8-1

CB2101
Flexible Budgets, Standard Costs
and Variance Analysis
Chapter 8

Budgeting and Control

Identify Organization Objectives
and Short-Term Goals
Develop Long-Term Strategy
and Short-Term Plans

Planning

Develop Master
Budget
Measure and Assess
Performance

Control
Reevaluate Objectives, Goals,
Strategy, and Plans
8-2

Variance Analysis Cycle

Identify
questions

Receive
explanations

Take
corrective
actions
Conduct next
periods
operations

Analyze
variances
Prepare standard
cost performance
report

Begin

8-3

Variance Analysis
Favorable variance (F) increases operating income

relative to the budgeted or standard amount.

Unfavorable variance (U) decreases operating income

relative to the budgeted or standard amount.

The label of favorable and unfavorable should not be

considered as indications of good or bad performance

without additional investigation.

8-4

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.
8-5

Learning Objective 1
Prepare a flexible
budget.

8-6

Deficiencies of the Static Planning

Budget
Larrys
Larrys Lawn
Lawn Service
Service provides
provides lawn
lawn care
care in
in aa planned
planned
community
community where
where all
all lawns
lawns are
are approximately
approximately the
the same
same size.
size.
At
At the
the end
end of
of May,
May, Larry
Larry prepared
prepared his
his June
June budget
budget based
based on
on
mowing
mowing 500
500 lawns.
lawns. Since
Since all
all of
of the
the lawns
lawns are
are similar
similar in
in size,
size,
Larry
Larry felt
felt that
that the
the number
number of
of lawns
lawns mowed
mowed in
in aa month
month would
would
be
be the
the best
best way
way to
to measure
measure overall
overall activity
activity for
for his
his business.
business.

Larrys Budget
8-7

Deficiencies of the Static Planning

Budget
Larrys Planning Budget

8-8

Deficiencies of the Static Planning

Budget
Larrys Actual Results

8-9

Deficiencies of the Static Planning

Budget

Larrys Actual Results Compared with the Planning Budget

8-10

Deficiencies of the Static Planning

Budget
Larrys Actual Results Compared with the Planning Budget
F = Favorable variance that occurs when actual
revenue is greater than budgeted revenue.

U = Unfavorable variance that occurs when

actual costs are greater than budgeted costs.
F = Favorable variance that occurs when
actual costs are less than budgeted costs.
8-11

Deficiencies of the Static Planning

Budget
Larrys Actual Results Compared with the Planning Budget

Since these variances are unfavorable, has

Larry done a poor job controlling costs?
Since these variances are favorable, has
Larry done a good job controlling costs?
8-12

Deficiencies of the Static Planning

Budget
I dont think I
can answer the
questions using
a static budget.

Actual activity is above

planned activity.
So, shouldnt the variable
costs be higher if actual
activity is higher?

8-13

Deficiencies of the Static Planning

Budget
The
The relevant
relevant question
question is
is .. .. ..

How
How much
much of
of the
the cost
cost variances
variances are
are
due
due to
to higher
higher activity
activity and
and how
how much
much
are
are due
due to
to cost
cost control?
control?
To
To answer
answer the
the question,
question,

we
we must
must
the
the budget
budget to
to the
the
actual
actual level
level of
of activity.
activity.

8-14

Characteristics of Flexible Budgets

Planning budgets
are prepared for
a single, planned
level of activity.

Hmm! Comparing
static planning budgets
with actual costs
is like comparing
apples and oranges.

Performance
evaluation is difficult
when actual activity
differs from the planned
level of activity.
8-15

Characteristics of Flexible Budgets

May be prepared for any activity
level in the relevant range.
Show costs that should have been
incurred at the actual level of
activity, enabling apples to apples
cost comparisons.
Help managers control costs.
Improve performance evaluation.

8-16

How a Flexible Budget Works

To

a budget, we need to know that:

Total variable costs change

in direct proportion to
changes in activity.
Total fixed costs remain

unchanged within the

relevant range.

le
b
ria
a
V
Fixed

8-17

How a Flexible Budget Works

Lets prepare a
budget
for Larrys Lawn
Service.

