Chapter 21: Appendix

Expanded Overhead Variances and Standard Cost Accounting System In a standard cost system, expanded overhead variances help break down the total overhead variance into spending and efficiency components for both variable and fixed overhead costs. This detailed analysis provides insights into cost management, with the ability to attribute variances to specific causes. 1. Expanded Overhead Variances Framework Overhead Variance Types: • • Spending Variance: Difference between the actual amount paid for overhead costs and the standard cost. Efficiency Variance: Difference between the standard hours expected for the actual production and the actual hours used. 2. Variable and Fixed Overhead Variances For G-Max, overhead costs are applied based on direct labor hours with the following data: • • Standard Variable Overhead Rate: $4.00 per direct labor hour (DLH). Standard Fixed Overhead: Based on a budgeted amount of $12,000 per month. Variable Overhead Variances 1. Variable Overhead Spending Variance o Measures the difference between the actual variable overhead cost and the flexible budget amount for variable overhead based on the actual hours worked. o Formula: Variable Overhead Spending Variance=Actual Variable Overhead−(A ctual DLH×Standard Variable Overhead Rate) o Example Calculation:  Actual Variable Overhead = $6,350  Actual DLH = 1,700 hours  Standard Variable Overhead Rate = $4.00  Budgeted Variable Overhead = 1,700 hours x $4.00 = $6,800 Spending Variance=6,350−6,800=−450 (Favorable) This $450 favorable variance indicates better-than-expected control over variable overhead costs. 2. Variable Overhead Efficiency Variance o Measures the efficiency of using direct labor hours relative to the standard hours allowed for actual production. o Formula: Variable Overhead Efficiency Variance=(Standard DLH for Actual Pr oduction−Actual DLH)×Standard Variable Overhead Rate o Example Calculation:  Standard DLH for 3,500 units = 1,750 hours  Actual DLH = 1,700 hours  Standard Variable Overhead Rate = $4.00 Efficiency Variance=(1,750−1,700)×4=200 (Favorable) The $200 favorable efficiency variance shows labor hours were used efficiently, saving overhead costs. Fixed Overhead Variances 1. Fixed Overhead Spending Variance o Compares actual fixed overhead costs to budgeted fixed overhead costs, measuring how well fixed overhead costs were managed. o Formula: Fixed Overhead Spending Variance=Actual Fixed Overhead−Budgete d Fixed Overhead o Example Calculation:  Actual Fixed Overhead = $11,800  Budgeted Fixed Overhead = $12,000 Spending Variance=11,800−12,000=−200 (Favorable This $200 favorable variance indicates that fixed overhead costs were kept below budget. 2. Fixed Overhead Volume Variance o Reflects the impact of producing fewer or more units than the planned capacity, affecting the allocation of fixed costs. o Formula: Fixed Overhead Volume Variance=Budgeted Fixed Overhead−Standa rd Fixed Overhead Applied o Example Calculation:  Budgeted Fixed Overhead = $12,000  Standard Fixed Overhead Applied (3,500 units x 0.5 DLH per unit x $4) = $10,500 Volume Variance=12,000−10,500=1,500 (Unfavorable) This $1,500 unfavorable variance indicates that G-Max operated below the predicted production level, which resulted in underutilization of fixed resources. 3. Journal Entries for Standard Cost System Recording Standard Costs and Variances involves capturing differences between standard and actual costs in specific variance accounts. Direct Materials 1. Record Direct Materials at Standard Cost: o Debit Work in Process (WIP) Inventory: $35,000 o Credit Raw Materials Inventory (at actual cost): $37,800 o Debit Direct Materials Price Variance: $1,800 (Unfavorable) o Debit Direct Materials Quantity Variance: $1,000 (Unfavorable) Direct Labor 2. Record Direct Labor at Standard Cost: o Debit WIP Inventory: $56,000 o Credit Factory Wages Payable (at actual cost): $56,100 o Debit Direct Labor Rate Variance: $1,700 (Unfavorable) o Credit Direct Labor Efficiency Variance: $1,600 (Favorable) Overhead 3. Record Overhead Applied at Standard Cost: o Debit WIP Inventory: $17,500 o Credit Factory Overhead (actual overhead): $18,150 o Credit Controllable Overhead Variance: $850 (Favorable) o Debit Volume Variance: $1,500 (Unfavorable) These variance accounts are reconciled at period-end, adjusting the Cost of Goods Sold if the balances are minor, similar to handling under-applied or over-applied overhead in job order costing. Summary Expanded Overhead Variance Analysis enhances insight into spending and efficiency in overhead costs, identifying controllable areas of improvement. The standard cost accounting system captures these variances through detailed journal entries, allowing for clear tracking and evaluation of cost control efforts.