# Standard Costing--Manufacturing Overhead Variances - DOC

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```					Standard Costing--Manufacturing Overhead Variances
   A little bit more difficult to analyze because it is composed of a variety of indirect costs
(variable and fixed)
   Overhead is applied using standard allowable quantities in standard costing (rather than
actual quantities)

Fixed Cost—a cost that remains constant within a defined range of activity or time period
Variable Cost—a cost that changes in direct proportion to change in productive output

Goals:
Break down the total overhead variance into controllable and volume components

Problem One
The nature of costs is considered when developing budgets. Complete the budget bel ow for the
production of 19,100 units. In parentheses, is per unit budgeted cost of each item.

Example Co mpany
Budget
For the year ended December 31, 2002

Direct materials (\$2.40)                     \$
Direct labor (\$3.90)

Variable
Indirect materials (\$.60)
Indirect labor (\$.80)
Ut ilit ies (\$.40)
Other (\$.50)
Fixed (normal capacity)
Supervisory salaries                                19,000
Depreciation                                        15,000
Ut ilit ies                                          4,500
Other                                               10,900

Total Budgeted Costs                                    \$
======

What is budgeted manufacturing overhead costs?

Later on you will be asked to compute budgeted manufacturing overhead. Budgeted

Difference in standard costing application of overhead
In the job order and process costing chapter, overhead was applied by multiplying a
predetermined overhead application rat e times actual allocation units . In standard costing, the
work in process account i s shown at standard costs. Standard costs are standard dollars
multiplied by standard quantities. Manufacturing overhead is applied (in standard costing) by

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multiplying the combined standard overhead application rate (includes fix ed and variable) x
standard allowable quantities, a budgeted figure.

1.   The variable standard manufacturing overhead rate is \$3 per direct labor hour. The fixed
standard manufacturing overhead rate is \$4 per direct labor hour (developed from budget
of normal capacity). Compute manufacturing overhead applied when standard allowable
direct labor hours is 1,000.

2.   The variable standard manufacturing overhead rate is \$2 per direct labor hour, and the
fixed standard manufacturing overhead rate is \$1 per direct labor hour. Standard
allowable direct labor hours are 2,000. What is standard manufacturing ove rhead
applied to production?

3.   The variable standard manufacturing overhead rate is \$1.50 per direct labor hour, and
the fixed standard manufacturing overhead rate is \$3 per direct labor hour. Standard
allowable direct labor hours are 500. What is standar d manufacturing overhead applied
to production?

The total manufacturing overhead variance is the difference between applied standard

\$3,800. What is the total manufacturing overhead variance (U or F)?

\$3,800. What is the total manufacturing overhead variance (U or F)?

\$4,700. What is the total manufacturing overhead variance (U or F)?

Budgeted manufacturing overhead is the combination of fixed manufacturing overhead at normal
capacity and variable manufacturing overhead at standard allowable hours for actual volume.

Standard allowab le time (d irect labor) is a budgeted figure relat ing to output. It is variable.

1.   The variable manufacturing overhead rate is \$3 per direct labor hour. The fixed
manufacturing overhead rat e is \$4 per direct labor hour. Standard allowable direct labor
hours for level of production are 11,000. Normal capacity is 10,000 direct labor hours.
What is budgeted manufacturing overhead for the actual direct labor hours worked.
capacity.)

Fixed overhead at normal capacity   (\$4 x 10,000)                                      \$40,000
Variable overhead at tandard allowable (\$3 x 11,000)                                    33,000

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2.   The variable manufacturing overhead rate is \$2 per direct labor hour. The fixed
manufacturing overhead rat e is \$3 per direct labor hour. Standard allo wable direct labor
hours for level of production are 2,000. Normal capacity is 1,800 direct labor hours.
What is the budgeted manufacturing overhead?

3.   The variable manufacturing overhead rate is \$2.20 per direct labor hour. The fixed
manufacturing overhead rat e is \$3.50 per direct labor hour. Standard allowable direct
labor hours for level of production are 11,500. Normal capacity is 10,000 direct labor
hours. What is budgeted manufacturing overhead?

4.   The variable manufacturing overhead rate is \$6.00 per direct labor hour. The fixed
manufacturing overhead rat e is \$2.50 per direct labor hour. Standard allowable direct
labor hours for level of production are 3,000. Normal capacity is 3,200 hours. What is

Controllable manufacturing overhead varianc e—the difference bet ween actual manufacturing
Manufacturing overhead volume variance—the differenc e between budgeted manufacturing

Volume Variance                      Controllable Variance

Actual hours are not used in the application of standard manufacturing overhead
to work in process, because work in process is shown at standard costs. Note
also that budgeted overhead makes use of standard allowable time for the
computation of variable costs.

Work in Process
Standard Direct Materials Cost
Standard Direct Labor Cost

The materials inventory account showed actual
units at standard materials prices. The work in
process account shows standard prices/rates at
standard quantities. The work in process account
does not show actual quantities; overhead is applied
based on standard allo wable units.

Problem Five—breaking down the overhead variances

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1.   Applied standard manufacturing overhead is \$10,000. Budgeted manufacturing

2.   Applied standard manufacturing overhead is \$12,000. Budgeted manufacturing
overhead is \$10,000. Actual factory overhead is \$11, 500. What are the controllable and

3.   Applied standard manufacturing overhead is \$23,000. Budgeted manufacturing
controllable and the volume manufacturing overhead variances?

Problem Six

1.   The fixed standard manufacturing overhead rate is \$1.50 per direct labor hour? The
variable standard manufacturing overhead rat e is \$2 per direct labor hour. Normal
capacity is 21,000 hours. Standard allowable hours were 20,000. Actual manufacturing
a. What is applied standard manufacturing overhead?
b. What is budgeted manufacturing overhead?
c. What is the total manufacturing overhead variance? Applied-Actual
d. What is the controllable manufacturing overhead variance?
e. What is manufacturing overhead volume variance?

2.        Fixed manufacturing overhead rate       \$10.00 per direct labor hour
Variable manufacturing overhead rate \$5 per direct labor hour
Standard allowable direct labor hours   20,000
Normal capacity                         19,000 direct labor hours
a. What is applied standard manufacturing overhead?
b. What is budgeted manufacturing overhead?
c. What is the total manufacturing overhead variance? Applied-Actual
d. What is the controllable manufacturing overhead variance?
e. What is manufacturing overhead volume variance?

3.        Fixed manufacturing overhead rate        \$20.00 per direct labor hour
Variable manufacturing overhead rate \$11.00 per direct labor hour
Standard allowable direct labor hours    15,000
Normal capacity                  14,000 direct labor hours
a. What is applied manufacturing overhead?
b. What is budgeted manufacturing overhead?
c. What is the total manufacturing overhead variance? Applied-Actual
d. What is the controllable manufacturing overhead variance?
e. What is manufacturing overhead volume variance?

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