8-18

Preparing a Flexible Budget

Larrys Flexible Budget

8-19

Quick Check
What
What should
should the
the total
total wages
wages and
and salaries
salaries cost
cost
be
be in
in aa flexible
flexible budget
budget for
for 600
600 lawns?
lawns?
a.
a. $18,000.
$18,000.
b.
b. $20,000.
$20,000.
c.
c. $23,000.
$23,000.
d.
d. $25,000.
$25,000.

8-20

Quick Check
What
be
total
total
wages
wages
and
salaries
salaries
cost
What should
should the
be the
the
the
total
total
wages
wages
andand
and
salaries
salaries
cost
cost
be
in
aaaflexible
flexible
budget
budget
for
for
600
600
lawns?
lawns?
cost
be
inin
in
aflexible
flexible
budget
budget
for
for
600
600
lawns?
lawns?
a.
$18,000
a. $18,000.
$18,000
$18,000.
b.
b. $20,000.
$20,000.
c.
c. $23,000.
$23,000.
d.
d. $25,000.
$25,000.
Total wages and salaries cost
= $5,000 + ($30 per lawn 600 lawns)
$5,000 + $18,000 = $23,000
8-21

Learning Objective 2
Prepare a report
showing revenue and
spending variances.

8-22

Revenue and Spending Variances

Flexible budget revenue

Actual revenue

The difference is a revenue variance.

Flexible budget cost

Actual cost

The difference is a spending variance.

8-23

Revenue and Spending Variances

Now, lets use

budgeting

concepts to compute revenue and

spending variances for Larrys Lawn
Service.

8-24

Revenue and Spending Variances

Larrys Flexible Budget Compared with the Actual Results

$1,750 favorable
revenue variance

8-25

Revenue and Spending Variances

Larrys Flexible Budget Compared with the Actual Results
Spending
variances

8-26

Learning Objective 3
Prepare a flexible budget
with more than one cost
driver.

8-27

Flexible Budgets with Multiple Cost

Drivers
More than one cost
driver may be needed to
adequately explain all of
the costs in an organization.
The cost formulas used
to prepare a flexible
budget can be adjusted
to recognize multiple
cost drivers.
8-28

Flexible Budgets with Multiple Cost

Drivers
Because
Because of
of the
the large
large unfavorable
unfavorable wages
wages and
and salaries
salaries spending
spending
variance,
variance, Larry
Larry decided
decided to
to add
add an
an additional
additional cost
cost driver
driver for
for
wages
wages and
and salaries.
salaries. The
The variance
variance is
is due
due primarily
primarily to
to the
the number
number
of
of hours
hours required
required for
for the
the additional
additional edging
edging and
and trimming.
trimming. So
So
Larry
Larry estimates
estimates the
the additional
additional hours
hours and
and builds
builds those
those hours
hours into
into
both
both his
his revenue
revenue and
and expense
expense budget
budget formulas.
formulas.

Larrys New Budget

8-29

Flexible Budgets with Multiple Cost

Drivers

Larrys Budget Based on More than One Cost Driver

8-30

Standard Costs
Standards are benchmarks or norms for
measuring performance. In managerial accounting,
two types of standards are commonly used.
Quantity standards
specify how much of an
input should be used to
make a product or
provide a service.

Price standards
specify how much
should be paid for
each unit of the
input.

Examples: Firestone, Sears, McDonalds, hospitals,

construction, and manufacturing companies.

8-31

Setting Direct Materials Standards

Standard Price
per Unit

Standard Quantity
per Unit

Final, delivered
cost of materials,
net of discounts.

Summarized in
a Bill of Materials.

8-32

Setting Direct Labor Standards

Standard Rate
per Hour

Standard Hours
per Unit

Often a single
rate is used that reflects
the mix of wages earned.

Use time and

motion studies for
each labor operation.

8-33

Setting Variable Manufacturing

Overhead Standards
Price
Standard

Quantity
Standard

The rate is the

variable portion of the
predetermined overhead
rate.

The quantity is
the activity in the
allocation base for
predetermined overhead.

