Standard Cost Chapter Ten 10-1 Standard Cost Chapter Ten This chapter begins our study of management control and performance measures. It explains how standard costs are used by managers to control costs.  

10-2 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. A standard is a benchmark or “norm” for measuring performance. In managerial accounting, two types of standards are commonly used by manufacturing, service, food and not-for-profit organizations:  Quantity standards specify how much of an input should be used to make a product or provide a service. For example: a. Auto service centers like Firestone and Sears set labor time standards for the completion of work tasks. b. Fast-food outlets such as McDonald’s have exacting standards for the quantity of meat going into a sandwich.  Cost (price) standards specify how much should be paid for each unit of the input. For example: a. Hospitals have standard costs for food, laundry, and other items. b. Home construction companies have standard labor costs that they apply to sub-contractors such as framers, roofers, and electricians. c. Manufacturing companies often have highly developed standard costing systems that establish quantity and cost (price) standards for each separate product’s material, labor and overhead inputs. These standards are listed on a standard cost card.

Manufacturing Overhead 10-3 Standard Costs Deviations from standards deemed significant are brought to the attention of management, a practice known as management by exception. Standard Amount Direct Material Management by exception is a system of management in which standards are set for various operating activities, with actual results compared to these standards. Any deviations that are deemed significant are brought to the attention of management as “exceptions.” This chapter applies the management by exception principle to quantity and cost (price) standards with an emphasis on manufacturing applications. Direct Labor Manufacturing Overhead Type of Product Cost

10-4 Learning Objective 1 Explain how direct materials standards and direct labor standards are set. Learning objective number 1 is to explain how direct materials standards and direct labor standards are set.

Setting Direct Material Standards 10-5 Setting Direct Material Standards Price Standards Quantity Standards Summarized in a Bill of Materials. Final, delivered cost of materials, net of discounts. The standard price per unit for direct materials should reflect the final, delivered cost of the materials, net of applicable discounts. The standard quantity per unit for direct materials should reflect the amount of material required for each unit of finished product, as well as an allowance for unavoidable waste, spoilage, and other normal inefficiencies. A bill of materials is a list that shows the quantity of each type of material in a unit of finished product.

Setting Direct Labor Standards 10-6 Setting Direct Labor Standards Rate Standards Often a single rate is used that reflects the mix of wages earned. Time Standards Use time and motion studies for each labor operation. The standard rate per hour for direct labor includes not only wages earned but also fringe benefits and other labor costs. Many companies prepare a single rate for all employees within a department that reflects the “mix” of wage rates earned.   The standard hours per unit reflects the labor hours required to complete one unit of product. Standards can be determined by using available references that estimate the time needed to perform a given task, or by relying on time and motion studies.

Setting Variable Overhead Standards 10-7 Setting Variable Overhead Standards Rate Standards The rate is the variable portion of the predetermined overhead rate. Activity Standards The activity is the base used to calculate the predetermined overhead. The price standard for variable manufacturing overhead comes from the variable portion of the predetermined overhead rate. The quantity standard for variable manufacturing overhead is usually expressed in either direct labor hours or machine hours depending on which is used as the allocation base in the predetermined overhead rate.

Standard Cost Card – Variable Production Cost 10-8 Standard Cost Card – Variable Production Cost A standard cost card for one unit of product might look like this: The standard cost card is a detailed listing of the standard amounts of direct materials, direct labor, and variable overhead inputs that should go into a unit of product, multiplied by the standard price or rate that has been set for each input.

Standards vs. Budgets A standard is a per unit cost. 10-9 Standards vs. Budgets A standard is a per unit cost. Standards are often used when preparing budgets. Are standards the same as budgets? A budget is set for total costs. A standard is a unit amount, whereas a budget is a total amount. A standard can be viewed as the budgeted cost for one unit of product.

Price and Quantity Standards 10-10 Price and Quantity Standards Price and and quantity 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. Price and and quantity standards are determined separately for two reasons: Different managers are usually responsible for buying and for using inputs. For example: 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 points in time. For example: Raw material purchases may be held in inventory for a period of time before being used in production. 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.

