Question

1. Mastery Problem: Manufacturing Cost Variance (Actual Costs Compared to Standard Costs)

   Manufacturing cost variances may come from material costs that are higher or lower than expected, material usage that is not what was expected, higher or lower labor costs than expected, or more or less time spent to produce an item than expected. Overhead cost and volume variances are another cause for costs to be higher or lower than what was expected. The total manufacturing variance can be broken down by cost type (materials, labor, overhead) and further by cost variances within cost types and usage or efficiency variances within cost types:

   	↗	Direct Materials Cost Variance	↗	Also referred to as materials rate variance. The direct materials price variance measures the difference between planned materials expenditures and what was actually spent on materials for actual output. This analysis is very important to businesses for which materials costs make up a significant portion of business expenses.Direct Materials Price Variance
   			↘	Also referred to as materials efficiency variance. The direct materials quantity variance measures the difference between planned materials to be used for output and what was actually used.Direct Materials Quantity Variance
   Total Manufacturing Cost Variance	→	Direct Labor Cost Variance	↗	Also referred to as direct labor price variance, direct labor rate variance measures the difference between planned labor expenditures and what was actually spent. Direct Labor Rate Variance
   			↘	Also referred to as labor usage variance, direct labor time variance measures the difference between planned labor usage (the quantitative measure of labor in terms of time or some other measure) and what was actually used.Direct Labor Time Variance
   	↘
   		Factory Overhead Cost Variance	↗	Variable overhead controllable variance: This variance measures the difference between actual variable overhead costs and the standard variable overhead costs for actual units produced. This can be split into a variable overhead spending variance and a variable overhead efficiency variance similar to the direct labor cost variances.Variable Factory Overhead Controllable Variance
   			↘	The fixed overhead variance occurs because the actual output differs from budgeted output (a volume variance where fixed costs are spread over a different number of units than planned) or because fixed overhead spending did not match the budget. Spending variances are generally rare with fixed costs because the costs are usually known and are not subject to change in the short-term.Fixed Factory Overhead Volume Variance

   Manufacturing cost variances are determined using a standard costing system. Standard costs are predetermined

   • actual
   • predetermined
   costs that should be incurred under efficient operating conditions. Standard costing is most suited to manufacturing
   • manufacturing
   • professional services
   organizations, where activities consist of common or repetitive operations and the direct costs required to produce each item are defined.

   In a standard costing system, it is important to understand that costs are compared to budget based on a flexible budget rather than a fixed budget. Flexible budgets use standard

   • actual
   • standard
   costs and actual
   • actual
   • standard
   production volume. This means that the actual costs in the period are compared to the number of units produced in the period at the standard cost.

   Feedback

   Standards are set up as part of the budgeting process and are used when per unit costs can be estimated under efficient operating conditions. Remember that flexible budgets account for changes in volume.

   If actual costs are greater than standard costs, the variance is unfavorable

   • favorable
   • unfavorable
   , alternatively, if actual costs are less than standard costs, the variance is favorable
   • favorable
   • unfavorable
   .

   Direct Materials Cost Variance

   Calculating Direct Materials Cost Variance, you can see that the actual costs are higher

   • higher
   • lower
   than standard and the actual quantity purchased and used is less
   • higher
   • less
   than standard. The two variances are combined for a total favorable
   • favorable
   • unfavorable
   direct material cost variance of $.

   Direct Labor Cost Variance

   Calculating Direct Labor Cost Variance, you can see that the actual costs are higher

   • higher
   • lower
   than standard and the actual hours are less
   • higher
   • less
   than standard. The two variances are combined for a total favorable
   • favorable
   • unfavorable
   direct labor cost variance of $.

   Feedback

   The illustrations provide the information to complete the problem.

   The standard cost sheet for a product is shown.

   Manufacturing Costs	Standard price	Standard Quantity	Standard Cost per unit
   Direct materials	$4.60 per pound	6.00 pounds	$	27.60
   Direct labor	$11.87 per hour	2.40 hours	$	28.49
   Overhead	$2.40 per hour	2.40 hours	$	5.76
   			$	61.85

   The company produced 3,000 units that required:

   • 18,500 pounds of material purchased at $4.45 per pound

   • 7,100 hours of labor at an hourly rate of $12.27 per hour

   • Actual overhead in the period was $17,750

   Fill in the Budget Performance Report for the period. Some amounts are provided. Round your answers to the nearest dollar. However, do not round your intermediate calculations.

   Budget Performance Report
   Manufacturing Costs: 3,000 units	This is the actual cost to produce 3,000 units.Actual Costs	This is the actual production volume (3,000) at the standard unit cost.Standard Costs	Actual costs - Standard costsVariance (Favorable)/ Unfavorable
   Direct materials	$82,325	$	$
   Direct labor		85,464
   Overhead	17,750
   	$	$	$1,648

   Split the direct materials cost variance into the materials price varaince and the Direct materials quantity variance. Remember that you want to isolate the price variance from the quantity variance so be sure to use factors that do not overlap. Also remember that the two variances should equal the Proof:
   Direct materials price variance
   + Direct materials quantity variance
   = Direct material cost variance total direct material cost variance.

   Direct materials price variance:	Direct materials quantity variance:
   (Actual price - Standard price) x actual actual standard quantity	(Actual quantity - Standard quantity) x standard actual standard price
   $2,775 favorable $2,300 favorable $2,750 favorable $2,775 favorable $2,775 unfavorable	$2,300 unfavorable $2,750 favorable $2,300 favorable $2,300 unfavorable $2,775 favorable

   Split the direct labor cost variance into the direct labor rate variance and the direct labor time variance. Remember that you want to isolate the price variance from the efficiency variance so be sure to use factors that do not overlap. Also remember that the two variances should equal the Proof:
   Direct Labor Rate Variance
   + Direct Labor Time Variance
   = Total Direct Labor Cost Variance total direct labor cost variance.

   Direct labor rate variance:	Direct labor time variance:
   (Actual rate - Standard rate) x actual actual standard hours	(Actual hours - Standard hours) x standard actual standard labor rate
   $2,840 unfavorable $2,840 favorable $2,840 unfavorable $2,300 favorable $2,300 unfavorable	$1,187 favorable $1,187 favorable $1,187 unfavorable $2,300 unfavorable $2,775 favorable

   Manufacturing variances are period costs that are rolled into cost of sales

   • revenue
   • cost of sales
   • assets
   • liabilities
   and reported on the income statement
   • balance sheet
   • income statement
   . A favorable variance is recorded as a credit
   • debit
   • credit
   and an unfavorable variance is recorded as a debit
   • debit
   • credit
   .

Answer 1

Direct materials price variance: Direct materials quantity variance:(Actual price - Standard price) x actual quantity = (4.45-4.60)*18500 = -2775 = 2775 Favorable

Direct materials quantity variance = (Actual quantity - Standard quantity) x standard price = (18500-(3000*6))*4.60 = 2300 = 2300 Unfavorable

Direct labor rate variance: (Actual rate - Standard rate) x actual hours = (12.27-11.87)*7100=2840 Unfavorable

Direct labor time variance: (Actual hours - Standard hours) x standard rate = (7100-(3000*2.40))*11.87 = - 1187 = 1187 Favorable