8-34

The Standard Cost Card

A standard cost card for one unit
of product might look like this:

Inputs
Direct materials
Direct labor
Variable mfg. overhead
Total standard unit cost

AxB

Standard
Quantity
or Hours

Standard
Price
or Rate

Standard
Cost
per Unit

3.0 lbs.
2.5 hours
2.5 hours

$ 4.00 per lb.

$
14.00 per hour
3.00 per hour
$

12.00
35.00
7.50
54.50
8-35

Using Standards in Flexible

Budgets
Standard costs per unit for direct materials, direct
labor, and variable manufacturing overhead can be
used to compute activity and spending variances.

Spending variances become more

useful by breaking them down into
quantity and price variances.
8-36

A General Model for Variance Analysis

Variance Analysis

Quantity Variance

Price Variance

Difference between
actual quantity and
standard quantity

Difference between
actual price and
standard price
8-37

Quantity and Price Standards

Quantity and price standards are
determined separately for two reasons:

The purchasing manager is responsible for raw

material purchase prices and the production manager

is responsible for the quantity of raw material used.

The buying and using activities occur at different times.

Raw material purchases may be held in inventory for a

period of time before being used in production.

8-38

A General Model for Variance Analysis

Variance Analysis

Quantity Variance

Price Variance

Materials quantity variance

Labor efficiency variance
VOH efficiency variance

Materials price variance

Labor rate variance
VOH rate variance
8-39

A General Model for Variance Analysis

(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)

(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)

Quantity Variance
(2) (1)

(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)

Price Variance
(3) (2)

Spending Variance
(3) (1)
8-40

A General Model for Variance Analysis

Actual quantity is the amount of direct materials, direct
labor, and variable manufacturing overhead actually used.
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)

(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)

Quantity Variance
(2) (1)

(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)

Price Variance
(3) (2)

Spending Variance
(3) (1)
8-41

A General Model for Variance Analysis

Standard quantity is the standard quantity allowed
for the actual output of the period.
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)

(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)

Quantity Variance
(2) (1)

(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)

Price Variance
(3) (2)

Spending Variance
(3) (1)
8-42

A General Model for Variance Analysis

Actual price is the amount actually
paid for the input used.
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)

(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)

Quantity Variance
(2) (1)

(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)

Price Variance
(3) (2)

Spending Variance
(3) (1)
8-43

A General Model for Variance Analysis

Standard price is the amount that should
have been paid for the input used.
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)

(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)

Quantity Variance
(2) (1)

(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)

Price Variance
(3) (2)

Spending Variance
(3) (1)
8-44

Learning Objective 4
Compute the direct
materials quantity and
price variances and
explain their
significance.

8-45

Materials Variances An Example

Glacier Peak Outfitters has the following direct
materials standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs. of fiberfill were purchased and
used to make 2,000 parkas. The materials cost a
total of $1,029.

8-46

Materials Variances Summary

Standard Quantity

Standard Price
200 kgs.

$5.00 per kg.

= $1,000

Actual Quantity

Standard Price
210 kgs.

$5.00 per kg.

= $1,050

Quantity variance
$50 unfavorable

Actual Quantity

Actual Price
210 kgs.

$4.90 per kg.

= $1,029

Price variance
$21 favorable
8-47

Materials Variances Summary

Standard Quantity

Standard Price

Actual Quantity

Standard Price

Actual Quantity

Actual Price

200 kgs.
210 kgs.
210 kgs.
0.1 kg per parka 2,000 parkas

= 200 kgs
$5.00 per kg.
$5.00 per kg.
$4.90 per kg.
= $1,000

= $1,050

Quantity variance
$50 unfavorable

= $1,029

Price variance
$21 favorable
8-48

Materials Variances Summary

Standard Quantity

Standard Price
200 kgs.

$5.00 per kg.

= $1,000

Actual Quantity

Standard Price
210 kgs.
210 kgs
$1,029
$5.00
per kg.
= $4.90
per kg
= $1,050

Quantity variance
$50 unfavorable

Actual Quantity

Actual Price
210 kgs.

$4.90 per kg.

