Albrecht 19.pdf - Marriott School

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976 Part 6 Control in a Management Accounting System | EOC | EM
R E M E M B E R T H I S . . .
• The fixed manufacturing overhead budget variance simply measures the difference
between the original budget amount and what was actually spent for
fixed manufacturing overhead.
• The volume variance doesn’t really report at all on how fixed manufacturing
overhead costs are being used. Instead, the volume variance is an output measure
that reports on the difference between expected production volume and
actual production volume.
• The formula for the volume variance is based on whatever activity (for example,
direct labor hours) that the company chooses to use to apply fixed overhead
costs to production. The formula for the volume variance is:
(Standard level of activity allowed Original activity level planned)
Standard overhead rate per activity unit.
• An alternative, and more direct, formula for the volume variance is:
(Actual production volume Original production volume planned)
Standard overhead rate per unit of production.
• The volume variance is combined with the fixed manufacturing overhead budget
variance and the variable manufacturing overhead spending and efficiency
variances to account for over- or underapplied overhead.
REVIEW OF
LEARNING OBJECTIVES
1
Describe the responsibility accounting concept and identify the three types
of organizational control units.
• Decentralized companies delegate decisions and responsibility to lower-level managers while
centralized companies retain decisions and responsibility to run the business at higher levels of
management.
• In order to support a responsibility accounting system, business units may be classified as cost
centers, profit centers, or investment centers.
2
Describe standard costing and use materials and labor cost variance analysis
to explain how performance is controlled in cost centers.
• Standards are budgeted costs and budgeted usage that serve as benchmarks to compare
against actual costs and actual usage. Differences between standard and actual are called
“variances.”
• Actual materials cost performance can be assessed separately as materials price variances and
materials quantity (or usage) variances.
• The materials price variance formula is:
• The materials quantity variance formula is:
(Standard price – Actual price) Actual quantity.
(Standard quantity allowed – Actual quantity used) Standard price.
• Actual labor cost performance can be assessed separately as labor rate variances and labor efficiency
(or usage) variances. The formula for labor rate variance and for labor efficiency variance
is very similar to the formula for materials price and materials quantity, respectively.