Standard Costs and

Variances
CHAPTER 10

Managerial
Accounting
Seventeenth edition

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution
permitted without the prior written consent of McGraw Hill.
 5-2

A Performance Report Combining Activity

and Revenue and Spending Variances 2

Larry’s Lawn Service

Flexible Budget Performance Report
For the Month Ended June 30
Revenue and Flexible
Revenue/ Actual Spending Activity Planning
Cost Formulas Results Variances Budget Variances Budget

Number of laws (Q) 550 550 500

Revenue ($75Q) $ 43,000 $ 1,750 F $ 41,250 $ 3,750 F $ 37,500
Expenses:

Wages and salaries ($5,000 + $30Q) $ 23,500 $ 2,000 U $ 21,500 $ 1,500 U $ 20,000

Gasoline and ($9Q) 5,100 150 U 4,950 450 U 4,500

supplies
Equipment ($3Q) 1,300 350 F 1,650 150 U 1,500
maintenance
Office and shop ($1,000) 950 50 F 1,000 - 1,000
utilities
 5-3

Standard gasoline cost per gallon: $3/ gallon

Standard gasoline use per lawn: 3 gallons
=> Standard gasoline cost per lawn: $9
 Basic Definitions and
Concepts
Standards are benchmarks or “norms” for
measuring performance. In managerial accounting,
two types of standards are commonly used.

Price standards Quantity standards

specify how much specify how much of an
should be paid for input should be used to
each unit of the make a product or
input. provide a service.

Examples: Firestone, Sears, McDonald’s, hospitals,

construction, and manufacturing companies.

© McGraw Hill 10-4

 Using Standards in Flexible
Budgets
Standard costs per unit for direct materials, direct
labor, and variable manufacturing overhead can be
used to compute activity and spending variances.

Spending variances become more useful by breaking

them down into price and quantity variances.

© McGraw Hill 10-5

 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

© McGraw Hill 10-6

 Price and Quantity Standards
Price 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.

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.

© McGraw Hill 10-7

 A General Model for Variance
Analysis
1 2  2  3
Actual Quantity Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, of Input, Allowed for
at at at Actual Output, at
Actual Price Standard Price Standard Price Standard Price
AQ × AP  AQ × SP  AQ × SP 
                              
SQ × SP 
Price Variance Quantity Variance
 2   1  3   2 
                             
Spending Variance
3 1
Access the text alternative for slide images.

© McGraw Hill 10-8

 Standard gasoline cost per gallon: $3/ gallon
Standard gasoline use per lawn: 3 gallons
Number of lawns mowed: 550
Þ Standard cost = $3/gallon
Þ Standard quantity =1650 gallons

Actual quantity of gasoline used = 2040 gallons

Actual cost per gallon = $2.5/ gallon

© McGraw Hill 10-9

 Price variance = (Actual Quantity * Actual Price) – (Actual Quantity *
Standard Price)
= Actual Quantity * (Actual Price – Standard Price)
= 2040 * (2.5 - 3) = 1020 Favorable

Quantity variance = (Actual Quantity * Standard Price) – (Standard

Quantity * Standard Price)
= Standard Price*(Actual Quantity – Standard Quantity)
= 3 * (2040 – 1650) = 1170 Unfavorable

Total (spending) variance = 1020 – 1170 = 150 Unfavorable.

© McGraw Hill 10-10

 Variance Analysis
Variance Analysis
• Price Variance:
• Materials price variance
• Labor rate variance
• VOH rate variance
• Quantity Variance:
• Materials quantity variance
• Labor efficiency variance
• VOH efficiency variance

© McGraw Hill 10-11

 A General Model for Variance
Analysis – Actual Quantity
Actual quantity is the amount of direct materials, direct labor, and
variable manufacturing overhead actually used.

1 2  2  3
Actual Quantity Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, of Input, Allowed for
at at at Actual Output, at
Actual Price Standard Price Standard Price Standard Price
AQ × AP  AQ × SP  AQ × SP  SQ × SP 
                              
Price Variance Quantity Variance

    
 2   1
             
3  2     
Spending Variance
3  1
© McGraw Hill 10-12
 A General Model for Variance
Analysis – Standard Quantity
Standard quantity is the standard quantity allowed for the actual
output of the period.

