1. 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. Using Standard Cost-Variable Manufacturing Overhead Variances By: G.E ZAFRAN ATENEO-MBA REGIS PROGRAM 2011-12

2. 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. -

3. - 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.

4. - 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.

5. - Compute the variable manufacturing overhead spending and efficiency variances. INPUTS(1) Std. Qty or Hr (2) Std Price or Rate Std. Cost 1 x 2 Direct Materials1kg60.25 Direct Labor P/kg1kg17.18 Vqriqble Mfg Overhead (VMO).54105.4 TOTAL STANDARD COST/UNIT82.83

6. 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 Variable Manufacturing Overhead Variances Example

7. EXHIBIT 11-7 Variance Analysis-Variance Manufacturing Overhead Actual hours Actual Hours Standard Hours Of Input, of Input, Allowed for Actual Output At the Actual Rate at the Standard Rate at the Standard Rate (AH x AR) (AH x SR) (SH x SR) 240 hrs x P9 per hr 240 hrs x P10 per hr 239.76 hrs* x 10 per hr = P2160 =P2400 = P2397.6 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 Actual hours Actual Hours Standard Hours Of Input, of Input, Allowed for Actual Output At the Actual Rate at the Standard Rate at the Standard Rate (AH x AR) (AH x SR) (SH x SR) 240 hrs x P9 per hr 240 hrs x P10 per hr 239.76 hrs* x 10 per hr = P2160 =P2400 = P2397.6 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

8. Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 240 hours 240 hours 239.76 hours × × × P83 per hour P82.43 per hour P82.43 per hour = P19, 920 = P19,783.20 = P19, 763.42 Spending variance P136.8 unfavorable Efficiency variance P19.78 favorable P19,920  240 hours = P83 per hour Variable Manufacturing Overhead Variances Summary

9. Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 240 hours 240 hours 239.76hours × × × P83 per hour $4.00 per hour $4.00 per hour = P19,920 = P96,000 = P94,000 Spending variance P136.8 unfavorable Efficiency variance P19.78 favorable.90 hour per kg siomai  266.40 kg of siomai = 239.76 hours Variable Manufacturing Overhead Variances Summary

10. 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

11. 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.

12. A Statistical Control Chart 123456789 Variance Measurements Favorable Limit Unfavorable Limit Warning signals for investigation Desired Value Exhibit 9-9

13. Advantages of Standard Costs Management by exception Advantages Promotes economy and efficiency Simplified bookkeeping Enhances responsibility accounting

14. Potential Problems Emphasis on negative may impact morale. Emphasizing standards may exclude other important objectives. Favorable variances may be misinterpreted. Continuous improvement may be more important than meeting standards. Standard cost reports may not be timely. Invalid assumptions about the relationship between labor cost and output. Potential Problems with Standard Costs

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