Managerial Accounting II

Semester: Winter 2025

Chapter 10: Standard Costs and Overhead Analysis

 Course Learning Outcomes1
(CLO)
CLO 2: Determine standard product costs, identify
variances from standard costs and suggest
corrective action for exceptional variances where
necessary.

Note: 1- Per course outline

2
 Chapter Objectives
1. Explain how direct materials standards and
direct labour standards are set.
2. Compute the direct materials price and
quantity variances and explain their
significance.
3. Compute the direct labour rate and
efficiency variances and explain their
significance.
4. Compute the variable manufacturing
overhead spending and efficiency
variances and explain their significance.
3
 Chapter Objectives
5. Explain the significance of the denominator
activity figure in determining the standard
cost of a unit of product.
6. Compute and interpret the fixed overhead
budget and volume variances.

4
 Standard Costs
Standards are benchmarks or “norms" for
measuring performance.

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.
• Cost (price) standards specify how much
should be paid for each unit of the input.

5
 Setting Standard Costs
• Setting price and quantity standards is designed to
combines the expertise of everyone who is
responsible for purchasing and using the inputs.
This includes accountants, engineers, purchasing
agents, and production managers.
• Ideal Standards: Can only be attained under the
best circumstances. Requires employees to work at
100% peak efficiency all the time.
• Practical standards: Tight but attainable.
Requires reasonable, although highly efficient,
efforts by the average employee.
6
 Setting Direct Material
Standards
Standard Price Standard Quantity
per Unit per Unit

The amount of
Final, delivered material required for
cost of materials, each unit, as well as an
net of discounts including allowance for
shipping, receiving, unavoidable waste,
and other such costs. spoilage, and other
normal
inefficiencies.

7
Setting Direct Labour Standards

Standard Rate Standard Hours

per Hour per Unit

Use time and

The labour rate that motion studies for
should be incurred per each labour operation to
hour of labour time, determine the amount of
including Employment labour time to complete
Insurance, employee one unit. Should include
benefits, and other allowance for normal
labour costs. inefficiencies.

8
 Setting Variable Overhead
Standards
Price Quantity
Standards Standards

The rate is the The quantity is the

variable portion of the activity in the allocation
predetermined overhead base used to calculate
rate. the predetermined
overhead.

9
 Standards vs. Budgets

• Standards and budgets are very similar.

• A budget is set for total costs, whereas a
standard is a per unit cost.
• A standard can be viewed as the
budgeted cost for one unit of product.

10
Price and Quantity Standards
Price and quantity standards are determined
separately for two reasons:
1. The purchasing manager is responsible for
raw material purchase prices and the
production manager is responsible for the
quantity of raw material used.
2. The buying and using activities occur at
different times. Raw material purchases may
be held in inventory for a period of time
before being required for use in production.

11
A General Model for Variance Analysis

Variance Analysis

Price Variance Quantity Variance

Difference between Difference between

actual price and actual quantity and
standard price standard quantity

12
A General Model for Variance Analysis

Variance Analysis

Price Variance Quantity Variance

Materials quantity variance

Labour efficiency variance
VOH efficiency variance

Fixed Overhead Variance Analysis follows a different model (slide 49)

13
 A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Total Variance

14
 A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Total Variance

15
 A General Model for Variance Analysis

Actual quantity is the amount of direct material, direct labour,

and variable manufacturing overhead actually acquired.

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Total Variance
16
 A General Model for Variance Analysis

Standard quantity is the standard quantity allowed for

the actual number of units produced.

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Total Variance

17
 A General Model for Variance Analysis

Actual price is the amount actually

paid for amount of the input acquired.

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Total Variance
18
 A General Model for Variance Analysis

Standard price is the amount that should

have been paid for the amount of input used.