A General Model for Variance Analysis 10-11 A General Model for Variance Analysis Variance Analysis Price Variance Difference between actual price and standard price Quantity Variance Difference between actual quantity and standard quantity Differences between standard prices and actual prices and standard quantities and actual quantities are called variances. The act of computing and interpreting variances is called variance analysis.

A General Model for Variance Analysis 10-12 A General Model for Variance Analysis Variance Analysis Price Variance Quantity Variance Price and quantity variances can be computed for all three variable cost elements – direct materials, direct labor, and variable manufacturing overhead – even though the variances have different names as shown. Materials price variance Labor rate variance VOH spending variance Materials quantity variance Labor efficiency variance VOH efficiency variance

A General Model for Variance Analysis 10-13 A General Model for Variance Analysis Price Variance Quantity Variance Actual Quantity Actual Quantity Standard Quantity × - × - × Actual Price Standard Price Standard Price Although price and quantity variances are known by different names, they are computed exactly the same way (as shown on this slide) for direct materials, direct labor, and variable manufacturing overhead.

A General Model for Variance Analysis 10-14 A General Model for Variance Analysis Price Variance Quantity Variance Actual Quantity Actual Quantity Standard Quantity × - × - × Actual Price Standard Price Standard Price Actual quantity is the amount of direct materials, direct labor, and variable manufacturing overhead actually used. The actual quantity represents the amount of direct materials, direct labor, and variable manufacturing overhead actually used.

A General Model for Variance Analysis 10-15 A General Model for Variance Analysis Price Variance Quantity Variance Actual Quantity Actual Quantity Standard Quantity × - × - × Actual Price Standard Price Standard Price Standard quantity is the standard quantity allowed for the actual output of the period. The standard quantity represents the standard quantity allowed for the actual output of the period.

A General Model for Variance Analysis 10-16 A General Model for Variance Analysis Price Variance Quantity Variance Actual Quantity Actual Quantity Standard Quantity × - × - × Actual Price Standard Price Standard Price The actual price represents the actual amount paid for the input used. Actual price is the amount actually paid for the input used.

A General Model for Variance Analysis 10-17 A General Model for Variance Analysis Price Variance Quantity Variance Actual Quantity Actual Quantity Standard Quantity × - × - × Actual Price Standard Price Standard Price The standard price represents the amount that should have been paid for the input used. Standard price is the amount that should have been paid for the input used.

A General Model for Variance Analysis 10-18 A General Model for Variance Analysis Price Variance Quantity Variance Actual Quantity Actual Quantity Standard Quantity × - × - × Actual Price Standard Price Standard Price In equation form, price and quantity variances are calculated as shown. (AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity

10-19 Learning Objective 2 Compute the direct materials price and quantity variances and explain their significance. Learning objective number 2 is to compute the direct materials price and quantity variances and explain their significance.

Material Variances Example 10-20 Material Variances Example Glacier Peak Outfitters has the following direct material 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 material cost a total of $1,029. Here’s an example that will give us an opportunity to compute material price and quantity variances.

Material Variances Summary 10-21 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 $21 favorable Quantity variance $50 unfavorable The materials price variance, defined as the difference between what is paid for a quantity of materials and what should have been paid according to the standard, is $21 favorable. The price variance is labeled favorable because the actual price was less than the standard price by $0.10 per kilogram. The materials quantity variance, defined as the difference between the quantity of materials used in production and the quantity that should have been used according to the standard, is $50 unfavorable. The quantity variance is labeled unfavorable because the actual quantity exceeds the standard quantity allowed by 10 kilograms

Material Variances Summary 10-22 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 $1,029  210 kgs = $4.90 per kg The actual price of $4.90 per kilogram is computed by dividing the actual cost of the material by the actual number of kilograms purchased. Price variance $21 favorable Quantity variance $50 unfavorable

Material Variances Summary 10-23 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 0.1 kg per parka  2,000 parkas = 200 kgs The standard quantity of 200 kilograms is computed by multiplying the standard quantity per parka times the number of parkas made. Price variance $21 favorable Quantity variance $50 unfavorable

Material Variances: Using the Factored Equations 10-24 Material Variances: Using the Factored 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/parka 2,000 parkas)) = $5.00/kg (210 kgs - 200 kgs) = $5.00/kg (10 kgs) = $50 U The equations that we have been using thus far can be factored as shown and used to compute price and quantity variances.

