1. Chapter 19
Manufacturing Overhead Standard Costs: Completing the Accounting Cycle for Standards costs

2. Introduction
Manufacturing overhead costs consist of numerous costs items
Few are directly related to individual products
The standard for manufacturing overhead per completed unit of product is largely the result of an allocation process

3. Standard Manufacturing Overhead Costs
Determined at the start of the year
Based on budgeted overhead allowed for the volume of activity chosen
Expected actual production
Normal capacity for a period
Represents the average expected utilization of plant and labor for a year in order to even out variations

4. Setting up a Standard Cost System
Establish standard overhead costs per unit
Record actual costs incurred
Determine standard costs for units produced
Compute variances by comparison of costs
Break down variances into component parts
Record standard costs and variances
Transfer standard cost of units produced to Finished Goods Inventory

5. Illustration of Terminology
Total budgeted hours
Estimated work hours for the period - budgeted output of units x standard hours
Total standard hours
Number of hours it should take to produce actual output - actual output of units x standard hours
Total actual hours
Number of hours it did take to produce actual output - actual output of units x actual hour

6. Establishing Standard Overhead Costs Per Unit of Product
Established by using estimated costs and selected basis for application
Standard hours per unit X
Rate per hour
Overhead rate per unit of product

7. Recording Actual Costs
Actual manufacturing overhead costs are accounted for in two steps
Record in the Manufacturing Overhead Control account the actual costs incurred
Allocate the service department costs to the producing departments
Manufacturing Overhead Control dr.
Various Payables (Prepaid Expenses, etc) cr.

8. Determining Standard Costs for Period
Usually direct labor hours are used to apply manufacturing overhead to production
Standard cost applied = standard hours allowed x standard overhead rate per hour

9. Measuring and Analyzing the Total Overhead Variance
Variance analyses
Analyzes total variance in each department and divides it into its component parts

10. Two-Variance Analysis Method
Total variance is separated into:
Budget variance - difference between actual cost incurred and the overhead in flexible budget for the standard hours allowed for units produced
Relates to variable and fixed costs
Volume variance – difference between the number of hours on which overhead was charged and the number of hours used by the original budget to compute standard overhead rate
Relates to fixed costs

11. Three-Variance Analysis Method
This method results in
Volume variance
Spending variance
Compares what should have been spent with what was actually spent for the actual hours worked
Efficiency variance
Compares the standard hours worked with the actual hours worked for the actual level of output times the variable application rate

12. Four-Variance Analysis Method
Volume variance
Efficiency variance
Variable overhead spending variance
Difference between the actual variable overhead cost incurred and the budget allowance for variable overhead based on the actual hours worked
Fixed overhead spending variance
Difference between the actual fixed cost incurred and the budgeted fixed cost

13. Applying and Recording Overhead Variances
Manufacturing overhead is applied on the basis of standard cost for the number of actual units produced
Summaries of overhead variances provide information for recording journal entries

14. Recording Transfer of Finished Goods and Sale of Products
Completed units are valued at their standard costs when transferred to Finished Goods
Sold units are also priced at standard costs when transferred to Cost of Goods Sold

15. Disposition of Standard Cost Variance
Variances are prorated among Cost of Goods Sold, Finished Goods, and Work in Process
Variances are accumulate until the end of the year – either prorated or closed into Cost of Goods Sold
Variances are accumulate until the end of the year closed into Cost of Goods Sold and adjusted in the income statement
Variance accounts are closed into Cost of Goods Sold at the end of each month
Variances are closed into the income and expense summary account and shown as income or other expenses in the income statement at the end of each month

16. Disposition of Standard Cost Variance (cont’d)
Showing variances in the income statement
When variances are treated as adjustment to cost of goods sold in the income statement
Individual variances may be shown
All variances may be combined and shown as a single figure