Do you have any question for clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.

Keywords index
Flexible budget
Static budget

Self-help
You can also refer to the sources below to help you further understand the
lesson:
Raiborn, C. A., & Kinney, M.R. (2014). Cost accounting (2014 second edition).
Philippines Hixes Press, Inc.

Cabrera, M. E. (2017). Management Accounting: Concepts and Application.

Manila: GIC Enterprises & Co., Inc.

De Leon, E.D., & De Leon N.D. (2016). Cost accounting. Manila: IC Enterprises &
Co., Inc.

Big Picture in Focus: ULOb.apply the conceptstandard cost in measuring

the operational performance of the business.

Metalanguage
In this section, the most essential terms relevant to the topic and to demonstrate
ULObwill be operationally defined to establish a common frame of reference as to
how the texts work in your chosen field or career.
1. Standard costs – represent what costs should be under attainable,
acceptable performance. They do not represent what the cost would be if
perfection in performance had actually been attained. Standards establish
desirable minimum costs.

41
 2. Variance analysis–is a quantitative examination of the difference between
the planned and actual result. The variance analysis is used to maintain
control over the business.

Essential Knowledge
Proper control of costs requires a comparison of actual cost result with some base
data. Management is interested to know what costs are but also whether they
represent an efficient level of productive operations. To properly interpret and control
costs, we can compare actual costs with standard costs so we can study any
difference or variance.

1. Standards– are yardsticks that measure achievement or lack of achievement.

The standards relate to the quantity and cost of inputs used in manufacturing
goods or providing services.
 Quantity standard – indicate how much of a cost element, such as labor, time
raw materials should be used in manufacturing a unit of product or in
providing a unit of service.
 Cost standard – indicate what the cost of the time or the materials should be.

2. Standard cost – is the predetermined cost of manufacturing a single unit or a

number of product units during a specific period in the immediate future. It is a
planned cost of a product under current and/or anticipated operating conditions.

2.1. Uses of Standard Costs

Standard cost system help in planning operations and gaining insights into the
probable impact of managerial decisions on cost levels and profits. Specifically,
standard costs are used for:
1. Establishing budgets
2. Controlling costs
3. Motivating and measuring performance
4. Promoting cost awareness and cost reduction
5. Simplifying costing procedures and expediting cost reports

2.2. Benefits of standard costs

When standard cost are set carefully and used widely, they provide benefits to
and organization such as:
1. Managers and employees become cost conscious because variances
between standard costs and actual costs are reported, studied and their
causes are determined.
2. They aid management planning by providing the unit amount for
budgeting.
3. Standard cost systems integrate managerial, accounting and engineering
functions.
4. Using standard cost systems can save data processing costs.

2.3. Limitation of standard cost

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 Although the advantages of using standard costs are significant, certain
difficulties can also be encountered by the manager. The following are some of
the problems or potential problems in using standard costs:
1. Difficulty may be encountered in determined which variance are materials
or significant in amount to warrant investigation.
2. Other useful information such as trends may not be noticed at an early
stage since attention is focused only on variances above a certain level.
3. Subordinates may be tempted to cover up unfavorable exceptions or not
report them at all, particularly when they do not receive reinforcement or
commendation for the positive things they do.

3. Setting Direct Materials Standards

3.1. Standard Quantity

Industrial engineers develop specification for the kinds and quantities of materials
used in producing the goods budgeted. Operation schedules list the materials
and quantities required for the expected volume of production.

3.2. Standard Price

The purchasing department receives the operation schedule and bills of material
established jointly by the engineering department, the manufacturing supervisor
and the accountant. This information becomes the basis for the material price
standard.

Purchasing agents are responsible for price variances, they should help set the
price standards which should reflect the study of market conditions, vendors’
quoted prices and the optimum size of purchase order. The account should
consider cash discounts, material handling costs (freight in, purchasing, receiving
and other costs) in the standard price to be established.

