Paradis Ltd adopts a standard costing system. The standard cost card for their product is as follows: Direct material $14.50 Direct labour (2 hours at $25 per hour) $50.00 Manufacturing overhead (2 hours at $11 per hour) $22.00 Total standard cost $86.50 The annual budgeted manufacturing overhead totals $6,600,000, of which $3,600,000 is variable. The company allocates overhead costs based on machine hours and calculates separate rates for variable and fixed overheads. The normal annual level of machine-hours is 600,000 hours. The planned production for each month is 25,000 units. Paradis Ltd produced 26,000 units this month and used 53,500 machine hours. The actual manufacturing overhead for the month was $320,000 variable and $260,000 fixed. The total manufacturing overhead applied during the month was $572,000. Calculation of variable overhead variance Variable overhead spending 320,000 - (53,500 * $6) $ (1,000.00) Variable Overhead Standard Rate Monthly variable overhead / monthly labour hour 300,000 / 50,000 $ 6.00 Monthly budgeted variable overhead Annual budgeted variable overhead / total months 36,000,000 / 12 $ 3,000,000.00 Variable Overhead Efficiency Variance (53,500 * 6) - (50,000 * 6) 21,000.00 Standard Hours for a Month Annual Budgeted hours / Total months 600,000 / 12 50,000.00 Calculation of Fixed Overhead Variance Fixed Overhead Cost Variance Standard Cost - Actual Cost 250,000 - 260,000 $ (10,000.00) Fixed Overhead Monthly Standard Cost Annual fixed standard cost / total months 3,000,000 /12 $ 250,000.00 Fixed Overhead Production Volume 5* (25,000 - 26,000) $ (5,000.00) Standard Fixed Overhead Rate Monthly standard fixed / production hours 250,000 / 50,000 $ 5.00 Prepare journal entries to record: Actual overhead costs Adding manufacturing overhead to work in process inventory. The closing of variances to cost of goods sold.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Paradis Ltd adopts a standard costing system. The standard cost card for their product is as follows:
|
Direct material |
$14.50 |
|
Direct labour (2 hours at $25 per hour) |
$50.00 |
|
Manufacturing overhead (2 hours at $11 per hour) |
$22.00 |
|
Total standard cost |
$86.50 |
The annual budgeted manufacturing overhead totals $6,600,000, of which $3,600,000 is variable. The company allocates overhead costs based on machine hours and calculates separate rates for variable and fixed
| Calculation of variable overhead variance | |
| Variable overhead spending | |
| 320,000 - (53,500 * $6) | $ (1,000.00) |
| Variable Overhead Standard Rate | |
| Monthly variable overhead / monthly labour hour | |
| 300,000 / 50,000 | $ 6.00 |
| Monthly budgeted variable overhead | |
| Annual budgeted variable overhead / total months | |
| 36,000,000 / 12 | $ 3,000,000.00 |
| Variable Overhead Efficiency Variance | |
| (53,500 * 6) - (50,000 * 6) | 21,000.00 |
| Standard Hours for a Month | |
| Annual Budgeted hours / Total months | |
| 600,000 / 12 | 50,000.00 |
| Calculation of Fixed Overhead Variance | |
| Fixed Overhead Cost Variance | |
| Standard Cost - Actual Cost | |
| 250,000 - 260,000 | $ (10,000.00) |
| Fixed Overhead Monthly Standard Cost | |
| Annual fixed standard cost / total months | |
| 3,000,000 /12 | $ 250,000.00 |
| Fixed Overhead Production Volume | |
| 5* (25,000 - 26,000) | $ (5,000.00) |
| Standard Fixed Overhead Rate | |
| Monthly standard fixed / production hours | |
| 250,000 / 50,000 | $ 5.00 |
Prepare
- Actual overhead costs
- Adding manufacturing overhead to work in process inventory.
- The closing of variances to cost of goods sold.
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