1 2  2  3
Actual Quantity Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, of Input, Allowed for
at at at Actual Output, at
Actual Price Standard Price Standard Price Standard Price
AQ × AP  AQ × SP  AQ × SP  SQ × SP 
                              
Price Variance Quantity Variance

    
 2   1
             
3  2     
Spending Variance
3  1
© McGraw Hill 10-13
 A General Model for Variance
Analysis – Actual Price
Actual price is the amount actually paid for the input used.

1 2  2  3
Actual Quantity Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, of Input, Allowed for
at at at Actual Output, at
Actual Price Standard Price Standard Price Standard Price
AQ × AP  AQ × SP  AQ × SP  SQ × SP 
                              
Price Variance Quantity Variance

    
 2   1
             
3  2     
Spending Variance
3  1
© McGraw Hill 10-14
 A General Model for Variance
Analysis – Standard Price
Standard price is the amount that should have been paid for the input
used.

1 2  2  3
Actual Quantity Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, of Input, Allowed for
at at at Actual Output, at
Actual Price Standard Price Standard Price Standard Price
AQ × AP  AQ × SP  AQ × SP  SQ × SP 
                              
Price Variance Quantity Variance

    
 2   1
             
3  2     
Spending Variance
3  1
© McGraw Hill 10-15
 Setting Direct Materials
Standards
Standard Price per Unit Standard Quantity per Unit

Final, delivered cost of Summarized in a bill of

materials, net of materials.
discounts.

© McGraw Hill 10-16

 Setting Direct Labor
Standards
Standard Rate per Hour Standard Hours per Unit

Often a single Use time and

rate is used that reflects motion studies for
the mix of wages earned. each labor operation.

© McGraw Hill 10-17

 Setting Variable Manufacturing
Overhead Standards
Price Standard Quantity Standard

The rate is the The quantity is the

variable portion of the activity in the allocation
predetermined overhead base for predetermined
rate. overhead.

© McGraw Hill 10-18

 Learning Objective 1
Compute the direct materials price and
quantity variances and explain their
significance.

© McGraw Hill 10-19

 Materials Variances – An
Example
Glacier Peak Outfitters has the following direct
materials standard for the fiberfill in its mountain
parka.
0.1 kg of fiberfill per parka at $5.00 per kg
Last month, 210 kg of fiberfill were purchased and
used to make 2,000 parkas. The materials cost a total
of $1,029.

© McGraw Hill 10-20

 Materials Variances Summary 1

Actual Quantity Actual Quantity Actual Quantity Standard Quantity

× × × ×
Actual Price Standard Price Standard Price Standard Price
210 kg 210 kg 210 kg 200 kg
× × × ×
$4.90 per kg $5.00 per kg $5.00 per kg $5.00 per kg
= $1,029 = $1,050 = $1,050 = $1,000
                            
Price Variance Quantity Variance
$21 favorable $50 unfavorable

Access the text alternative for slide images.

© McGraw Hill 10-21

 Materials Variances Summary 2

Actual Quantity Actual Quantity Actual Quantity Standard Quantity

× Actual Price × Standard Price × Standard Price × Standard Price
210 kg 210 kg 210 kgs 200 kg
× $4.90 per kg × $5.00 per kg × $5.00 per kg × $5.00 per kg
= $1,029 = $1,050 = $1,050 = $1,000
                             
Price Variance Quantity Variance
$21 favorable $50 unfavorable

0.1 kg per parka × 2,000 parkas = 200 kg

© McGraw Hill 10-22

 Materials Variances Summary 3

Actual Quantity Actual Quantity Actual Quantity Standard Quantity

× Actual Price × Standard Price × Standard Price × Standard Price
210 kg 210 kg 210 kg 200 kg
× $4.90 per kg × $5.00 per kg × $5.00 per kg × $5.00 per kg
= $1,029 = $1,050 = $1,050 = $1,000
                             