4. Setting Labor Standards

4.1. Standard Time

Examination of past payroll and production records can reveal the worker – hours
used on various jobs and can help determine standard performance. Time
reports from the workers for a limited period will be a good basis for the standard.

4.2. Standard Labor Rate

Labor rates should be determined by considering the current rate as well as the
competitive markets. The company may use any of the following methods in
determining the labor rate standards:
1. A company may establish a standard rate for the job; regardless of who
performs the job, the rate stays the same, or
2. A company may establish a rate for an individual worker and the worker
receives this rate regardless of the work performed.

43
5. Setting Overhead Standards
Factory overhead cost standards provide a means of allocating factory overhead
to cost inventories for pricing decisions and controlling expense. A standard cost
system uses budgeted rates based on standard hours or other cost drivers
allowed for actual production. Standards set on practical capacity are likely to be
attainable and are more realistic that theoretical standards.

6. Variance – is the difference between actual costs and standard costs. To be

meaningful to users, the variance should be described as either favorable or
unfavorable.
a. Actual costs are more than the standard costs, the variance is
unfavorable.
b. Actual costs are less than the standard costs, the variance is favorable.

6.1. Direct Materials Variance Analysis

The difference between actual cost and standard cost of materials used is called
a material cost variance. This variance is made up of a price variance and a
quantity variance.

 Materials Price Variance (MPV) – is the difference between the price

actually paid and the standard price that should have been paid for the
quantity of materials actually purchased or used. This type of variance is the
responsibility of the purchasing department. The formula is:
MPV = (Actual Price – Standard Price) * Actual Quantity Purchased

 Materials Quantity Variance (MQV) – is the difference between the actual

units of materials used and the standard quantity allowed for actual
production. This type of variance is the responsibility of the production
department. The formula is:
MQV – (Actual Quantity Used – *Standard Quantity Allowed) * Standard Price
Note: Standard Quantity Allowed = (Actual production * SQM required per unit of
product)

The possible causes of material price variance are as follows:

1. Fluctuations in market prices of materials.
2. Purchasing from distant suppliers, which results in additional transportation.
3. Failure to take cash discount available.
4. Purchasing materials of substandard quality or in uneconomical lots.
5. Unfavorable purchase contract terms.

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Responsibility: The Purchasing Department is usually responsible for material price
variances. However, the Production Planning Department could be responsible for
unfavorable price variance occurring (1) because of a request for rush order due to
poor scheduling or (2) when they specify certain brand-name materials or materials
of certain grade or quality other than those initially included in the bill of materials.

The possible causes of material quantity variance are as follows:

1. Waste and loss of material in handling and processing.
2. Substitution of defective or nonstandard materials.
3. Spoilage or production of excess scrap because of inexperienced workers or
poor supervision.
4. Lack of proper tools or machines.
5. Variation in yields from materials

Responsibility: Production line supervisors should be held responsible for materials

under their control.

Sample Problem 1: Direct Materials Variance

Glass Peak Outfitters has the following direct material standard for the fiberfill in its
mountain parka.0.1 kg. of fiberfill per parka at P5.00 per kg.
Last month 210 kgs of fiberfill were purchased and used to make 2,000 parkas. The
material cost a total of P1,029.

Materials price variance

MPV = AQ (AP - SP)
= 210 kgs (P4.90/kg - P5.00/kg)
= 210 kgs (-P0.10/kg)
= P21 F

Materials quantity variance

MQV = SP (AQ - SQ)
= P5.00/kg {210 kgs-(0.1 kg/parka 2,000 parkas)}
= P5.00/kg (210 kgs - 200 kgs)
= P5.00/kg (10 kgs)
= P50 U

When the manufacturing process uses several different direct materials that are
supposed to be combined in a standard proportion, the materials quantity may be
broken down into:
a. Materials Mix Variance – arises from the usage of materials in a proportion
different from standard.
b. Materials Yield Variance – arises when actual output differs from the quantity
of expected output.

