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Standard Costing: Factory Overhead

Standard Costing: Factory Overhead. Energy costs Indirect materials Indirect labor Equipment repair and maintenance. Factory managers’ salaries Plant and equipment depreciation Plant security guards Insurance and property taxes for factory building and equipment.

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Standard Costing: Factory Overhead

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  1. Standard Costing:Factory Overhead

  2. Energy costs • Indirect materials • Indirect labor • Equipment repair and maintenance • Factory managers’ salaries • Plant and equipment depreciation • Plant security guards • Insurance and property taxes for factory building and equipment Standard Costs forFactory Overhead VariableOverhead FixedOverhead

  3. Standard Costs forFactory Overhead We will use a general model similar to labor and material to calculate overhead variances.

  4. A General Model for Variable Overhead Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual OH Rate Standard OH Rate Standard OH Rate SpendingVariance EfficiencyVariance The total variance is the flexible budget variance.

  5. A General Model for Variable Overhead Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual OH Rate Standard OH Rate Standard OH Rate SpendingVariance EfficiencyVariance Standard Overhead rate is the amount that should have been paid for the resources acquired.

  6. A General Model for Variable Overhead Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual OH Rate Standard OH Rate Standard OH Rate SpendingVariance EfficiencyVariance Standard quantity is the quantityallowed for the actual good output.

  7. A General Model for Variable Overhead Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual OH Rate Standard OH Rate Standard OH Rate SpendingVariance EfficiencyVariance AQ(AR - SR) SR(AQ - SQ) AQ = Actual Quantity SR= Standard RateAR = Actual Rate SQ = Standard Quantity Materials price variance Materials quantity varianceLabor rate variance Labor efficiency varianceVariable overhead Variable overhead spending variance efficiency variance

  8. Establishing the Standard Costfor 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.

  9. Determining a Standard Variable 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.

  10. Variable Factory OverheadVariances Example Do you remember theHanson Inc. examplefrom Chapter 15 thatwe used for materialand labor? Let’s revisit Hansonfor factory overheadanalysis.

  11. Jerf Variable Factory OverheadVariances Example 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.

  12. Jerf Variable Factory OverheadVariances Question 1 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.

  13. Jerf Variable Factory OverheadVariances Question 1 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. AR = $5,115 ÷ 1,550 hours AR = $3.30 per hour

  14. Jerf Variable Factory OverheadVariances Question 2 Hanson’s spending variance (SV)for variable factory overhead forthe month was: a. $465 unfavorable. b. $400 favorable. c. $335 unfavorable. d. $300 favorable.

  15. Jerf Variable Factory OverheadVariances Question 2 Hanson’s spending variance (SV)for variable factory overhead forthe month was: a. $465 unfavorable. b. $400 favorable. c. $335 unfavorable. d. $300 favorable. SV = AH(AR - SR) SV = 1,550 hrs($3.30 - $3.00) SV = $465 unfavorable

  16. Jerf Variable Factory OverheadVariances Question 3 Hanson’s efficiency variance (EV)for variable factory overhead forthe month was: a. $435 unfavorable. b. $435 favorable. c. $150 unfavorable. d. $150 favorable.

  17. Jerf Variable Factory OverheadVariances Question 3 Hanson’s efficiency variance (EV)for variable factory overhead forthe month was: a. $435 unfavorable. b. $435 favorable. c. $150 unfavorable. d. $150 favorable. EV = SR(AH - SH) EV = $3.00(1,550 hrs - 1,500 hrs) EV = $150 unfavorable

  18. Jerf Variable Factory OverheadVariances Question 3 Hanson’s efficiency variance (EV)for variable factory overhead forthe month was: a. $435 unfavorable. b. $435 favorable. c. $150 unfavorable. d. $150 favorable. EV = SR(AH - SH) EV = $3.00(1,550 hrs - 1,500 hrs) EV = $150 unfavorable 1,000 units × 1.5 hrs per unit

  19. Jerf Variable Factory OverheadVariances – Summary 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$465 unfavorable Efficiency variance$150 unfavorable

  20. Spending Variance Efficiency Variance Interpretation and Implications of Variable Factory Overhead Variances A function of the selected activitymeasure. It does not reflectoverhead control. Results from paying moreor less than expected foroverhead items such assupplies and utilities.

  21. Fixed Overhead Variances Now let’s turn our attention to fixed overhead.

  22. Determining a Standard Variable 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.

  23. 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 costsDenominator quantity for activity measure FR =

  24. Fixed Overhead Variances Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied SH × FR Spending Variance VolumeVariance FR = Standard Fixed Overhead RateSH = Standard Hours Allowed

  25. Jerf $9,000 budgeted fixed overhead 3,000 budgeted units FR = = $3.00 per unit Fixed OverheadVariances – Example 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 the fixed overhead rate.