= $1,029

Price variance
$21 favorable
8-49

Materials Variances:
Using the Factored Equations
Materials quantity variance
MQV = (AQ SP) (SQ SP)
= SP(AQ SQ)
= $5.00/kg (210 kgs (0.1 kg/parka 2,000 parkas))
= $5.00/kg (210 kgs 200 kgs)
= $5.00/kg (10 kgs) = $50 U

Materials price variance

MPV = (AQ AP) (AQ SP)
= AQ(AP SP)
= 210 kgs ($4.90/kg $5.00/kg)
= 210 kgs ( $0.10/kg) = $21 F
8-50

Responsibility for Materials Variances

Materials Quantity Variance

Production Manager

Materials Price Variance

Purchasing Manager

The standard price is used to compute the quantity variance

so that the production manager is not held responsible for
the purchasing managers performance.
8-51

Responsibility for Materials

Variances
Your poor scheduling

I am not responsible for

this unfavorable materials
quantity variance.
You purchased cheap
material, so my people
had to use more of it.

Production Manager

sometimes requires me to
rush order materials at a
higher price, causing
unfavorable price variances.

Purchasing Manager

8-52

Quick Check

Zippy

Hanson Inc. has the following direct materials

standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of materials were
purchased and used to make 1,000 Zippies. The
materials cost a total of $6,630.

8-53

Quick Check

Zippy

How many pounds of materials should Hanson

have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds.

8-54

Quick Check

Zippy

How many pounds of materials should Hanson

have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
The standard quantity is:
d. 1,000 pounds.

1,000 1.5 pounds per Zippy.

8-55

Quick Check

Zippy

Hansons materials quantity variance (MQV)

for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.

8-56

Quick Check

Zippy

Hansons materials quantity variance (MQV)

for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable
8-57

Quick Check

Zippy

Hansons materials price variance (MPV)

for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.

8-58

Quick Check

Zippy

Hansons materials price variance (MPV)

for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.MPV = AQ(AP - SP)

MPV = 1,700 lbs. ($3.90 - 4.00)

MPV = $170 Favorable

8-59

Quick Check
Standard Quantity

Standard Price

Zippy

Actual Quantity

Standard Price

Actual Quantity

Actual Price

1,500 lbs.

$4.00 per lb.

1,700 lbs.

$4.00 per lb.

1,700 lbs.

$3.90 per lb.

= $6,000

= $ 6,800

= $6,630

Quantity variance
$800 unfavorable

Price variance
$170 favorable
8-60

Quick Check

Zippy

Recall that the standard quantity for 1,000 Zippies

is 1,000 1.5 pounds per Zippy = 1,500 pounds.

Standard Quantity

Standard Price

Actual Quantity

Standard Price

Actual Quantity

Actual Price

1,500 lbs.

$4.00 per lb.

1,700 lbs.

$4.00 per lb.

1,700 lbs.

$3.90 per lb.

= $6,000

= $ 6,800

= $6,630

Quantity variance
$800 unfavorable

Price variance
$170 favorable
8-61

Materials VariancesAn Important

Subtlety

The quantity variance is

computed only on the quantity
used.
The price variance is computed
on the entire quantity purchased.
8-62

Materials VariancesAn Important

Subtlety
Glacier Peak Outfitters has the following direct
materials standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs. of fiberfill were purchased at a
cost of $1,029. Glacier used 200 kgs. to make
2,000 parkas.

8-63

Materials VariancesAn Important Subtlety

Materials Quantity Variance
Actual Quantity
Purchased

Actual Price
210 kgs.

$4.90 per kg.

kg.

Actual Quantity
Purchased

Standard Price
210 kgs.

$5.00 per kg. .

Actual Quantity
Used

Standard Price
200 kgs.

$5.00 per kg.

Standard Quantity

Standard Price
200 kgs.

$5.00 per

= $1,029

= $1,050

= $1,000

= $1,000

Price variance
$21 favorable

Quantity variance
$0

8-64

Materials VariancesAn Important Subtlety

Materials Price Variance
Actual Quantity
Purchased

Actual Price
210 kgs.

$4.90 per kg.

kg.

Actual Quantity
Purchased

Standard Price
210 kgs.

$5.00 per kg. .

Actual Quantity
Used

Standard Price
200 kgs.

