Note that the spending variance is the sum of the variable overhead spending variance and the fixed overhead spending variance. For Adler Company, the variable overhead spending variance is $1,000 Favorable and the fixed overhead spending variance is $1,000 Unfavorable, so the overall spending variance is indeed zero. The standard QuickBooks hours for actual production equal direct labor hours. Fill in the following table, being sure to select the appropriate direction for the variance . Variable overhead efficiency varianceCompares actual fixed overhead spending with budgeted fixed overhead spending. B) actual fixed overhead costs with budgeted fixed overhead costs.

__ standards specify how much input should be used normal balance to produce a product or provide a service.

T-accounts are very useful for organizing and working comprehensive standard cost problems. The generic set of accounts introduced in Chapter 4, in connection with normal historical costing, is also used in this chapter, although some additional accounts are needed for the variances.

Three Important Decisions About Cost

Since the actual variance for March is $40,000 unfavorable, the unplanned variance is $21,000 unfavorable. Although the production volume variance is referred to as uncontrollable, a large unplanned variance may need to be investigated and explained. The unplanned variance above could have been caused by a decrease in the demand for the Company’s product, or by various production problems. The calculations are presented in Exhibit 10-18A as a more revealing alternative to the analysis in Exhibit 10-18.

If no one in the department is able to step in, plant management will pull maintenance department workers off their regular work, if possible, and assign them temporarily to the department. These maintenance workers are all classified as Grade D employees, with a standard wage rate of $10 an hour. You’ll note that the labor variance is referred to as a rate variance. This is a favorable variance of ($5,000 – $4,140), or $860. Suggest several possible reasons for the labor rate and efficiency variances.

For example, buying raw materials of superior quality may be offset by reduction in waste and spoilage. Blue Rail’s very favorable labor rate variance resulted from using inexperienced, less expensive labor. Was this the reason for the unfavorable outcomes in efficiency and volume? The challenge for a good manager is the variable overhead efficiency variance compares the to take the variance information, examine the root causes, and take necessary corrective measures to fine tune business operations. In this illustration, AH is the actual hours worked, AR is the actual labor rate per hour, SR is the standard labor rate per hour, and SH is the standard hours for the output achieved.

Good managers should explore the nature of variances related to their variable overhead. It’s not enough to Simply conclude that more or less was spent than intended. As with direct material and direct labor, it’s possible that the prices you paid for underlying components deviated from the expectations. On the other hand, it is also possible that the company’s productive efficiency drove the variances.

Direct Labor Efficiency Variance Calculation

The four overhead variances that appear in Exhibit 10-2 provides one possibility. These include the variable overhead spending variance, VO efficiency variance, the fixed overhead spending variance and the production volume variance. As we shall see later in this chapter, the overhead variances are not price and quantity variances and are much more difficult to interpret in any meaningful way. The fixed overhead variances are the fixed overhead spending variance and the fixed overhead volume variance. The fixed overhead spending variance compares actual fixed overhead with budgeted fixed overhead.

• The following illustration is intended to demonstrate the very basic relationship between actual cost and standard cost.
• However, a more serious problem is that labor efficiency variances tend to promote competitive behavior among lower level managers that can destroy the cooperation needed to optimize the system.
• Standard costs are used to establish the flexible budget for direct labor.
• Points B, C and D represent the three flexible budgets that all fall on the flexible budget line.

Subtract the actual revenue from the budgeted price to find the sales price variance. Variance Analysis is very important as it helps the management of an entity to control its operational performance and control direct material, direct labor, and many other resources. Adding the budget variance and volume variance, we get a total unfavorable variance of $1,600.

Is a flexible budget needed in all standard cost variance calculations, i.e., for all variances? Could we calculate a production volume variance in normal historical job order costing? What are some of the causes of unfavorable and adjusting entries favorable direct labor efficiency variances? The diagram in Exhibit emphasizes the flexible budgets involved in the direct labor variance analysis. A conceptual view of direct material cost drivers is presented in Exhibit 10-9.

The difference between the debit to WIP and the credit to the factory payroll account represents the total direct labor cost variance. Therefore, the direct labor rate and efficiency variances must be calculated to complete the entry. Alternative equations are provided below for this purpose. Recall from Figure 10.1 “Standard Costs at Jerry’s Ice Cream” that the variable overhead standard rate for Jerry’s is $5 per direct labor hour and the standard direct labor hours is 0.10 per unit. Review this figure carefully before moving on to the next section where these calculations are explained in detail.