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Total Variance
19
 A General Model for Variance Analysis
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)
= AQ x (AP – SP) = SP x (AQ – SQ)
AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Total Variance
20
 Material Variance Analysis

Variance Analysis

Price Variance Quantity Variance

Material Price Variance Materials quantity variance

Labour Rate Variance Labour efficiency variance
VOH Spending Variance VOH efficiency variance

21
 Material Variances Example
• Glacier Peak Outfitters has the following
direct material standard for the fibrefill in
its mountain parkas.
• 0.1 kg. of fibrefill per parka(p) at $5.00
per kg.
• Last month 210 kgs of fibrefill were
purchased and used to make 2,000
parkas. The material cost a total of
$1,029.
22
Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× × ×
$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favourable $50 unfavourable

$29 unfavourable
23
Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× $1,029× 210 kgs ×
$4.90 per kg. $5.00 per
= $4.90 per kg
kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favourable $50 unfavourable

$29 unfavourable
24
Material Variances Summary
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× ×  2,000 parkas ×
0.1 kg per parka
$4.90 per kg. $5.00
= 200 per
kgskg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favourable $50 unfavourable

$29 unfavourable
25
Material Variances: Using the
Equations
Materials price variance:
MPV = AQ (AP – SP)
= 210 kgs ($4.90/kg – $5.00/kg)
= 210 kgs (-$0.10/kg)
= $21 F
Materials quantity variance:
MQV = SP (AQ – SQ)
= $5.00/kg (210 kgs – (0.1 kg/p  2,000p))
= $5.00/kg (210 kgs – 200 kgs)
= $5.00/kg (10 kgs)
= $50 U
26
 Quick Check ✓

• Hanson Inc. has the following direct

material standard to manufacture one
Zippy:
• 1.5 kg per Zippy at $4.00 per kg

• Last week, 1,700 kg of material were

purchased and used to make 1,000
Zippies. The material cost a total of
$6,630.

27
 Quick Check ✓

Hanson’s material price variance

(MPV) for the week was:

a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
d. $800 favourable.

28
 Quick Check ✓

Hanson’s material quantity variance

(MQV) for the week was:

a. $170 unfavourable.
b. $170 favourable.
c. $800 unfavourable.
d. $800 favourable.

29
 Material Variances
Hanson purchased and used 1,700 kg.
How are the variances computed if the amount
purchased differs from the amount used?
1. The price variance is computed on the
entire amount purchased.
2. The quantity variance is computed only on
the amount used.

30
 Quick Check ✓ Continued
• Hanson Inc. has the following material
standard to manufacture one Zippy:
• 1.5 kg per Zippy at $4.00 per kg
• Last week, 2,800 kg of material were
purchased at a total cost of $10,920, and
1,700 kg were used to make 1,000 Zippies.

31
 Labour Variances Analysis

Variance Analysis

Price Variance Quantity Variance

Material Price Variance Materials quantity variance

Labour Rate Variance Labour efficiency variance
VOH Spending Variance VOH efficiency variance

32
 Labour Variances Example
• Glacier Peak Outfitters has the
following direct labour standard for its
mountain parka.
• 0.6 standard hours per parka at
$20.00 per hour
• Last month, employees actually worked
1,250 hours at a total labour cost of
$26,250 to make 2,000 parkas.
33
 Labour Variances Example

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
1,250 hours 1,250 hours 1,200 hours
× × ×
$21.00 per hour $20.00 per hour $20.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavourable $1,000 unfavourable

$2,250 unfavourable
34
 Labour Variances Example

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
1,250 hours 1,250 hours 1,200 hours
$26,250  1,250 hours
× × ×
= $21.00 per hour
$21.00 per hour $20.00 per hour $20.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavourable $1,000 unfavourable

$2,250 unfavourable
35
 Labour Variances Example

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
1,250 hours 1,250 hours 1,200 hours
0.6× hours per parks x ×2,000 parkas ×
$21.00 per hour $20.00
= 1,200 hoursper hour $20.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavourable $1,000 unfavourable

$2,250 unfavourable
36
 Labour Variances Example

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
1,250 hours 1,250 hours 1,200 hours
× × ×
$21.00 per hour $20.00 per hour $20.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavourable $1,000 unfavourable