Price Variance Quantity Variance
$21 favorable $50 unfavorable

$1,029 ÷ 210 kg = $4.90 per kg

© McGraw Hill 10-23

 Materials Variances: Using the
Factored Equations
Materials price variance
MPV = (AQ × AP) – (AQ × SP)
= AQ(AP – SP)
= 210 kg($4.90/kg – $5.00/kg)
= 210 kg(– $0.10/kg) = $21 F
Materials quantity variance
MQV = (AQ × SP) – (SQ × SP)
= SP(AQ – SQ)
= $5.00/kg[210 kg – (0.1 kg/parka  2,000 parkas)]
= $5.00/kg(210 kg – 200 kg)
= $5.00/kg(10 kg) = $50 U

© McGraw Hill 10-24

 Responsibility for Materials
Variances
Who is responsible for the Who is responsible for the
materials price variance? materials quantity variance?
Purchasing Manager Production Manager

The standard price is used to compute the quantity variance

so that the production manager is not held responsible for
the purchasing manager’s performance.

© McGraw Hill 10-25

 Controllability of Materials
Variances
The materials variances are not always entirely controllable
by one person or department. For example:

The production manager may schedule production in

such a way that it requires express delivery of raw
materials resulting in an unfavorable materials price
variance.

The purchasing manager may purchase lower-quality

raw materials resulting in an unfavorable materials
quantity variance for the production manager.

© McGraw Hill 10-26

 Quick Check 1
Hanson Inc. has the following direct materials
standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of materials were
purchased and used to make 1,000 Zippies. The
materials cost a total of $6,630.

© McGraw Hill 10-27

 Quick Check 1a
How many pounds of materials should Hanson
have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds.

© McGraw Hill 10-28

 Quick Check 1b
How many pounds of materials should Hanson
have used to make 1,000 Zippies?
a. 1,700 pounds.
b. Answer: 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds.

The standard quantity is: 1,000 × 1.5 pounds per Zippy.

© McGraw Hill 10-29

 Quick Check 1c
Hanson’s materials quantity variance (MQV) for the
week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.

© McGraw Hill 10-30

 Quick Check 1d
Hanson’s materials quantity variance (MQV) for the
week was:
a. $170 unfavorable.
b. $170 favorable.
c. Answer: $800 unfavorable.
d. $800 favorable.
MQV = SP(AQ − SQ)
MQV = $4.00(1,700 lbs. − 1,500 lbs.)
MQV = $800 unfavorable

© McGraw Hill 10-31

 Quick Check 1e
Hanson’s materials price variance (MPV) for the
week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.

© McGraw Hill 10-32

 Quick Check 1f
Hanson’s materials price variance (MPV) for the
week was:
a. $170 unfavorable.
b. Answer: $170 favorable.
c. $800 unfavorable.
d. $800 favorable.

MPV = AQ(AP − SP)

MPV = 1,700 lbs. × ($3.90 − $4.00)
MPV = $170 favorable

© McGraw Hill 10-33

 Quick Check 1g
Actual Actual Actual Standard
Quantity Quantity Quantity Quantity
× Actual Price × Standard Price × Standard Price × Standard Price
1,700 lbs. 1,700 lbs. 1,700 lbs. 1,500 lbs.
× $3.90 per lb. × $4.00 per lb. × $4.00 per lb. × $4.00 per lb.
= $6,630 = $6,800 = $6,800 = $6,000
                          
Price variance Quantity variance
$170 favorable $800 unfavorable

Access the text alternative for slide images.

© McGraw Hill 10-34

 Quick Check 1h
Recall that the standard quantity for 1,000 Zippies is 1,000 ×
1.5 pounds per Zippy = 1,500 pounds.

Actual Actual Actual Standard

Quantity Quantity Quantity Quantity
× Actual Price × Standard Price × Standard Price × Standard Price
1,700 lbs. 1,700 lbs. 1,700 lbs. 1,500 lbs.
× $3.90 per lb. × $4.00 per lb. × $4.00 per lb. × $4.00 per lb.
= $6,630 = $6,800 = $6,800 = $6,000
                          
Price variance Quantity variance
$170 favorable $800 unfavorable

© McGraw Hill 10-35

 Learning Objective 2
Compute the direct labor rate and
efficiency variances and explain
their significance.