$5.00 per kg.

Standard Quantity

Standard Price
200 kgs.

$5.00 per

= $1,029

= $1,050

= $1,000

= $1,000

Price variance
$21 favorable

Quantity variance
$0

8-65

Learning Objective 5
Compute the direct labor
efficiency and rate
variances and explain
their significance.

8-66

Labor Variances An Example

Glacier Peak Outfitters has the following direct labor
standard for its mountain parka.
1.2 standard hours per parka at $10.00 per hour
Last month, employees actually worked 2,500 hours
at a total labor cost of $26,250 to make 2,000
parkas.

8-67

Labor Variances Summary

Standard Hours

Standard Rate

Actual Hours

Standard Rate

Actual Hours

Actual Rate

2,400 hours

$10.00 per hour

2,500 hours

$10.00 per hour

2,500 hours

$10.50 per hour

= $24,000

= $25,000

= $26,250

Efficiency variance
$1,000 unfavorable

Rate variance
$1,250 unfavorable

8-68

Labor Variances Summary

Standard Hours

Standard Rate
2,400 hours

$10.00 per hour

= $24,000

Actual Hours

Standard Rate

Actual Hours

Actual Rate

2,500 hours
2,500 hours
1.2 hours per parka 2,000

parkasper
= 2,400
$10.00
hour hours$10.50 per hour
= $25,000

Efficiency variance
$1,000 unfavorable

= $26,250

Rate variance
$1,250 unfavorable

8-69

Labor Variances Summary

Standard Hours

Standard Rate

Actual Hours

Standard Rate

Actual Hours

Actual Rate

2,400 hours
2,500 hours

hours
$26,250 2,500
$10.00 per hour = $10.50
$10.00per
perhour
hour

2,500 hours

$10.50 per hour

= $24,000

= $25,000

Efficiency variance
$1,000 unfavorable

= $26,250

Rate variance
$1,250 unfavorable

8-70

Labor Variances: Using the Factored

Equations
Labor efficiency variance
LEV = (AH SR) (SH SR)
= SR (AH SH)
= $10.00 per hour (2,500 hours 2,400 hours)
= $10.00 per hour (100 hours)
= $1,000 unfavorable

Labor rate variance

LRV = (AH AR) (AH SR)
= AH (AR SR)
= 2,500 hours ($10.50 per hour $10.00 per hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavorable
8-71

Responsibility for Labor Variances

Production managers are
usually held accountable
for labor variances
because they can
influence the:

Mix of skill levels

assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.

Production Manager

Quality of training
provided to employees.
8-72

Responsibility for Labor Variances

I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.

I think it took more time

to process the
materials because the
Maintenance
Department has poorly
maintained your
equipment.

8-73

Quick Check

Zippy

Hanson Inc. has the following direct labor

standard to manufacture one Zippy:
1.5 standard hours per Zippy at
$12.00 per direct labor-hour
Last week, 1,550 direct labor-hours were
worked at a total labor cost of $18,910
to make 1,000 Zippies.
8-74

Quick Check

Zippy

Hansons labor efficiency variance (LEV)

for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.

8-75

Quick Check

Zippy

Hansons labor efficiency variance (LEV)

for the week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
8-76

Quick Check

Zippy

Hansons labor rate variance (LRV) for the

week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.

8-77

Quick Check

Zippy

Hansons labor rate variance (LRV) for the

week was:
a. $310 unfavorable.
b. $310 favorable.
LRV = AH(AR - SR)
c. $300 unfavorable.
LRV = 1,550 hrs($12.20 - $12.00)
d. $300 favorable.LRV = $310 unfavorable

8-78

Quick Check
Standard Hours

Standard Rate
1,500 hours

$12.00 per hour

= $18,000

Zippy

Actual Hours

Standard Rate
1,550 hours

$12.00 per hour

= $18,600

Efficiency variance
$600 unfavorable

Actual Hours

Actual Rate
1,550 hours

$12.20 per hour

= $18,910

Rate variance
$310 unfavorable
8-79

Learning Objective 6
Compute the variable
manufacturing overhead
efficiency and rate
variances and explain
their significance.