$2,250 unfavourable
37
 Labour Variances: Using the
Equations
Labour rate variance
LRV = AH (AR – SR)
= 1,250 hours ($21.00/hour – $20.00/hour)
= 1,50 hours ($1.00/hour)
= $1,250 unfavourable

Labour efficiency variance

LEV = SR (AH – SH)
= $20.00/hr (1,250 hours – 1,200 hours)
= $20.00/hr (50 hours)
= $1,000 unfavourable
38
 Quick Check ✓

• Hanson Inc. has the following direct

labour standard to manufacture one
Zippy:
• 0.75 standard hours per Zippy at
$24.00 per direct labour hour
• Last week, 775 direct labour hours
were worked at a total labour cost of
$18,910 to make 1,000 Zippies.

39
 Quick Check ✓

Hanson’s labour rate variance (LRV) for

the week was:

a. $310 unfavourable.
b. $310 favourable.
c. $300 unfavourable.
d. $300 favourable.

40
 Quick Check ✓

Hanson’s labour efficiency variance

(LEV) for the week was:

a. $590 unfavourable.
b. $590 favourable.
c. $600 unfavourable.
d. $600 favourable.

41
Variable Overhead Variances Analysis

Variance Analysis

Price Variance Quantity Variance

Material Price Variance Materials quantity variance

Labour Rate Variance Labour efficiency variance
VOH Spending Variance VOH efficiency variance

42
 Variable Manufacturing
Overhead Variances Example
• Glacier Peak Outfitters has the following
direct variable manufacturing overhead
labour standard for its mountain parka.
• 0.6 standard hours per parka at
$8.00/hour
• Last month, employees actually worked
1,250 hours to make 2,000 parkas. Actual
variable manufacturing overhead for the
month was $10,500.
43
Variable Manufacturing Overhead
Variances Summary
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
1,250 hours 1,250 hours 1,200 hours
× × ×
$8.40 per hour $8.00 per hour $8.00 per hour
= $10,500 = $10,000 = $9,600

Spending variance Efficiency variance

$500 unfavourable $400 unfavourable

$900 unfavourable
44
Variable Manufacturing Overhead
Variances Summary
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
1,250 hours 1,200 hours 1,200 hours
× $10,500
×  1,250 hours ×
$8.40 per hour = $8.40
$8.00 per hour $8.00 per hour
per hour
= $10,500 = $10,000 = $9,600

Spending variance Efficiency variance

$500 unfavourable $400 unfavourable

$900 unfavourable
45
Variable Manufacturing Overhead
Variances Summary
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
1,250 hours 1,250 hours 1,200 hours
0.6 hours per parka  2,000
× × ×
parkas = 1,200 hours
$8.4 per hour $8.00 per hour $8.00 per hour
= $10,500 = $10,000 = $9,600

Spending variance Efficiency variance

$500 unfavourable $400 unfavourable

$900 unfavourable
46
 Quick Check ✓
• Hanson Inc. has the following variable
manufacturing overhead standard to
manufacture one Zippy:
• 1.5 standard hours per Zippy at $3.00
per direct labour hour
• Last week, 1,550 hours were worked to
make 1,000 Zippies, and $5,115 was
spent for variable manufacturing
overhead.
47
 Quick Check ✓

Hanson’s variable overhead spending

variance (VOSV) for the week was:

a. $465 unfavourable.
b. $400 favourable.
c. $335 unfavourable.
d. $300 favourable.

48
 Quick Check ✓

Hanson’s variable overhead efficiency

variance (VOEV) for the week was:

a. $435 unfavourable.
b. $435 favourable.
c. $150 unfavourable.
d. $150 favourable.

49
Fixed Overhead Variances

Fixed OH Variance
Analysis

Budget Variance Volume Variance

50
 Fixed Overhead Variances

Budget Variance
The budget variance is a measure of the
difference between the actual fixed overhead
costs incurred during the period and the
budgeted fixed overhead costs as contained in
the flexible budget.