© McGraw Hill 10-36

 Labor Variances – An
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.

© McGraw Hill 10-37

 Labor Variances Summary 1

Actual Hours Actual Hours Actual Hours Standard Hours

× Actual Rate × Standard Rate × Standard Rate × Standard Rate
2,500 hours 2,500 hours 2,500 hours 2,400 hours
× × × ×
$10.50 per hour $10.00 per hour $10.00 per hour $10.00 per hour
= $26,250 = $25,000 = $25,000 = $24,000
                           
Rate variance Efficiency variance
$1,250 unfavorable $1,000 unfavorable

Access the text alternative for slide images.

© McGraw Hill 10-38

 Labor Variances Summary 2

1.2 hours per parka  2,000 parkas = 2,400 hours

Actual Hours Actual Hours Actual Hours Standard Hours

× Actual Rate × Standard Rate × Standard Rate × Standard Rate
2,500 hours 2,500 hours 2,500 hours 2,400 hours
× × × ×
$10.50 per hour $10.00 per hour $10.00 per hour $10.00 per hour
= $26,250 = $25,000 = $25,000 = $24,000
                           
Rate variance Efficiency variance
$1,250 unfavorable $1,000 unfavorable

© McGraw Hill 10-39

 Labor Variances Summary 3

$26,250  2,500 hours = $10.50 per hour

Actual Hours Actual Hours Actual Hours Standard Hours

× Actual Rate × Standard Rate × Standard Rate × Standard Rate
2,500 hours 2,500 hours 2,500 hours 2,400 hours
× × × ×
$10.50 per hour $10.00 per hour $10.00 per hour $10.00 per hour
= $26,250 = $25,000 = $25,000 = $24,000
                           
Rate variance Efficiency variance
$1,250 unfavorable $1,000 unfavorable

© McGraw Hill 10-40

 Labor Variances: Using the
Factored Equations
Labor rate variance
LRV = (AH × AR) – (AH × SR)
= 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 = (AH × SR) – (SH × SR)
= SR(AH – SH)
= $10.00 per hour(2,500 hours – 2,400 hours)
= $10.00 per hour(100 hours)
= $1,000 unfavorable
© McGraw Hill 10-41
 Responsibility for Labor
Variances
Production managers are usually held accountable for
labor variances because they can influence key factors.
• Mix of skill levels assigned to work tasks
• Level of employee motivation
• Quality of production supervision
• Quality of training provided to employees

© McGraw Hill 10-42

 Controllability of Labor
Variances
The labor variances are not always entirely controllable by one
person or department. For example:

The Maintenance Department manager may do a poor job of

maintaining production equipment. This may increase the
processing time required per unit, thereby causing an
unfavorable labor efficiency variance.

The Purchasing manager may purchase lower-quality raw

materials resulting in an unfavorable labor efficiency variance
for the production manager.

© McGraw Hill 10-43

 Quick Check 2
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.

© McGraw Hill 10-44

 Quick Check 2a
Hanson’s labor rate variance (LRV) for the week
was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.

© McGraw Hill 10-45

 Quick Check 2b
Hanson’s labor rate variance (LRV) for the week
was:
a. Answer: $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

© McGraw Hill 10-46

 Quick Check 2c
Hanson’s labor efficiency variance (LEV) for the
week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.

© McGraw Hill 10-47

 Quick Check 2d
Hanson’s labor efficiency variance (LEV) for the
week was:
a. $590 unfavorable.
b. $590 favorable.
c. Answer: $600 unfavorable.
d. $600 favorable.

LEV = SR(AH − SH)

LEV = $12.00(1,550 hrs. − 1,500 hrs.)
LEV = $600 unfavorable

© McGraw Hill 10-48

 Quick Check 2e

Actual Hours Actual Hours Actual Hours Standard Hours

× Actual Rate × Standard Rate × Standard Rate × Standard Rate
1,550 hours 1,550 hours 1,550 hours 1,500 hours
× $12.20 per × $12.00 per × $12.00 per × $12.00 per
hour hour hour hour
= $18,910 = $18,600 = $18,600 = $18,000
                           
Rate variance Efficiency variance
$310 unfavorable $600 unfavorable

Access the text alternative for slide images.