10-25 Material Variances The price variance is computed on the entire quantity purchased. The quantity variance is computed only on the quantity used. Hanson purchased and used 1,700 pounds. How are the variances computed if the amount purchased differs from the amount used? The materials price variance is computed using the entire amount of material purchased during the period. The materials quantity variance is computed using only the portion of materials that was used in production during the period.

1.5 pounds per Zippy at $4.00 per pound 10-26 Quick Check  Zippy Hanson Inc. has the following direct material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week, 1,700 pounds of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630. In this example, the company produces a Zippy. The direct materials standard calls for 1.5 pounds per Zippy at $4.00 per pound. Last week, Hanson purchased and used 1,700 pounds of material to produce 1,000 Zippies. The 1,700 pounds of material cost a total of $6,630. Now, we will see several questions based on the information on this screen. You may wish to take some notes to use as you answer the questions. Try to answer each question before advancing to the solution.

Quick Check  Hanson’s material price variance (MPV) for the week was: 10-27 Quick Check  Zippy Hanson’s material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. Here’s your first question.

10-28 Quick Check  Zippy Hanson’s material 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 We find the material price variance by multiplying the actual quantity of material purchased times the difference between the actual price per pound and the standard price per pound. We find the actual price per pound by dividing the $6,630 total actual price paid for the material by the 1,700 pounds purchased. The $170 favorable material price variance results because Hanson paid 10 cents per pound less than standard for 1,700 pounds of material.

10-29 Quick Check  Zippy Hanson’s material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. Here’s your second question.

10-30 Quick Check  Zippy Hanson’s material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. The standard quantity is the amount of material that Hanson should have used to make 1,000 Zippies. We find the standard quantity by multiplying the 1.5 pounds per unit standard for one Zippy times the 1,000 Zippies. Now that we know the standard quantity, let’s calculate the material quantity variance. We find the material quantity variance by multiplying the standard price for one pound of material times the difference between the actual quantity of material and the standard quantity of material. The $800 unfavorable material quantity variance results because Hanson used 200 pounds more than standard to make the 1,000 Zippies, and each pound of material has a standard price of $4.00. MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable

10-31 Quick Check  Zippy Actual Quantity Actual Quantity Standard Quantity × - × - × Actual Price Standard Price Standard Price 1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb. = $6,630 = $ 6,800 = $6,000 Here we see a summary of the material price and quantity variance computations in a convenient three-column format. You may find this three-column format more helpful than the equations that we used to answer the previous two questions. Price variance $170 favorable Quantity variance $800 unfavorable

Quick Check  Continued 10-32 Quick Check  Continued Zippy Hanson Inc. has the following material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week, 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000 Zippies. Let’s extend the Hanson example by increasing the quantity of material purchased to 2,800 pounds at a total cost of $10,920. All other information is the same as before.

Quick Check  Continued 10-33 Quick Check  Continued Zippy Actual Quantity Actual Quantity Purchased Purchased × - × Actual Price Standard Price 2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb. = $10,920 = $11,200 Hanson actually paid $10,920 for the 2,800 pounds of material. Multiplying the standard price of $4.00 per pound times the 2,800 pounds of material purchased, we find that Hanson should have paid $11,200. The price variance is now $280 favorable. The price variance increases in this example because the quantity purchased increased. The $280 favorable material price variance results because Hanson paid $0.10 per pound less than standard for 2,800 pounds of material. Price variance $280 favorable Price variance increases because quantity purchased increases.