Budget variance = Actual fixed overhead cost –

flexible budget fixed overhead cost

51
 Fixed Overhead Variances
Volume Variance
The volume variance is a measure of utilization
of plant facilities.

fixed portion of denominator

Volume the hours –
= x
Variance predetermined standard hours
overhead rate allowed

52
 Overhead Rates and Fixed
Overhead Analysis
• Recall that overhead costs are assigned to
products and services using a pre-
determined overhead rate (POHR):

Assigned Overhead = POHR × Standard Activity

Overhead from the

flexible budget for the
denominator level of activity
POHR =
Denominator level of activity

53
 Denominator Activity

• The denominator activity is the activity level

used to compute the predetermined
overhead rate, such as number of machine
hours or number of labour hours.

• Once an estimated activity level

(denominator activity) has been chosen, it
remains unchanged throughout the year,
even if the actual activity turns out to be
different from the original estimate.

54
 Overhead Rates and Fixed
Overhead Analysis
• The predetermined overhead rate can be
broken down into fixed and variable
components.
• The variable component is useful for
preparing and analyzing variable overhead
variances.
• The fixed component is useful for preparing
and analyzing fixed overhead variances.

55
 Overhead Rates and Overhead
Analysis – Example
ColaCo prepared this flexible budget for overhead:

Total Variable Total Fixed

Machine Variable Overhead Fixed Overhead
Hours Overhead Rate Overhead Rate
3,000 $ 6,000 ? $ 9,000 ?
4,000 8,000 ? 9,000 ?

With this information, overhead rates can be calculated.

ColaCo applies overhead based

on machine-hour activity.
56
 Overhead Rates and Overhead
Analysis – Example
ColaCo prepared this flexible budget for overhead:

Machine Total Variable Total Fixed

Hours Variable Overhead Fixed Overhead
Overhead Rate Overhead Rate
3,000 $ 6,000 $ 2.00 $ 9,000 ?
4,000 8,000 2.00 9,000 ?

Pre-determined Rate = Total Variable Overhead

Machine Hours

57
 Overhead Rates and Overhead
Analysis – Example
ColaCo prepared this flexible budget for overhead:

Machine Total Variable Total Fixed

Hours Variable Overhead Fixed Overhead
Overhead Rate Overhead Rate
3,000 $ 6,000 $ 2.00 $ 9,000 $ 3.00
4,000 8,000 2.00 9,000 2.25

Pre-determined Rate = ÷ Overhead

Total Fixed
Machine Hours

58
 Overhead Rates and Overhead
Analysis – Example
ColaCo prepared this flexible budget for overhead:

Machine Total Variable Total Fixed

Hours Variable Overhead Fixed Overhead
Overhead Rate Overhead Rate
3,000 $ 6,000 $ 2.00 $ 9,000 $ 3.00
4,000 8,000 2.00 9,000 2.25

The total POHR is the sum of

the fixed and variable rates
for a given activity level.
59
 Fixed Overhead Variances

Actual Fixed Fixed Fixed

Overhead Overhead Overhead
Incurred Budget Applied
DH × PFR SH × PFR

Budget Volume
Variance Variance
DH = Denominator Hours
PFR = Pre-determined Fixed Overhead Rate
SH = Standard Hours Allowed
60
 Fixed Overhead Variances –
Example

• ColaCo’s actual production required 3,200

standard machine hours.
• Actual fixed overhead was $8,450.
• The predetermined overhead rate is
based on 3,000 machine hours.

61
 Fixed Overhead Variances –
Example
Actual Fixed Fixed Fixed
Overhead Overhead Overhead
Incurred Budget Applied

$8,450 $9,000

The budget variance results

Budget variance from spending
$550 favourable less than expected for fixed
overhead items.

62
 Fixed Overhead Variances –
Example
Actual Fixed Fixed Fixed
Overhead Overhead Overhead
Incurred Budget Applied
SH × FR
3,200 hours
×
$8,450 $9,000 $3.00 per hour
$9,600
Budget variance
$550 favourable Volume variance
$600 favourable

$1,150 favourable
63
Volume Variance – A Closer
Look 1
Volume
Variance

Results when standard hours

allowed for actual output differs
from the denominator activity.

