Hanson Inc' has the following material standard to manufacture one Zippy:

1
Material Variances

• Hanson Inc. has the following material standard
  to manufacture one Zippy
• 1.5 pounds per Zippy at 4.00 per pound
• Last week 2,800 pounds of material were
  purchased at a total cost of 10,920, and 1,700
  pounds were used to make 1,000 Zippies.

2
Material Variances Continued
Actual Quantity Actual Quantity
Purchased Purchased

Actual Price Standard Price

2,800 lbs. 2,800 lbs.

3.90 per lb.
4.00 per lb. 10,920
11,200
Price variance increases because quantity
purchased increases.
Price variance280 favorable
3
Material Variances Continued
Actual
Quantity
Used Standard Quantity


Standard Price
Standard Price
1,700
lbs. 1,500 lbs.


4.00 per lb. 4.00
per lb.
6,800 6,000
Quantity variance is unchanged because actual and
standard quantities are unchanged.
Quantity variance800 unfavorable
4
Isolation of Material Variances
5
Responsibility for Material Variances
6
Standard Costs
Now lets calculate standard cost variances for
direct labor.
7
Labor Variances Example
Hanson Inc. has the following direct labor
standard to manufacture one Zippy 1.5 standard
hours per Zippy at 6.00 perdirect labor hour
Last week 1,550 direct labor hours were worked at
a total labor cost of 9,610 to make 1,000
Zippies.
8
Labor Variances Summary
Actual Hours Actual Hours
Standard Hours

Actual Rate Standard Rate
Standard Rate
1,550 hours 1,550 hours
1,500 hours

6.20 per hour 6.00 per
hour 6.00 per hour 9,610
9,300
9,000
Rate variance310 unfavorable
Efficiency variance300 unfavorable
9
Labor Rate Variance A Closer Look
Using highly paid skilled workers toperform
unskilled tasks results in anunfavorable rate
variance.
High skill,high rate
Low skill,low rate
Production managers who make work assignmentsare
generally responsible for rate variances.
10
Labor Efficiency Variance A Closer Look
Poorlytrainedworkers
Poorqualitymaterials
UnfavorableEfficiencyVariance
Poorlymaintainedequipment
Poorsupervisionof workers
11
Responsibility for Labor Variances
12
Responsibility for Labor Variances
Maybe I can attribute the laborand material
variances to personnel for hiring the wrong
peopleand training them poorly.
13
Standard Costs
Now lets calculate standard cost variances for
the last of the variable production costs
variable manufacturing overhead.
14
Variable ManufacturingOverhead Variances Example
Hanson Inc. has the following variable
manufacturing overhead standard tomanufacture
one Zippy 1.5 standard hours per Zippy at 3.00
perdirect labor hour Last week 1,550 hours
were worked to make 1,000 Zippies, and 5,115 was
spent forvariable manufacturing overhead.
15
Variable ManufacturingOverhead Variances
Actual Hours Actual Hours
Standard Hours

Actual Rate Standard Rate
Standard Rate
1,550 hours 1,550 hours
1,500 hours

3.30 per hour 3.00 per
hour 3.00 per hour 5,115
4,650
4,500
Spending variance465 unfavorable
Efficiency variance150 unfavorable
16
Variable Manufacturing Overhead Variances A
Closer Look
If variable overhead is applied on the basisof
direct labor hours, the labor efficiencyand
variable overhead efficiency varianceswill move
in tandem.
17
Advantages of Standard Costs
Management byexception
Possible reductionsin production costs
Advantages
Improved cost control and performanceevaluation
Better Informationfor planning anddecision
making
18
Emphasis on negativemay impact morale.
Favorable variancesmay be misinterpreted.
PotentialProblems
Continuous improvementmay be moreimportant
thanmeeting standards.
Standard costreports maynot be timely.