Materials Mix Variance may be computed as follows:

45
 Actual Quantity X Standard Price (per material) P XX
Less: Total Actual Input X Average Standard Price XX
Unfavorable (Favorable) P XX

Materials Yield Variance may be computed as follows:

Total Actual Input X Average Standard Price P XX
Less: Standard Quantity X Standard Price (per material) XX
Unfavorable (Favorable) P XX

Sample Problem 2: Materials Mix and Yield Variance

A company combines three types of materials to produce its product. for a 100-kilo
batch, the standard costs for materials are as follows:
Standard Quantity Standard Price Total
Material A 3,200 kgs. P5 P 300
Material B 2,350 kgs. 4 144
Material C 1,510 kgs. 3 72
Total Usage 7,060 kgs 516

During August, the company produced 200 batches or 20,000 kilos of its product.
materials used for this production were:
Quantity Price Total
Material A 12,600 kgs. P 4.80 P 69,480
Material B 7,300 kgs. 4.10 29,930
Material C 4,700 kgs. 3.40 15,980
Total Usage 24,600 kgs P 106,390

Material Mix Variance:

Actual Quantity Standard Price Total
Material A 12,600 kgs. X P5 P 63,000
Material B 7,300 kgs. X 4 29,200
Material C 4,700 kgs. X 3 14,100
Total 106,300
Less: Total Actual Input X Average Standard Price* (105,780)
Materials Mix Variance P520
Unfavorable
*(24,600 kgs X P4.30** = P 16,238)
**(P516/120 kgs. = P4.30)

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The materials yield variance is computed as follows:
Total Actual Input X Average Standard Price P 105,780
Less: Standard Quantity Standard Price
Material A 12,000 X P5 P 60,000
(24,000x60/120)
Material B 7,200 X P4 28,800
(24,000x36/120)
Material C 4,800 X P3 14,400
(24,000x24/120)
Total 103,200
Materials Yield Variance P2,580
Unfavorable
6.2. Direct Labor Variance Analysis

Labor cost variance is the difference between actual labor cost and standard
labor cost. This variance may be analyzed into two components, namely, the
labor rate variance and labor efficiency variance.

 Labor Rate Variance (LRV)– is the difference between the actual labor rate
paid and the standard labor rate. This type of variance is the responsibility of
the personnel department. The formula is:
LRV = (Actual Rate – Standard Rate) * Actual Hours

 Labor Efficiency Variance (LEV) – is the difference between the actual

hours used and the standard hours allowed for actual production. This type of
variance is the responsibility of the production department. The formula is:
LEV = (Actual Hours - *Standard Hours Allowed) * Standard rate

Note: Standard Hours Allowed = (Actual production * SH required per unit of product)

If several different materials are used in the manufacturing process, the labor
efficiency variance may further be analyzed into:
a. Labor Efficiency Variance – the formula is:
Actual hours x Std. Rate P XX
Less: Std. Hours based on Actual Output x Std. Rate XX
Unfavorable (Favorable) P XX

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 b. Labor Yield Variance – a difference between the expected and the actual
quantities of output would also give rise to a variance in labor cost. The
formula is:
Std. Hours based on Actual Input x Std. Rate P XX
Less: Std. Hours based on Actual Output x Std. Rate XX
Unfavorable (Favorable) P XX

The possible causes of labor rate variance are as follows:

1. Inexperienced workers hired.
2. Change in labor rate particularly peak season that has not been incorporated
in standard rate.
3. Use of an employee having a wage classification other than that assumed
when the standard for a job was set.
4. Use of a greater number of higher paid employees in the group than
anticipated.
Responsibility: if production line supervisors have the authority to match workers
and machine to task by hiring the proper grade of labor, line supervisor should be
responsible. They will also be responsible if they control the wage rate of their labor
force. If they do not, the Personnel Department may be responsible.