Unfavourable Favourable
when standard hours when standard hours
< denominator hours > denominator hours
64
 Volume Variance – A Closer
Look
Volume
Variance

Does not measure over- or under- spending

It is an activity related variance,

that measures of utilization of
plant facilities.
65
 Quick Check ✓
Yoder Enterprises’ actual production for the period
required 2,100 standard direct labour hours. Actual
fixed overhead for the period was $14,800. The
budgeted fixed overhead was $14,450. The
predetermined fixed overhead rate was $7 per
direct labour hour. What was the budget variance?

a. $350 U
b. $350 F
c. $100 F
d. $100 U
66
 Quick Check ✓
Yoder Enterprises’ actual production for the period
required 2,100 standard direct labour hours. Actual
fixed overhead for the period was $14,800. The
budgeted fixed overhead was $14,450. The
predetermined fixed overhead rate was $7 per
direct labour hour. What was the volume variance?

a. $250 U
b. $250 F
c. $100 F
d. $100 U
67
 Overhead Reporting and
Variance Investigation
• A performance report builds on the analysis of
variable and fixed overhead.
• After preparing the performance report,
management still has to decide whether the
variances that have been calculated require
further action.
• Not all variances are worth investigating.
• Management should consider the dollar amount
of the variance and the size of the variance
relative to the amount of spending involved.

68
Capacity Analysis: Theoretical
vs. Practical
• Theoretical capacity is the volume of
capacity if all available production time is
used, and no waste occurs. (i.e. operations
conducted 24 hours per day, 7 days per
week, 365 days per year, with no downtime)

• Practical capacity represents what could be

produced with operations at theoretical
capacity less unavoidable downtime.

69
Advantages of Standard Costs

1. Management by exception
2. Promotes economy and efficiency
3. Simplified bookkeeping
4. Enhances responsibility accounting

70
 Potential Problems with
Standard Costs
1. Invalid assumptions about the relationship
between labour cost and output.
2. Favourable variances may be misinterpreted.
3. Emphasizing standards may exclude other
important objectives.
4. Continuous improvement may be more
important than meeting standards.

71
 Appendix 10A
Further Analysis of
Materials Variances

72
Further Analysis of Materials
Variances: Mix and Yield
When the production process requires the
input of more than one material, the material
quantity variance (MQV) can be further
broken down into a mix variance and a yield
variance.

73
Further Analysis of Materials
Variances: Mix and Yield
• Mix Variance: The dollar effect on total
materials cost when there is a difference
between the actual mix of materials inputs and
the standard mix of materials.

• Yield Variance: The dollar effect on total

materials cost when the total quantity of inputs
actually used generate a different output than
would have been achieved using standard
quantities of inputs at the standard mix.

74
Extended Model for Variance
Analysis – Materials

75
 Appendix 10B

General Ledger Entries

to Record Variances

76
Recording Direct Materials
Variances
GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Raw Materials xxx
Materials Price Variance xxx
Accounts Payable xxx
To record the purchase of material

Work in Process xxx

Materials Quantity Variance xxx
Raw materials xxx
To record the use of material

77
 Recording Direct Labour
Variances

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Process xxx
Labour Rate Variance xxx
Labour Efficiency Variance xxx
Wages Payable xxx
To record incurrence of direct labour cost

78
 Recording Manufacturing
Overhead Variances

Variable manufacturing overhead

variances are usually not recorded in the
accounts separately but are determined
as part of the general analysis of
overhead.

79
 Recording Manufacturing
Overhead Variances

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Overhead costs xxx
Various credits such as accounts payable xxx

To record actual variable and fixed overhead

80
 Recording Manufacturing
Overhead Variances

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Progress xxx
Overhead Costs xxx

To record the application of variable overhead and fixed overhead

81
 Recording Manufacturing
Overhead Variances

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Variable overhead spending variance xxx
Variable overhead efficiency variance xxx
Fixed overhead budget variance xxx
Fixed overhead volume variance xxx
Overhead costs xxx
To record the overhead variances and the
disposition of underapplied overhead

82