Direct Labor Variances

The actual selling price, minus the standard selling price, multiplied by the number of units sold. Subtract the total standard quantity of materials that are supposed to be used from the actual level of use and multiply the remainder by the standard price per unit. The variable overhead efficiency variance can be confusing as it may reflect efficiencies or inefficiencies experienced with the base used to apply overhead. For Blue Rail, remember that the total number of hours was “high” because of inexperienced labor. These welders may have used more welding rods and had sloppier welds requiring more grinding.

In the previous example, the assigned overhead cost was $10 per unit. To obtain the fixed overhead volume variance, calculate the actual amount as and then subtract the budgeted amount, calculated as . How is the direct labor efficiency variance related to the variable overhead efficiency variance when direct labor hours are used as the overhead allocation basis? The original static budget for fixed overhead is used to separate the $42,500 total variance in fixed overhead costs into two parts, spending and production volume, or controllable and uncontrollable. Denominator hours are used in the budget calculation to find the static budgeted fixed overhead amount if it is not otherwise available.

Variable Factory Overhead Variances

This is difficult to understand at first, so before we examine this interpretation in more depth, consider how the variance is calculated. As noted in Chapter 8, backflush accounting usually relies on standard costs for the amounts charged back to the inventory accounts at the end of the period. Backflush cost accumulation methods might be thought of as partial methods, although they are simplified with little, or no variance analysis. Another approach involves using standard cost as a control device without recording the standard costs in the accounts. In this approach variance analysis is performed to provide information for management, but normal historical costing is used in the general ledger. In numerical terms, variable overhead efficiency variance is defined as x hourly rate for standard variable overhead, which includes such indirect labor costs as shop foreman and security.

Which Of The Following Does The Efficiency Variance Measure?

All of the overhead variances can be calculated in a combined approach that emphasizes the flexible budgets involved. A four variance approach appears on the right-hand side of the exhibit and a two variance approach appears on the left side.

Since direct labor hours used and purchased are equal, A’ and C are not needed in the analysis. As you can see from the graph, the variable overhead efficiency variance is the difference between two point estimates, i.e., two points on the flexible budget line. The volume variance occurs when actual production does not equal budgeted production.

In SPC, control limits are established to indicate when a process measurement is in control (i.e., results from a common, or system cause) or out of control (i.e., results from a special cause). Another way to apply the control concept is to use standard costing1, although it is a less precise form of control because it does not explicitly recognize the concept of variability. Developing upper and lower control limits is not part of the standard cost methodology. SPC is normally used to control specific processes at the operator level by plotting real time process measurements. Of course, these problems are closely related to the controversies discussed in Chapter 8 in connection with activity based management and in Chapter 9 in connection with responsibility accounting. The controversy in Chapter 8 is over whether or not the cost dimension of the ABM model should connect with the activity management dimension. The controversy in Chapter 9 involves whether the individualistic nature of responsibility accounting is compatible with the team oriented lean enterprise concepts of JIT and TOC.

Next, we can break down the total variable overhead variance into the spending and efficiency variances. The efficiency variance compares the amount of the variable overhead applied to the amount of variable overhead that would have been applied at actual. If more was applied than would have been incurred, the results are favorable. C) actual variable overhead expenditures with budgeted variable overhead costs. The quantity variance calculations are the same regardless of how the price variance is calculated. Therefore, the equations for the material quantity variance are not restated here. Comparing Exhibits 10-3 and 10-6 is a good way to see the similarities and differences between the two methods.

Then, both the price and quantity variances are calculated when materials are charged to work in process. The debit to work in process is the same as in the previous example. However, the credit to materials control is based on the actual price of $10.20.

Direct Material Price Variance:

Every time the standard price of a variable input is multiplied by any quantity of the input, the result is a flexible budget. In fact, there are three flexible budgets included above. The direct material quantity variance is the difference between a flexible budget based on actual quantity used and a flexible budget based on standard quantity allowed . When the entries are made, flexible budgets are used to record and provide a way to evaluate the costs simultaneously.

The three-variance method collapses the variable and fixed overhead spending variances into a spending variance. It retains the efficiency and volume variances from the four-variance method.

Then both the direct materials price variances and direct materials quantity variances are recorded when the material is used. Another partial method is illustrated in the bottom section of Exhibit 10-1. In this approach, actual costs flow into finished goods.