8-80

Variable Manufacturing Overhead

Variances An Example
Glacier Peak Outfitters has the following direct
variable manufacturing overhead labor standard for
its mountain parka.
1.2 standard hours per parka at $4.00 per hour
Last month, employees actually worked 2,500 hours
to make 2,000 parkas. Actual variable
manufacturing overhead for the month was
$10,500.

8-81

Variable Manufacturing Overhead

Variances Summary
Standard Hours

Standard Rate
2,400 hours

$4.00 per hour

= $9,600

Actual Hours

Standard Rate
2,500 hours

$4.00 per hour

= $10,000

Efficiency variance
$400 unfavorable

Actual Hours

Actual Rate
2,500 hours

$4.20 per hour

= $10,500

Rate variance
$500 unfavorable

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Variable Manufacturing Overhead

Variances Summary
Standard Hours
Actual Hours
Actual Hours

Standard Rate
Standard Rate
Actual Rate
2,400 hours
2,500 hours
2,500 hours

1.2 hours per parka 2,000

$4.00 per hour
$4.00 per
hour hours $4.20 per hour
parkas
= 2,400
= $9,600

= $10,000

Efficiency variance
$400 unfavorable

= $10,500
Rate variance
$500 unfavorable

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Variable Manufacturing Overhead

Variances Summary
Standard Hours
Actual Hours

Standard Rate
Standard Rate
2,400 hours
2,500 hours

$10,500 2,500
hours
$4.00 per hour
$4.00 per
per hour
hour
= $4.20
= $9,600

= $10,000

Efficiency variance
$400 unfavorable

Actual Hours

Actual Rate
2,500 hours

$4.20 per hour

= $10,500

Rate variance
$500 unfavorable

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Variable Manufacturing Overhead

Variances: Using Factored Equations
Variable manufacturing overhead efficiency variance
VMEV = (AH SR) (SH SR)
= SR (AH SH)
= $4.00 per hour (2,500 hours 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavorable

Variable manufacturing overhead rate variance

VMRV = (AH AR) (AH SR)
= AH (AR SR)
= 2,500 hours ($4.20 per hour $4.00 per hour)
= 2,500 hours ($0.20 per hour)
= $500 unfavorable
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Quick Check

Zippy

Hanson Inc. has the following variable

manufacturing overhead standard to
manufacture one Zippy:
1.5 standard hours per Zippy at
$3.00 per direct labor-hour
Last week, 1,550 hours were worked to make
1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.
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Quick Check

Zippy

Hansons efficiency variance (VMEV) for

variable manufacturing overhead for the week
was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.

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Quick Check

Zippy

Hansons efficiency variance (VMEV) for

variable manufacturing overhead for the week
was:
a. $435 unfavorable.
b. $435 favorable.
1,000 units 1.5 hrs per unit
c. $150 unfavorable.
d. $150 favorable.
VMEV = SR(AH - SH)
VMEV = $3.00(1,550 hrs - 1,500 hrs)
VMEV = $150 unfavorable

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Quick Check

Zippy

Hansons rate variance (VMRV) for variable

manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.

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Quick Check

Zippy

Hansons rate variance (VMRV) for variable

manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
VMRV = AH(AR - SR)
c. $335 unfavorable.
VMRV = 1,550 hrs($3.30 - $3.00)
d. $300 favorable. VMRV = $465 unfavorable

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Quick Check

Zippy

Standard Hours

Standard Rate
1,500 hours

$3.00 per hour

Actual Hours

Standard Rate
1,550 hours

$3.00 per hour

Actual Hours

Actual Rate
1,550 hours

$3.30 per hour

= $4,500

= $4,650

= $5,115

Efficiency variance
$150 unfavorable

Rate variance
$465 unfavorable
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Management Uses of Variances

Budgets serve both planning and control purposes.
In variance analysis, static budgets are not very

illuminating; Flexible budgets are a useful control tool.

Variance analysis leads to questions rather than answers!

Managers must not interpret variances in isolation of each

other

Managers use variances as part of performance evaluation.

But more importantly, it is used to trigger organization

learning, and to make continuous improvements.

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End of Chapter 08

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