Quick Check  Continued 10-34 Quick Check  Continued Zippy Actual Quantity Used Standard Quantity × - × Standard Price Standard Price 1,700 lbs. 1,500 lbs. × × $4.00 per lb. $4.00 per lb. = $6,800 = $6,000 The material quantity variance is the same as before because Hanson again used the same amount of material as before to make the same number of Zippies. Quantity variance is unchanged because actual and standard quantities are unchanged. Quantity variance $800 unfavorable

10-35 Learning Objective 3 Compute the direct labor rate and efficiency variances and explain their significance. Learning objective number 3 is to compute the direct labor rate and efficiency variances and explain their significance.

Labor Variances Example 10-36 Labor Variances 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. Now let’s turn our attention back to Glacier Peak Outfitters to illustrate the computation of labor rate and efficiency variances.

Labor Variances Summary 10-37 Labor Variances Summary Actual Hours Actual Hours Standard Hours × - × - × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × × $10.50 per hour $10.00 per hour. $10.00 per hour = $26,250 = $25,000 = $24,000 Rate variance $1,250 unfavorable Efficiency variance $1,000 unfavorable The labor rate variance, defined as the difference between the actual average hourly wage paid and the standard hourly wage, is $1,250 unfavorable. The rate variance is labeled unfavorable because the actual average wage rate was more than the standard wage rate by $0.50 per hour. The labor efficiency variance, defined as the difference between the actual quantity of labor hours and the quantity allowed according to the standard, is $1,000 unfavorable. The efficiency variance is labeled unfavorable because the actual quantity of hours exceeds the standard quantity allowed by 100 hours.

Labor Variances Summary 10-38 Labor Variances Summary Actual Hours Actual Hours Standard Hours × - × - × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × × $10.50 per hour $10.00 per hour. $10.00 per hour = $26,250 = $25,000 = $24,000 $26,250  2,500 hours = $10.50 per hour Rate variance $1,250 unfavorable Efficiency variance $1,000 unfavorable The actual price (or rate) of $10.50 per hour is computed by dividing the actual total cost for labor by the actual number of hours worked.

Labor Variances Summary 10-39 Labor Variances Summary Actual Hours Actual Hours Standard Hours × - × - × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × × $10.50 per hour $10.00 per hour. $10.00 per hour = $26,250 = $25,000 = $24,000 1.2 hours per parka  2,000 parkas = 2,400 hours Rate variance $1,250 unfavorable Efficiency variance $1,000 unfavorable The standard quantity of 2,400 hours is computed by multiplying the standard hours for one parka times the number of parkas made.

Labor Variances: Using the Factored Equations 10-40 Labor Variances: Using the Factored Equations Labor rate variance LRV = AH (AR - SR) = 2,500 hours ($10.50 per hour – $10.00 per hour) = 2,500 hours ($0.50 per hour) = $1,250 unfavorable Labor efficiency variance LEV = SR (AH - SH) = $10.00 per hour (2,500 hours – 2,400 hours) = $10.00 per hour (100 hours) = $1,000 unfavorable Factored equations can also be used to compute the rate and efficiency variances.

1.5 standard hours per Zippy at $12.00 per direct labor hour 10-41 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. Let’s return to the Hanson Company and compute labor variances. The direct labor standard to produce each Zippy is 1.5 hours at $12.00 per hour. Last week, it took 1,550 direct labor hours to produce 1,000 Zippies, and the total labor cost was $18,910. Next, we will see several questions based on the information on this screen. Again, you may wish to take some notes to use as you answer the questions. Also, just as you did with the material variance questions, try to answer each question before advancing to the solution.

Quick Check  Hanson’s labor rate variance (LRV) for the week was: 10-42 Quick Check  Zippy Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. Here’s your first labor variance question.