© McGraw Hill 10-49

 Learning Objective 3

Compute the variable manufacturing

overhead rate and efficiency variances and
explain their significance.

© McGraw Hill 10-50

 Variable Manufacturing Overhead
Variances – An Example
Glacier Peak Outfitters uses direct labor-hours as the
allocation base in its predetermined overhead rate. The
company has the following standard variable manufacturing
overhead cost for each mountain parka:
1.2 standard labor-hours per parka at $4.00 per labor-hour
Last month, employees actually worked 2,500 labor-hours to
make 2,000 parkas. Actual variable manufacturing overhead
for the month was $10,500.

© McGraw Hill 10-51

 Variable Manufacturing
Overhead Variances Summary 1

Actual Hours Actual Hours Actual Hours Standard Hours

× Actual Rate × Standard Rate × Standard Rate × Standard Rate
2,500 hours 2,500 hours 2,500 hours 2,400 hours
× $4.20 per hour × $4.00 per hour × $4.00 per hour × $4.00 per hour
= $10,500 = $10,000 = $10,000 = $9,600
                           
Rate variance Efficiency variance
$500 unfavorable $400 unfavorable

Access the text alternative for slide images.

© McGraw Hill 10-52

 Variable Manufacturing
Overhead Variances Summary 2

1.2 labor-hours per parka  2,000 parkas = 2,400 hours

Actual Hours Actual Hours Actual Hours Standard Hours

× Actual Rate × Standard Rate × Standard Rate × Standard Rate
2,500 hours 2,500 hours 2,500 hours 2,400 hours
× $4.20 per hour × $4.00 per hour × $4.00 per hour × $4.00 per hour
= $10,500 = $10,000 = $10,000 = $9,600
                           
Rate variance Efficiency variance
$500 unfavorable $400 unfavorable

© McGraw Hill 10-53

 Variable Manufacturing
Overhead Variances Summary 3

$10,500  2,500 labor-hours = $4.20 per hour

Actual Hours Actual Hours Actual Hours Standard Hours

× Actual Rate × Standard Rate × Standard Rate × Standard Rate
2,500 hours 2,500 hours 2,500 hours 2,400 hours
× $4.20 per hour × $4.00 per hour × $4.00 per hour × $4.00 per hour
= $10,500 = $10,000 = $10,000 = $9,600
                           
Rate variance Efficiency variance
$500 unfavorable $400 unfavorable

© McGraw Hill 10-54

 Variable Manufacturing Overhead
Variances: Using Factored Equations
Variable manufacturing overhead rate variance
VMRV = (AH × AR) – (AH – SR)
= 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 = (AH × SR) – (SH – SR)
= SR(AH – SH)
= $4.00 per hour(2,500 hours – 2,400 hours)
= $4.00 per hour(100 hours)
= $400 unfavorable

© McGraw Hill 10-55

 Quick Check 3
Hanson Inc. has the following variable
manufacturing overhead standard to
manufacture one Zippy:
1.5 standard labor-hours per Zippy at
$3.00 per direct labor-hour
Last week, 1,550 labor-hours were worked to make
1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.

© McGraw Hill 10-56

 Quick Check 3a
Hanson’s rate variance (VMRV) for variable
manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.

© McGraw Hill 10-57

 Quick Check 3b
Hanson’s rate variance (VMRV) for variable
manufacturing overhead for the week was:
a. Answer: $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
VMRV = AH(AR − SR)
VMRV = 1,550 hrs.($3.30 − $3.00)
VMRV = $465 unfavorable

© McGraw Hill 10-58

 Quick Check 3c
Hanson’s efficiency variance (VMEV) for variable
manufacturing overhead for the week was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.

