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Hermon O. Thompson Sports, Inc. (HOTS)

Hermon O. Thompson Sports, Inc. (HOTS). To illustrate the use of standard costs, consider the Herman O. Thompson Sports, Inc. aka. HOTS, Inc. Recall . . . HOTS, Inc. . . . standard cost card. AQ x AP. AQ x SP. SQ x SP. Materials Price Var. Material Quan Var. Labor Rate Var.

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Hermon O. Thompson Sports, Inc. (HOTS)

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  1. Hermon O. Thompson Sports, Inc. (HOTS)

  2. To illustrate the use of standard costs, consider the Herman O. Thompson Sports, Inc. aka HOTS, Inc

  3. Recall . . . HOTS, Inc . . . standard cost card

  4. AQ x AP AQ x SP SQ x SP Materials Price Var. Material Quan Var. Labor Rate Var. Labor Eff. Var. VOH Spending Var. VOH efficiency Var. Variance Variance Total Variance First, a General Model for Variance Analysis

  5. AQ x AP AQ x SP SQ x SP DM Price Variance DM Quantity Var. DL Rate Variance DL Efficiency Var. VOH Spending Var. VOH Efficiency Var. Variance Variance Total Variance

  6. Another Way to Calculate Variances

  7. (AQ x AP) - (AQ x SP) AQ(AP - SP) DM Price Variances . . .

  8. (AQ x SP) - (SQ x SP) SP(AQ - SQ) DM Quantity Variances . . .

  9. Calculating Variances An Example HOTS, Inc

  10. Calculating Direct Materials Variances

  11. Data for last month’s production: HOTS, Inc # of suits completed 5,000 Cost of DM purchases (20,000 x $5.40) $108,000 Yards of material used 20,000

  12. Using these data and the data from the standard cost card, calculate the materialprice and quantity variances.

  13. AQ x AP AQ x SP SQ x SP $20,000 x $5.40 $20,000 x $6 17,500 Yds x $6 $108,000 $120,000 $105,000 Price Variance Quantity Variance $12,000(F) $15,000(U) $3,000(U) Total Variance

  14. Alternative method – Direct Materials Price Variance (AQ x AP) - (AQ x SP) AQ(AP - SP) 20,000 Yds($5.40/Yd - $6.00/Yd) = $12,000(F)

  15. Alternative method – Direct Materials Quantity Variance (AQ x SP) - (SQ x SP) SP(AQ - SQ) $6.00/Yd(20,000 yds - 17,500 yds) = $15,000(U)

  16. Isolating the Variances

  17. The objective of variance analysis is to isolate the variances as soon in the process as possible.

  18. AQ x AP AQ x SP SQ x SP $20,000 x $5.40 $20,000 x $6 17,500 Yds x $6 $108,000 $120,000 $105,000 Price Variance Quantity Variance $12,000(F) $15,000(U) $3,000(U) Total Variance

  19. Placing Responsibility For Variances

  20. AQ x AP AQ x SP SQ x SP $20,000 x $5.40 $20,000 x $6 17,500 Yds x $6 $108,000 $120,000 $105,000 Price Variance Quantity Variance $12,000(F) $15,000(U) $3,000(U) Total Variance

  21. Calculating Direct Labor Variances

  22. Data for last month’s production: HOTS, Inc # of suits completed 5,000 Cost of Direct Labor (10,500 x $20) $210,000

  23. Using these data and the data from the standard cost card, calculate the laborrate and efficiency variances.

  24. AH x AR AH x SR SH x SR 10,500 Hrs x $20 10,500 Hrs x $18 10,000 Hrs x $18 $210,000 $189,000 $180,000 Efficiency Variance Rate Variance $21,000(U) $9,000(U) $30,000(U)

  25. Alternative Method DL Rate Variance (AH x AR) - (AH x SR) AH(AR - SR) 10,500 Hrs($20 Hr - $18 hr) = $21,000(U)

  26. Alternative Method DL Efficiency Variance (AH x SR) - (SH x SR) SR(AH - SH) $18 Hr(10,500 Hrs - 10,000 Hrs) = $9,000(U)

  27. Calculating Variable Overhead

  28. Data for last month’s production: HOTS, Inc # of suits completed 5,000 Actual DLHs 10,500 Actual VMOH $40,950

  29. Using these data and the data from the standard cost card, calculate the variable overhead variances.

  30. AH x AR AH x SR SH x SR Actual OH Cost 10,500Hrs. x $4 10,000 Hrs. x $4 $40,950 $42,000 $40,000 Efficiency Variance Spending Variance $1,050(F) $2,000(U) $950(U)

  31. Alternative Method Overhead Spending Variance (AH x AR) - (AH x SR) AH(AR - SR) 10,500 Hrs($3.90 Hr - $4.00 hr) = $1,050(F)

  32. Alternative Method Overhead Efficiency Variance (AH x SR) - (SH x SR) SR(AH - SH) $4 Hr(10,500 Hrs - 10,000 Hrs) = $2,000(U)

  33. This is still an accounting class isn’t it? Where are the journal entries. I want journal entries!

  34. Purchase of Materials Raw Materials 120,000 DM Price Variance 12,000 Accounts Payable 108,000

  35. Work in Process 105,000 DM Qty Variance 15,000 Raw Materials 120,000 Usage of Materials

  36. Work in Process 180,000 Labor Rate Variance 21,000 Labor Eff Variance 9,000 Wages Payable 210,000 Direct Labor Cost

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