10-43 Quick Check  Zippy Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. LRV = AH(AR - SR) LRV = 1,550 hrs($12.20 - $12.00) LRV = $310 unfavorable We find the actual labor rate by dividing the $18,910 total labor cost by 1,550 direct labor hours actually worked. Now that we know the actual labor rate, let’s calculate the labor rate variance. We find the labor rate variance by multiplying the actual labor hours worked times the difference between the actual rate per labor hour and the standard rate per labor hour. The $310 unfavorable labor rate variance results because Hanson paid $0.20 per labor hour more than standard for 1,550 labor hours actually worked.

10-44 Quick Check  Zippy Hanson’s labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. Here’s your second labor variance question.

10-45 Quick Check  Zippy Hanson’s labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. The total standard hours for labor is the amount of time Hanson’s employees should have worked to make 1,000 Zippies. We find the total standard hours by multiplying the 1.5 standard hours for one Zippy times the 1,000 Zippies made. Now that we know the total standard hours, let’s calculate the labor efficiency variance. We find the labor efficiency variance by multiplying the standard rate for one hour of labor times the difference between the actual hours of labor and the standard hours of labor. The $600 unfavorable labor efficiency variance results because Hanson’s employees worked 50 hours more than standard to make 1,000 Zippies, and each hour of labor has a standard rate of $12.00. LEV = SR(AH - SH) LEV = $12.00(1,550 hrs - 1,500 hrs) LEV = $600 unfavorable

10-46 Quick Check  Zippy Actual Hours Actual Hours Standard Hours × - × - × Actual Rate Standard Rate Standard Rate 1,550 hours 1,550 hours 1,500 hours × × × $12.20 per hour $12.00 per hour $12.00 per hour = $18,910 = $18,600 = $18,000 Here we see a summary of the labor rate and efficiency variance computations in a convenient three-column format. You may find this three-column format more helpful than the equations that we used to answer the previous two questions. Rate variance $310 unfavorable Efficiency variance $600 unfavorable

10-47 Learning Objective 4 Compute the variable manufacturing overhead spending and efficiency variances. Learning objective number 4 is to compute the variable manufacturing overhead spending and efficiency variances.

Variable Manufacturing Overhead Variances Example 10-48 Variable Manufacturing Overhead Variances 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. Now that we have studied material and labor variances, let’s take a look a variable manufacturing overhead variances. We will return to Glacier Peak Outfitters to illustrate the computation of variable manufacturing spending and efficiency variances.

Variable Manufacturing Overhead Variances Summary 10-49 Variable Manufacturing Overhead Variances Summary Actual Hours Actual Hours Standard Hours × - × - × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour = $10,500 = $10,000 = $9,600 Spending variance $500 unfavorable Efficiency variance $400 unfavorable The variable overhead spending variance, defined as the difference between the actual variable overhead costs incurred during the period and the standard cost that should have been incurred based on the actual activity of the period, is $500 unfavorable. The spending variance is labeled unfavorable because the actual variable overhead rate was more than the standard variable overhead rate by $0.20 per hour. The variable overhead efficiency variance, defined as the difference between the actual activity of a period and the standard activity allowed, multiplied by the variable part of the predetermined overhead rate, is $400 unfavorable. The efficiency variance is labeled unfavorable because the actual quantity of the activity (hours) exceeds the standard quantity of the activity allowed by 100 hours.

Variable Manufacturing Overhead Variances Summary 10-50 Variable Manufacturing Overhead Variances Summary Actual Hours Actual Hours Standard Hours × - × - × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour = $10,500 = $10,000 = $9,600 $10,500  2,500 hours = $4.20 per hour Spending variance $500 unfavorable Efficiency variance $400 unfavorable The actual price of $4.20 per hour is computed by dividing the actual total cost for variable manufacturing overhead by the actual number of hours worked.

Variable Manufacturing Overhead Variances Summary 10-51 Variable Manufacturing Overhead Variances Summary Actual Hours Actual Hours Standard Hours × - × - × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour = $10,500 = $10,000 = $9,600 1.2 hours per parka  2,000 parkas = 2,400 hours Spending variance $500 unfavorable Efficiency variance $400 unfavorable The standard quantity of 2,400 hours is computed by multiplying the standard hours for one parka times the number of parkas made.