  26. Jerf Fixed OverheadVariances – Example Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied $8,450 $9,000 Spending variance$550 favorable

  27. Jerf Fixed OverheadVariances – Example Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied 3,200 units × $3.00 per unit $8,450 $9,000 $9,600 Spending variance$550 favorable Volume variance$600 favorable

  28. Spending Variance Volume Variance Interpretation of Fixed Factory Overhead Variances Results from paying moreor less than expected foroverhead items. Results from the inabilityto operate at the activitybudgeted for the period.

  29. Fixed Factory Overhead Variances Let’s look at a graph showing fixed overhead variances. We will use Hanson’snumbers from the previous example.

  30. Jerf 3,200 units × $3.00 fixed overhead rate $600FavorableVolume Variance $9,600 applied fixed OH { { $550FavorableSpending Variance $8,450 actual fixed OH 3,200 Units Fixed Factory OverheadVariances – Example Cost $9,000 budgeted fixed OH Fixed overhead applied to products Volume 3,000 UnitsBudgeted Activity

  31. Unfavorable when standardquantity < budgeted quantity Favorable when standardquantity > budgeted quantity Interpretation of Fixed Factory Overhead Volume Variance A measure offacility use VolumeVariance Results when standard quantitydiffer from budgeted quantity

  32. Has no significance for cost control Explainable by and controllable only throughactivity Interpretation of Fixed Factory Overhead Volume Variance A measure offacility use VolumeVariance Results when standard quantitydiffer from budgeted quantity Unfavorable when standardquantity < budgeted quantity Favorable when standardquantity > budgeted quantity

  33. Factors Contributing to a Fixed Overhead Spending Variance • Ineffective budget procedures • Inadequate control of costs • Misclassification of cost items

  34. Factors Contributing to a Fixed Overhead Volume Variance • Management decisions • Unexpected changes in market demand • Unforeseen problems in manufacturing operations

  35. Total OHSpendingVariance Variable OHEfficiencyVariance Fixed OHVolumeVariance Three-Way Analysis of Factory Overhead Variances Variable OHSpendingVariance Fixed OHSpendingVariance Variable OHEfficiencyVariance Fixed OHVolumeVariance

  36. Fixed Factory Overhead Variances Let’s return to Hanson Inc to observe three-way analysis of factory overhead variances.

  37. Three-Way Analysis of Factory Overhead Variances Variable OHSpendingVariance$465 U Fixed OHSpendingVariance$550 F Variable OHEfficiencyVariance$150 U Fixed OHVolumeVariance$600 F Total OHSpendingVariance$85 F Variable OHEfficiencyVariance$150 U Fixed OHVolumeVariance$600 F

  38. Total OHControllableVariance Fixed OHVolumeVariance Two-Way Analysis of Factory Overhead Variances Variable OHSpendingVariance Fixed OHSpendingVariance Variable OHEfficiencyVariance Fixed OHVolumeVariance

  39. Fixed Factory Overhead Variances Now, let’s use the same numbers from Hanson Inc to illustrate two-way analysis of factory overhead variances.

  40. Two-Way Analysis of Factory Overhead Variances Variable OHSpendingVariance$465 U Fixed OHSpendingVariance$550 F Variable OHEfficiencyVariance$150 U Fixed OHVolumeVariance$600 F Total OHControllingVariance$65 U Fixed OHVolumeVariance$600 F

  41. Disposition of Variances 1. Dispose of the variance in the period it occurs in the income statement. 2. Prorate variances to: – work in process – finished goods – cost of goods sold First, we will look at this method using Hanson Inc’s resultsfor the month of June with this additional data:Sales at the standard price $100,000Cost of goods sold at standard cost $ 60,000Selling price variance $ 7,000 favorableSelling and administrative expenses $ 41,000

  42. Disposition of Variances Recall Hanson’s manufacturing costvariances from our previous work:

  43. Disposition of Variances

  44. Disposition of Variances 1. Dispose of the variance in the period it occurs in the income statement. 2. Prorate variances to: – work in process – finished goods – cost of goods sold We will now look at the secondmethod using this additional data:Finished goods ending inventory $ 20,000 Work-in-process ending inventory $ 20,000

  45. Disposition of Variances The selling price variance is added or subtractedfrom sales at standard in the income statement.

  46. Examples Examples 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.

  47. Standard Cost in Service Industries

  48. Standard costs in the New Manufacturing Environment New Manufacturing Environment ContinuousImprovement TotalQualityControl ManagingActivities, not Costs Flexible budgets used for overhead variance analysis are prepared using multiplecost drivers and activity-basedcosting concepts.

  49. Standard costs in the New Manufacturing Environment • 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

  50. The total variable overhead rate here is the same ascalculated earlier using a single variable overhead rate of$3.00 per direct labor hour × 1.5 direct labor hours per unit. Standard costs in the New Manufacturing Environment

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