The possible causes of labor efficiency variance are as follows:

1. Good or poor training of workers.
2. Poor materials or faulty equipment.
3. Good or poor supervision and scheduling of work.
4. Experience or lack of experience on the job.

Responsibility: Production line supervisors should be held responsible for labor

under their control.

Sample Problem 1: Direct Labor Variance

Glass Peak Outfitters has the following direct labor standard for its mountain
parka.1.2 standard hours per parka at P10.00 per hour

Last month employees actually worked 2,500 hours at a total labor cost of P26,250
to make 2,000 parkas.

Labor rate variance

LRV = AH (AR - SR)
= 2,500 hours (P10.50 per hour – P10.00 per hour)
= 2,500 hours (P0.50 per hour)
= P1,250 unfavorable

Labor efficiency variance

LEV = SR (AH - SH)

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 = P10.00 per hour (2,500 hours – 2,400 hours)
= P10.00 per hour (100 hours)
= P1,000 unfavorable

6.3. Factory Overhead Variance Analysis

Variable Manufacturing Overhead Variance Analysis

Total variable manufacturing overhead variance is the difference between actual
variable overhead and standard variable overhead allowed on actual output. This
may be broken down into:
a. Variable overhead spending variance
b. Variable overhead efficiency variance

These variances are computed as follows:

Variable Overhead Spending Variance

Actual Variable OH P XX
Less: Actual Hours * Standard variable OH rate XX
Unfavorable (Favorable) XX

Variable Overhead Efficiency Variance

Actual Hours P XX
Less: Standard Hours XX
Unfavorable (Favorable) XX
Multiplied by: Standard variable OH rate XX
Unfavorable (Favorable) XX

The possible causes of variable overhead spending or controllable variance

are as follows:
1. Increase in energy costs
2. Waste in using supplies
3. Avoidable machine breakdowns
4. Wrong grade of indirect material an indirect labor
5. Lack of operators or tools.

Responsibility: Supervisors of cost centers are responsible because they have

some degree of control over these budget or expense factors.

The possible cause of variable overhead efficiency variance is attributable to

efficiency in using the base on which variable overhead is applied.

Responsibility: Production line supervisors are responsible for this variance.

Fixed Manufacturing Overhead Variance Analysis

In variance analysis, fixed manufacturing costs are treated differently from variable
manufacturing costs. It is usually assumed that fixed costs are unchanged when

49
 volume changes, so the amount budgeted for fixed overhead is the same in both the
master and flexible budgets. There is no input – output relationship for fixed
overhead.
a. Fixed spending variance – the difference between the actual fixed overhead
and the budgeted fixed overhead at normal capacity.
b. Volume variance – difference between the budgeted fixed overhead and
applied fixed overhead.

The possible causes of volume variance are as follows:

1. Poor production scheduling
2. Unusual machine breakdowns
3. Storms or strikes
4. Fluctuations over time
5. Excess plant capacity

Responsibility: Line supervisors can control fixed overhead when the costs are
discretionary rather than committed. Top sales executive may be held responsible if
budgeted volume is matched with anticipated long – run sales. Responsibility usually
rests with top management, for the volume variance represents under or over
utilization of plant and equipment.

Combined Manufacturing Overhead (Variable & Fixed) Variance Analysis

I. If the company is using a flexible budget, the total overhead variance may
be analyzed as follows:

A. Under the Two – Variance Method

Controllable variance
Actual Manufacturing Overhead P XX
Less: Budget allowed based on standard hours:
Fixed Costs (at normal capacity) P XX
Variable (SH*VOH rate) XX XX
Unfavorable (Favorable) P XX

Volume variance
Budget allowed based on standard hours P XX
Less: Standard Hours * Standard Overhead rate XX
Unfavorable (Favorable) P XX

