
Spending variance
P136.8 unfavorable
Efficiency variance
P19.78 favorable
Variable Manufacturing Overhead Variances:
Using Factored Equations
Variable manufacturing overhead spending variance
VMSV = AH (AR - SR)
= 240 (P83 per hour – P82.43 per hour)
= 240 hours (P.57 per hour)
= P136.8 unfavorable
Variable manufacturing overhead efficiency variance
VMEV = SR (AH - SH)
= P82.43 per hour (240 hours – 239.76 hours)
= P82.43 per hour (.24 hours)
= P19.78 unfavorable
Variance Analysis and
Management by Exception
How do I know
which variances to
investigate?
Larger variances, in
dollar amount or as a
percentage of the
standard, are
investigated first.
Exhibit
9-9
A Statistical Control Chart
Warning signals for investigation
Favorable Limit
•
Desired Value
•
•
• •
•
•
Unfavorable Limit
•
•
1
2
3
4
5
6
Variance Measurements
7
8
9
Advantages of Standard Costs
Promotes economy
and efficiency
Management by
exception
Advantages
Simplified
bookkeeping
Enhances
responsibility
accounting
Potential Problems with Standard
Costs
Emphasizing standards
may exclude other
important objectives.
Standard cost
reports may
not be timely.
Invalid assumptions
about the relationship
between labor
cost and output.
Potential
Problems
Favorable
variances may
be misinterpreted.
Emphasis on
negative may
impact morale.
Continuous
improvement may
be more important
than meeting standards.
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