Page 928 - Accounting Principles (A Business Perspective)

24. Control through standard costs

The variance is favorable because the company achieved a higher level of production than was expected.
Recording overhead variances These journal entries are related to overhead:
(d) Work in Process (+A) 110,000
Manufacturing Overhead (+SE) 110,000
To record the application of manufacturing
overhead to work in process.

(e) Manufacturing overhead (-SE) 108,000
Various accounts (Varies) 108,000
To record actual manufacturing overhead.
(f) Manufacturing overhead (-SE) 2,000
Overhead budget variance (-SE) 4,000
Overhead volume variance (+SE) 6,000
To record the variances related to overhead
and close the manufacturing overhead
account.
The first entry applies manufacturing overhead to Work in Process at the rate of USD 5 per standard machine-

hour. The second entry records the actual manufacturing overhead costs incurred during the period by Beta
Company. The final entry reduces the Manufacturing Overhead account balance to zero and sets up the two
variances calculated for overhead; these two variance accounts reveal the causes of the overapplied manufacturing
overhead for the period.
Summary of overhead variances To easily determine the accuracy of the two overhead variances, Beta
would compare the sum of the budget and volume variances with the difference between the costs of actual
manufacturing overhead and applied manufacturing overhead (the amount of over- or underapplied overhead). For
Beta Company, the difference between actual and applied manufacturing overhead was:
Actual manufacturing overhead incurred $ 108,000
Applied manufacturing overhead allowed (22,000 machine-
hours x $5 per hour) 110,000
Total overhead variance (favorable) $ -2,000
This difference is made up of the two overhead variances:
Overhead budget variance – unfavorable ($108,000 - $104,000) $ 4,000
Overhead volume variance -favorable [$104,000 – (22,000 x $5)] -6,000
Total overhead variance (favorable) $ -2,000
For a summary of the six variances from standard discussed in this chapter, see Exhibit 201 below.

Materials price (Actual price – Standard price) x Actual quantity
variance = purchased
Materials usage (Actual quantity used – Standard quantity allowed) x
variance = Standard price
Labor rate variance = (Actual rate – standard rate) x Actual hours worked
Labor efficiency (Actual hours worked – standard hours allowed) x
variance = Standard rate
Overhead budget Actual overhead – budgeted overhead
variance =
Overhead volume Budgeted overhead – applied overhead
variance =
Exhibit 201: Summary of variances from standard

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