TOTAL MANUFACTURING OVERHEAD VARIANCE P XXX

B. Under the Three – Variance Method

Spending variance
Actual Manufacturing Overhead P XX
Less: Budget allowed based on actual hours:
Fixed Costs (at normal capacity) P XX
Variable (AH*VOH rate) XX XX
Unfavorable (Favorable) P XX

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 Variable efficiency variance
Budget allowed based on actual hours P XX
Less: Budget allowed based on standard hours:
Fixed Costs (at normal capacity) P XX
Variable (SH*VOH rate) XX XX
Unfavorable (Favorable) P XX

Volume variance
Budget allowed based on standard hours P XX
Less: Standard Hours * Standard Overhead rate XX
Unfavorable (Favorable) P XX

TOTAL MANUFACTURING OVERHEAD VARIANCE P XXX

C. Under the Four – Variance Method

Variable OH Spending variance
Actual Variable Manufacturing Overhead P XX
Less: Budget allowed based on actual hours:
Variable (AH*VOH rate) XX
Unfavorable (Favorable) P XX

Variable OH efficiency variance

Budget allowed based on actual hours (variable) P XX
Less: Budget allowed based on standard hours:
Variable (SH*VOH rate) XX
Unfavorable (Favorable) P XX

Fixed OHspending variance

Actual Fixed Manufacturing Overhead P XX
Less: Applied Fixed Manufacturing Overhead XX
Unfavorable (Favorable) P XX

Volume variance
Budget allowed based on standard hours P XX
Less: Standard Hours * Standard Overhead rate XX
Unfavorable (Favorable) P XX

TOTAL MANUFACTURING OVERHEAD VARIANCE P XXX

II. If the company is using a static budget, the total overhead variance may be
analyzed as follows:
A. Under the Two – Variance Method
Budget variance
Actual Manufacturing Overhead P XX

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 Less: Budgeted Overhead (at normal capacity) XX
Unfavorable (Favorable) P XX

Capacity variance
Budgeted Overhead P XX
Less: Standard or Applied Overhead
XX
(Standard hours * Standard overhead rate)
Unfavorable (Favorable) P XX

TOTAL MANUFACTURING OVERHEAD VARIANCE P XXX

B. Under the Three – Variance Method

Budget variance
Actual Manufacturing Overhead P XX
Less: Budgeted Overhead (at normal capacity) XX
Unfavorable (Favorable) P XX

Capacity variance
Budgeted hours * Standard overhead rate P XX
Less: Actual hours * Standard overhead rate
Unfavorable (Favorable) P XX

Efficiency variance
Actual hours * Standard overhead rate P XX
Less: Standard Hours * Standard Overhead rate XX
Unfavorable (Favorable) P XX

TOTAL MANUFACTURING OVERHEAD VARIANCE P XXX

Sample Problem 1: Manufacturing Overhead Variance

Select Company uses a standard cost system for its production process and applies
overhead based on direct labor hours. The following information is available for July
when Select made 4,500 units:

Standard:
Direct Labor Hour per unit 2.50
Variable overhead per DLH P1.75
Fixed overhead per DLH P3.10
Budgeted variable overhead P21,875
Budgeted fixed overhead P38,750

Actual:
Direct labor hours 10,000
Variable overhead P26,250
Fixed overhead P38,000

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A. Under the Two – Variance Method
Controllable variance
Actual Manufacturing Overhead P 64,250.00
Less: Budget allowed based on standard hours:
Fixed Costs (at normal capacity) P 38,750
Variable (SH*VOH rate) 19,687.50 58,437.50
Unfavorable P 5,812.50

Volume variance
Budget allowed based on standard hours P 58,437.50
Less: Standard Hours * Standard Overhead rate 54,562.50
Unfavorable P 3,875.00