Variable Manufacturing Overhead Variances: Using Factored Equations 10-52 Variable Manufacturing Overhead Variances: Using Factored Equations Variable manufacturing overhead spending variance VMSV = AH (AR - SR) = 2,500 hours ($4.20 per hour – $4.00 per hour) = 2,500 hours ($0.20 per hour) = $500 unfavorable Variable manufacturing overhead efficiency variance VMEV = SR (AH - SH) = $4.00 per hour (2,500 hours – 2,400 hours) = $4.00 per hour (100 hours) = $400 unfavorable Factored equations can be used to compute the spending and efficiency variances.

1.5 standard hours per Zippy at $3.00 per direct labor hour 10-53 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. Now let’s return to the Hanson company and compute the variable manufacturing overhead variances. The variable manufacturing overhead standard to produce each Zippy is 1.5 hours at $3.00 per hour. Last week, it took 1,550 hours to produce 1,000 Zippies, and the total variable manufacturing overhead cost was $5,115. Next, we will see several questions based on the information on this screen. Again, you may wish to take some notes to use as you answer the questions. Also, just as you did with the material and labor variance questions, try to answer each question before advancing to the solution.

10-54 Quick Check  Zippy Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. c. $335 unfavorable. d. $300 favorable. Here’s your first variable manufacturing overhead variance question.

10-55 Quick Check  Zippy Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. c. $335 unfavorable. d. $300 favorable. VOSV = AH(AR - SR) VOSV = 1,550 hrs($3.30 - $3.00) VOSV = $465 unfavorable We find the actual variable manufacturing overhead rate by dividing the $5,115 total variable manufacturing overhead cost by $1,550 direct labor hours actually worked. Now that we know the actual variable manufacturing overhead rate, let’s calculate the variable manufacturing overhead spending variance. We find the variable manufacturing overhead spending variance by multiplying the actual hours worked times the difference between the actual variable manufacturing overhead rate per hour and the standard variable manufacturing overhead rate per hour. The $465 unfavorable variable manufacturing overhead rate variance results because Hanson’s actual variable manufacturing overhead rate per labor hour is $0.30 per hour more than the standard variable manufacturing overhead rate per hour for the 1,550 hours actually worked.

10-56 Quick Check  Zippy Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a. $435 unfavorable. b. $435 favorable. c. $150 unfavorable. d. $150 favorable. Here’s your second variable manufacturing overhead variance question.

10-57 Quick Check  Zippy Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a. $435 unfavorable. b. $435 favorable. c. $150 unfavorable. d. $150 favorable. 1,000 units × 1.5 hrs per unit The total standard hours is the amount of time Hanson’s employees should have worked to make 1,000 Zippies. We find the total standard hours by multiplying the 1.5 standard hours for one Zippy times the 1,000 Zippies made. Now that we know the total standard hours, let’s calculate the variable manufacturing overhead efficiency variance. We find the variable manufacturing overhead efficiency variance by multiplying the standard rate for variable manufacturing overhead times the difference between the actual hours of labor and standard hours of labor. The $150 unfavorable variable manufacturing overhead efficiency variance results because Hanson’s employees worked 50 hours more than standard to make 1,000 Zippies at a standard variable manufacturing overhead rate of $3.00 per hour. VOEV = SR(AH - SH) VOEV = $3.00(1,550 hrs - 1,500 hrs) VOEV = $150 unfavorable

10-58 Quick Check  Zippy 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 Just as we did with labor and material variances, we can summarize the variable manufacturing overhead variance computations in a convenient three-column format. You may find this three-column format more helpful than the equations that we used to answer the previous two questions. Spending variance $465 unfavorable Efficiency variance $150 unfavorable

Variance Analysis and Management by Exception 10-59 Variance Analysis and Management by Exception Larger variances, in dollar amount or as a percentage of the standard, are investigated first. All variances are not worth investigating. Methods for highlighting a subset of variances as exceptions include: Looking at the size of the variance. Looking at the size of the variance relative to the amount of spending. How do I know which variances to investigate?