© McGraw Hill 10-59

 Quick Check 3d
Hanson’s efficiency variance (VMEV) for variable
manufacturing overhead for the week was:
a. $435 unfavorable.
b. $435 favorable.
c. Answer: $150 unfavorable.
d. $150 favorable.
1,000 units × 1.5 hrs. per unit
VMEV = SR(AH − SH)
VMEV = $3.00(1,550 hrs. − 1,500 hrs.)
VMEV = $150 unfavorable

© McGraw Hill 10-60

 Quick Check 3e

Actual Hours Actual Hours Actual Hours Standard Hours

× Actual Rate × Standard Rate × Standard Rate × Standard Rate
1,550 hours 1,550 hours 1,550 hours 1,500 hours
× $3.30 per hour × $3.00 per hour × $3.00 per hour × $3.00 per hour
= $5,115 = $4,650 = $4,650 = $4,500
                           
Rate variance Efficiency variance
$465 unfavorable $150 unfavorable

Access the text alternative for slide images.

© McGraw Hill 10-61

 A General Model for Variance
Analysis

Price Variance = Actual Quantity * (Actual Price – Standard Price)

Quantity Variance = Standard Price * (Actual Quantity – Standard

Quantity)

© McGraw Hill 10-62

 Materials Variances – An
Example
Glacier Peak Outfitters has the following direct
materials standard for the fiberfill in its mountain
parka.
0.1 kg of fiberfill per parka at $5.00 per kg
Last month, 210 kg of fiberfill were purchased and
used to make 2,000 parkas. The materials cost a total
of $1,029.

© McGraw Hill 10-63

 Materials Variances – An
Example
Standard Price = $5/kg
Standard Quantity = 0.1*2000 = 200 kg
Actual Cost = $1,029/ 210 = $4.9/kg
Actual Quantity = 210 kg

Price Variance = 210 * (4.9 – 5) = $21 Favorable

Quantity Variance = 5 * (210 – 200) = $50 Unfavorable

© McGraw Hill 10-64

 Materials Variances – An
Important Subtlety

The quantity variance is computed only on the

quantity used.
The price variance is computed on the entire
quantity purchased.

© McGraw Hill 10-65

 Materials Variance Analysis

Price Variance = Actual Purchased Quantity * (Actual Price – Standard

Price)

Quantity Variance = Standard Price * (Actual Used Quantity – Standard

Quantity)

© McGraw Hill 10-66

 Materials Variances – An
Important Subtlety: Example
Glacier Peak Outfitters has the following direct
materials standard for the fiberfill in its mountain
parka.
0.1 kg of fiberfill per parka at $5.00 per kg
Last month, 210 kg of fiberfill were purchased at a
cost of $1,029. Glacier used 200 kg to make 2,000
parkas.

© McGraw Hill 10-67

 Materials Variances – An Important
Subtlety: Example Solution
Actual Quantity Actual Quantity Actual Quantity Standard
Purchased Purchased Used Quantity
× Actual Price × Standard Price × Standard Price × Standard Price
210 kg 210 kg 200 kg 200 kg
× × × ×
$4.90 per kg $5.00 per kg $5.00 per kg $5.00 per kg
= $1,029 = $1,050 = $1,000 = $1,000
                           
Price variance Quantity variance
$21 favorable $0

Access the text alternative for slide images.

© McGraw Hill 10-68

 Advantages of Standard
Costs
Standard costs are a key
Standards can
element of the
provide benchmarks
management by
that promote
exception approach.
economy and
efficiency.

Advantages

Standards can greatly

Standards can
simplify bookkeeping.
support responsibility
accounting systems.

© McGraw Hill 10-69

 Potential Problems with
Standard Costs 1

Standard cost variance

If variances are
reports are usually
misused as a club to
prepared on a monthly
negatively reinforce
basis and may contain
employees, morale
information that is Potential Problems may suffer, and
outdated.
employees may make
dysfunctional
decisions.

Labor variances assume that the production process is labor-paced and that
labor is a variable cost. These assumptions are often invalid in today’s
automated manufacturing environment where employees are essentially a
fixed cost.

© McGraw Hill 10-70

 Potential Problems with
Standard Costs 2

Just meeting standards In some cases, a

may not be sufficient; “favorable” variance
continuous can be as bad or
improvement worse than an
may be necessary to Potential Problems unfavorable variance.
survive in a competitive
environment.

Excessive emphasis on meeting the standards may overshadow other

important objectives such as maintaining and improving quality, on-time
delivery, and customer satisfaction.

© McGraw Hill 10-71

 End of Chapter 10

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