TOTAL MANUFACTURING OVERHEAD VARIANCE P 9,687.50

Unfavorable

Note:
Actual Mfg. OH = P26,250 + 38,000
= 64,250.00
BABOSH (variable) = 4,500 units x 2.5 DLH x P1.75
= 19,687.50
Std. Mfg. OH = 4,500 units x 2.5 DLH x (P1.75 + P3.10)
= 54,562.50

B. Under the Three – Variance Method

Spending variance
Actual Manufacturing Overhead P 64,250.00
Less: Budget allowed based on actual hours:
Fixed Costs (at normal capacity) P 38,750
Variable (AH*VOH rate) 17,500 56,250.00
Unfavorable P 8,000

Variable efficiency variance

Budget allowed based on actual hours P 56,250.00
Less: Budget allowed based on standard
58,437.50
hours:
Favorable P (2,187.50)

Volume variance
Budget allowed based on standard hours P 58,437.50
Less: Standard Hours * Standard Overhead
54,562.50
rate
Unfavorable P 3,875.00

TOTAL MANUFACTURING OVERHEAD P 9,687.50

VARIANCE Unfavorable
Note:

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BABOAH (variable) = 10,000 DLH x P1.75
= 19,687.50

C. Under the Four – Variance Method

Variable OH Spending variance
Actual Variable Manufacturing Overhead P 26,250
Less: Budget allowed based on actual hours:
Variable (AH*VOH rate) 17,500
Unfavorable P 8,750.00

Variable OH efficiency variance

Budget allowed based on actual hours (variable) P 17,500.00
Less: Budget allowed based on standard hours:
Variable (SH*VOH rate) 19,687.50
Favorable P (2,187.50)

Fixed OH spending variance

Actual Fixed Manufacturing Overhead P 38,000.00
Less: Applied Fixed Manufacturing Overhead 38,750.00
Favorable P (750.00)

Volume variance
Budget allowed based on standard hours P 58,437.50
Less: Standard Hours * Standard Overhead rate 54,562.50
Unfavorable (Favorable) P 3,875.00

TOTAL MANUFACTURING OVERHEAD VARIANCE P 9,687.50

Unfavorable

ILLUSTRATIVE PROBLEM 1: VARIANCE ANALYSIS

The following events took place at Nova Containers, Inc. during the month of
November:
a. Produced and sold 50,000 plastic water containers at a sales price of P10
each. (budgeted sales were 45,000 units at P10.15)

b. Standard variable cost per unit:

Direct Materials: 2 lbs. @ P1.00 P 2.00
Direct Labor: 0.10 hours @ P15.00 1.50
Variable Manufacturing Overhead: 0.10 hours @ P5.00 0.50
P 4.00 per unit

c. Fixed manufacturing overhead cost:

Monthly budget (P20 per hour) P 80,000
Estimated monthly production - 40,000 units or 4,000 hours

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 d. Actual production costs
Direct Materials purchased: 200,000 lbs. @ P1.20 P 240,000
Direct Materials used: 110,000 lbs. @ P1.20 132,000
Direct Labor: 6,000 hours @ P14.00 84,000
Variable Manufacturing Overhead 28,000
Fixed Manufacturing Overhead 83,000

Required:
I. Compute the following:
a. Direct materials variance
b. Direct labor variance
c. Manufacturing overhead variance

Solution:

Direct materials variance

Materials Price Variance
Actual materials purchased P240,000
Less: Actual Quantity Purchased at Standard price:
200,000
(200,000 x P 1.00)
Unfavorable P 40,000

Materials Quantity Variance

Actual Quantity Used at Standard price:
P 110,000
(110,000 x P1.00)
Less; Standard quantity at Standard Price
100,000
(50,000 units x 2 lbs x P1.00)
Unfavorable P 10,000
TotalDirect Materials Variance P 50,000

Journal Entries:

Direct materials inventory 200,000

Materials price variance 40,000
Accounts Payable 240,000

Work in process inventory 100,000

Materials quantity variance 10,000
Direct materials inventory 110,000

Direct labor variance

Labor rate Variance

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 Actual labor costs P84,000
Less: Actual hours at Standard rate:
90,000
(6,000 x P 15.00)
Favorable P (6,000)

Labor Efficiency Variance

Actual hours at Standard rate:
P 90,000
(6,000 x P 15.00)
Less; Standard hours at Standard rate
75,000
(50,000 units x 0.10hrs. x P15.00)
Unfavorable P 15,000
TotalDirect LaborVariance P 9,000

Journal Entries:

Work in process inventory 75,000

Labor efficiency variance 15,000
Labor rate variance 6,000
Accrued Payroll 84,000

A. Under the Two – Variance Method

Controllable variance
Actual Manufacturing Overhead P 111,000
Less: Budget allowed based on standard
hours:
Fixed Costs (at normal capacity) P 80,000
Variable (SH*VOH rate) 25,000 105,000
Unfavorable P 6,000

Volume variance
Budget allowed based on standard hours P 105,000
Less: Standard Hours * Standard Overhead
125,000
rate
Favorable P (20,000)

TOTAL MANUFACTURING OVERHEAD P

VARIANCE 14,000Favorable
B. Under the Three – Variance Method
Spending variance
Actual Manufacturing Overhead P 111,000
Less: Budget allowed based on actual
hours:
Fixed Costs (at normal capacity) P 80,000
Variable (AH*VOH rate) 30,000 110,000
Unfavorable P 1,000

Variable efficiency variance

Budget allowed based on actual hours P 110,000

56
 Less: Budget allowed based on standard
105,000
hours:
Unfavorable P 5,000

Volume variance
Budget allowed based on standard hours P 105,000
Less: Standard Hours * Standard Overhead
125,000
rate
Favorable P (20,000)

TOTAL MANUFACTURING OVERHEAD P 14,000

VARIANCE Favorable

C. Under the Four – Variance Method

Variable OH Spending variance
Actual Variable Manufacturing Overhead P 28,000
Less: Budget allowed based on actual hours:
Variable (AH*VOH rate) 30,000
Favorable P (2,000)

Variable OH efficiency variance

Budget allowed based on actual hours (variable) P 30,000
Less: Budget allowed based on standard hours:
Variable (SH*VOH rate) 25,000
Unfavorable P 5,000

Fixed OH spending variance

Actual Fixed Manufacturing Overhead P 83,000.00
Less: Applied Fixed Manufacturing Overhead 80,000.00
Unfavorable P 3,000

Volume variance
Budget allowed based on standard hours P 105,000
Less: Standard Hours * Standard Overhead rate 125,000
Favorable P (20,000)

TOTAL MANUFACTURING OVERHEAD VARIANCE P 14,000

Favorable

Journal Entries:

Work in process inventory 25,000

Variable overhead applied 25,000

Variable overhead actual 28,000

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 Miscellaneous Accounts 28,000

Variable overhead applied 25,000

Variable overhead efficiency variance 5,000
Variable overhead spending variance 2,000
Variable overhead actual 28,000

Work in process inventory 100,000

Fixed overhead applied 100,000

Fixed overhead actual 83,000

Miscellaneous Accounts 83,000

Fixed overhead applied 100,000

Fixed overhead spending variance 3,000
Fixed overhead production volume variance 20,000
Fixed overhead actual 83,000

Let’s Check!
I. Questions:

1. “Cost control means cost reduction.” Do you agree?

________________________________________________________
________________________________________________________
________________________________________________________

2. Why separate price and quantity variances?

________________________________________________________
________________________________________________________
________________________________________________________

3. What is meant by the term variance?

________________________________________________________
________________________________________________________
________________________________________________________

II. Multiple Choice:

Encircle the letter that correspond to your answer.

1. The best characteristics of a standard cost system is

a) standard can pinpoint responsibility and help motivation
b) all variances from standard should be reviewed

58