A Statistical Control Chart 10-60 Exhibit 10-9 A Statistical Control Chart Warning signals for investigation • • Favorable Limit • • • • Desired Value • • Unfavorable Limit • Plotting variance analysis data on a statistical control chart is helpful in variance investigation decisions. Variances are investigated if: They are unusual relative to the normal level of random fluctuation. An unusual pattern emerges in the data. 1 2 3 4 5 6 7 8 9 Variance Measurements

10-61 Learning Objective 6 Compute delivery cycle time, throughput time, and manufacturing cycle efficiency (MCE). Learning objective number 6 is to compute delivery cycle time, throughput time, and manufacturing cycle efficiency.

Delivery Performance Measures 10-62 Delivery Performance Measures Order Received Production Started Goods Shipped Process Time + Inspection Time + Move Time + Queue Time Wait Time Throughput Time Delivery cycle time is the elapsed time from when a customer order is received to when the completed order is shipped. Throughput (manufacturing cycle) time is the amount of time required to turn raw materials into completed products. This includes process time, inspection time, move time, and queue time. Process time is the only value-added activity of the four times mentioned. Delivery Cycle Time Process time is the only value-added time.

Delivery Performance Measures 10-63 Delivery Performance Measures Order Received Production Started Goods Shipped Process Time + Inspection Time + Move Time + Queue Time Wait Time Throughput Time Manufacturing cycle efficiency (MCE) is computed by dividing value-added time by manufacturing cycle (throughput) time. An MCE less than one indicates that non-value-added time is present in the production process. Next, we will look at a series of questions dealing with delivery performance measures. Delivery Cycle Time Manufacturing Cycle Efficiency Value-added time Manufacturing cycle time =

10-64 Quick Check  A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the throughput time? a. 10.4 days b. 0.2 days c. 4.1 days d. 13.4 days Here’s your first question on delivery performance measures asking for a computation of throughput time.

10-65 Quick Check  A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the throughput time? a. 10.4 days b. 0.2 days c. 4.1 days d. 13.4 days Throughput time is the sum of process time, inspection time, move time, and queue time. The total for these four times is 10.4 days. Throughput time = Process + Inspection + Move + Queue = 0.2 days + 0.4 days + 0.5 days + 9.3 days = 10.4 days

10-66 Quick Check  A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the Manufacturing Cycle Efficiency? a. 50.0% b. 1.9% c. 52.0% d. 5.1% Here’s your second question on delivery performance measures asking for a computation of manufacturing cycle efficiency.

Quick Check  MCE = Value-added time ÷ Throughput time 10-67 Quick Check  A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the Manufacturing Cycle Efficiency? a. 50.0% b. 1.9% c. 52.0% d. 5.1% Manufacturing cycle efficiency is found by dividing value-added time by throughput time. Process time is the only value-added time. Process time of 0.2 days divided by throughput time of 10.4 days results in a manufacturing cycle efficiency of 1.9 percent. MCE = Value-added time ÷ Throughput time = Process time ÷ Throughput time = 0.2 days ÷ 10.4 days = 1.9%

10-68 Quick Check  A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the delivery cycle time? a. 0.5 days b. 0.7 days c. 13.4 days d. 10.4 days Here’s your third question on delivery performance measures asking for a computation of delivery cycle time.

Quick Check  Delivery cycle time = Wait time + Throughput time 10-69 Quick Check  Delivery cycle time = Wait time + Throughput time = 3.0 days + 10.4 days = 13.4 days A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the delivery cycle time? a. 0.5 days b. 0.7 days c. 13.4 days d. 10.4 days Delivery cycle time is the sum of wait time plus throughput time. The total for these two times is 13.4 days.

10-70 End of Chapter 10 End of Chapter 10.