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Chapter 7 & 8Standard costing
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A General Model for Variance Analysis
ActualQuantity Actual Quantity Standard Quantity
ActualPrice StandardPrice Standard Price
Price Variance Quantity Variance
Materials price variance Materials quantity varianceLabor rate variance Labor efficiency variance
Variable overhead Variable overhead
spending variance efficiency variance
AQ(AP - SP) SP(AQ - SQ)
AQ= Actual Quantity SP= Standard Price
AP = Actual Price SQ= Standard Quantity
10-2
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The price variance is computed onthe entire quantity purchased.
The quantity variance is computedonly on the quantity used.
Hanson purchased and used1,700 pounds. How are thevariances computed if the
amount purchased differsfromthe amount used?
Zippy
Material Variances
10-3
When the amount of direct-materials purchased is different from the amount
used, the direct-material price variance is based on the quantity purchased.
The difference between the purchase price and the standard price are
highlighted by the price variance, which relates to thepurchasing function.
In contrast, the direct-material quantity variance is based on the amount ofmaterial used in production.
The quantity variance highlights differences between the quantity of material
actually used and the standard quantity allowed.
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Standard Costs
Now lets calculate
standard cost
variances for directlabor.
10-4
Now we will use the concepts of the general model to calculate the direct-labor
variances for Hanson
Actual Hours Actual Hours Standard Hours
Actual Rate Standard Rate Standard Rate
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Hanson Inc. has the following direct
labor standard to manufacture oneZippy:
1.5 standard hours per Zippy at $10.00 perdirect labor hour
Last week 1,550 direct labor hourswere worked at a total labor cost of
$15,810 to make 1,000 Zippies.
Labor VariancesZippy
10-5
Hanson has established a standard for direct-labor at 1.5 hours at $10 per hour for
one Zippy.
Last week, 1,550 direct labor hours were used to make 1,000 Zippies.
The total direct labor cost was $15,810.
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What was Hansons actualrate (AR)
for labor for the week?
a. $10.20 per hour.
b. $10.10 per hour.
c. $9.90 per hour.d. $9.80 per hour.
Labor Variances Zippy
10-6
To calculate the direct-labor rate variance, we must first determine the actual price per
direct labor hour.
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What was Hansons actualrate (AR)
for labor for the week?
a. $10.20 per hour.
b. $10.10 per hour.
c. $9.90 per hour.d. $9.80 per hour.
Labor Variances Zippy
AR = $15,810 1,550 hours
AR = $10.20 per hour
10-7
The total direct labor cost for the week of $15,810 is divided by the 1,550 direct labor
hours worked. Therefore, the actual rate for the week was $10.20 per hour.
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Hansons labor rate variance (LRV)
for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.d. $300 favorable.
Labor Variances Zippy
10-8Now that we know the actual direct labor rate, the standard rate and the actual directlabor hours used, we can calculate the direct-labor rate variance.
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Hansons labor rate variance (LRV)
for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Labor Variances
LRV = AH(AR - SR)
LRV = 1,550 hrs($10.20 - $10.00)
LRV = $310 unfavorable
Zippy
10-9
The standard rate of $10.00 is subtracted from the actual rate of $10.20.
This difference is multiplied by the actual direct-labor hours of 1,550 pounds.
The resulting variance is a positive $310.
The variance is unfavorable because the actual rate per hour was greater than the
standard rate per hour.
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The standard hours (SH) of labor that
should have been worked to produce
1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
Labor Variances Zippy
10-10
To calculate the direct-labor efficiency variance, we must first determine the standard
number of hours that should have been used to produce 1,000 Zippies
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The standard hours (SH) of labor that
should have been worked to produce
1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
Labor Variances
SH = 1,000 units 1.5 hours per unitSH = 1,500 hours
Zippy
10-11
The standard hours allowed for one Zippy is 1.5 hours.
Since 1,000 Zippies were produced, we must multiply 1.5 hours times 1,000 units to
get 1,500 hours of direct-labor for the total standard hours allowed.
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Hansons labor efficiency variance (LEV)
for the week was:
a. $510 unfavorable.
b. $510 favorable.
c. $500 unfavorable.
d. $500 favorable.
Labor Variances Zippy
10-12Now that we know the actual hours used, the standard hours allowed and the standardrate per hour, we can calculate the direct-labor efficiency variance.
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Hansons labor efficiency variance (LEV)
for the week was:
a. $510 unfavorable.
b. $510 favorable.
c. $500 unfavorable.
d. $500 favorable.
Labor Variances
LEV = SR(AH - SH)
LEV = $10.00(1,550 hrs - 1,500 hrs)
LEV = $500 unfavorable
Zippy
10-13
The standard hours allowed of 1,500 hours is subtracted from the actual hours used of 1,550
pounds.
This difference is multiplied by the standard rate of $10.00 per hour.
The resulting variance is a positive $500.
The variance is unfavorable because the actual hours used were greater than the standardhours allowed to make the 1,000 Zippies.
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Actual Hours Actual Hours Standard Hours
Actual Rate Standard Rate Standard Rate
Labor Variances Summary
Rate variance
$310 unfavorable
Efficiency variance
$500 unfavorable
1,550 hours 1,550 hours 1,500 hours
$10.20 per hour $10.00 per hour $10.00 per hour
$15,810 $15,500 $15,000
10-14
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To summarize, the direct-labor rate variance isthe difference between the actual hours at theactual rate and the actual hours at the standardrate.
The result is a $310 unfavorable price variance. The direct-labor efficiency variance is the
difference between the actual hours at thestandard rate and the standard hours at the
standard rate. The result is a $500 unfavorable efficiency
variance.