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 | ↗ | Direct Materials Price Variance | |
↘ | Direct Materials Quantity Variance | |||
Total Manufacturing Cost Variance | → | Direct Labor Cost Variance | ↗ | Direct Labor Rate Variance |
↘ | Direct Labor Time Variance | |||
↘ | ||||
Factory Overhead Cost Variance | ↗ | Variable Factory Overhead Controllable Variance | ||
↘ | Fixed Factory Overhead Volume Variance |
Manufacturing cost variances are determined using a standard costing system. Standard costs are predetermined costs that should be incurred under efficient operating conditions. Standard costing is most suited to manufacturing 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 costs and actual 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 , alternatively, if actual costs are less than standard costs, the variance is favorable .
Direct Materials Cost Variance
Calculating Direct Materials Cost Variance, you can see that the actual costs are higher than standard and the actual quantity purchased and used is less than standard. The two variances are combined for a total favorable direct material cost variance of $.
Direct Labor Cost Variance
Calculating Direct Labor Cost Variance, you can see that the actual costs are higher than standard and the actual hours are less than standard. The two variances are combined for a total favorable 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 | $4.70 per pound | 5.80 pounds | $ | 27.26 |
Direct labor | $12.49 per hour | 2.00 hours | $ | 24.98 |
Overhead | $2.20 per hour | 2.00 hours | $ | 4.40 |
$ | 56.64 |
The company produced 3,000 units that required:
• 17,900 pounds of material purchased at $4.55 per pound
• 5,920 hours of labor at an hourly rate of $12.89 per hour
• Actual overhead in the period was $13,660
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 |
Actual Costs |
Standard Costs |
Variance (Favorable)/ Unfavorable |
Direct materials | $81,445 | $ | $ |
Direct labor | 74,940 | ||
Overhead | 13,660 | ||
$ | $ | $1,494 |
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 total direct material cost variance.
Direct materials price variance: | Direct materials quantity variance: |
(Actual price - Standard price) x actual quantity | (Actual quantity - Standard quantity) x standard price |
$2,685 favorable | $2,350 unfavorable |
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 total direct labor cost variance.
Direct labor rate variance: | Direct labor time variance: |
(Actual rate - Standard rate) x actual hours | (Actual hours - Standard hours) x standard labor rate |
$2,368 unfavorable | $999 favorable |
Manufacturing variances are period costs that are rolled into cost of sales and reported on the income statement . A favorable variance is recorded as a credit and an unfavorable variance is recorded as a debit .
CALCULATION OF:
1. DIRECT MATERIAL PRICE VARIANCE = (Standard Price - Actual Price) * Actual Quantity
Note : According to the question given, the formula is (Actual Price - Standard price ) * Actual Quantity
= ( $4.55 - $4.70) * 17,900 = (2685) , but since the Actual price is less than Standard price, the variance is 2685 FAVORABLE
2. DIRECT MATERIAL QUANTITY VARIANCE = (Actual Quantity - Standard Quantity) * Standard Price
= (17900 - (3000*5.80 pounds)) * $4.70= (17900 - 17400) * $4.70 = +2350, but since actual quantity is more than standard quantity, the variance is 2350 UNFAVORABLE
NOTE : The company produced 3000 units which is the standard quantity.
3. DIRECT LABOR RATE VARIANCE = (Actual rate - Standard rate) * Actual hours
= ($12.89 - $12.49) * 5920 hours = $0.4 * 5920 hours
= +2368, but since actual rate is greater than standard rate, the variance is 2368 UNFAVORABLE.
4. DIRECT LABOR TIME VARIANCE = (Actual hours worked - Standard hours) * Standard rate per hour
= (5920 hours - (3000* 2 hours)) * $12.49 per hour
= (5920 hrs - 6000) * $12.49 = -0.80 * $12.89 = (999.2) or (999) rounded figure
Since, the actual exceeds the standard rate, Thus the variance is 999 FAVORABLE
Mastery Problem: Manufacturing Cost Variance (Actual Costs Compared to Standard Costs) Manufacturing cost variances may come...
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...
The following information is for the standard and actual costs for the Happy Corporation: Enter favorable variances as negative numbers. Standard Costs: Budgeted units of production - 16,000 [80% (or normal) capacity] Standard labor hours per unit - 4 Standard labor rate - $26 per hour Standard material per unit - 8 lbs. Standard material cost - $12 per pound Standard variable overhead rate - $15 per labor hour Budgeted fixed overhead - $640,000 Fixed overhead rate is based on...
1) 2) 3) 4) 5) A favorable cost variance occurs when Oa. actual costs are the same as standard costs Ob. actual costs are more than standard costs Oc. standard costs are more than actual costs Od. standard costs are less than actual costs The Flapjack Corporation had 8,042 actual direct labor hours at an actual rate of $12.00 per hour. Original production had been budgeted for 1,100 units, but only 999 units were actually produced. Labor standards were 7.9...
The following describes production activities of Mercer Manufacturing for the year. Actual direct materials used Actual direct labor used Actual units produced 31,000 lbs. at $5.80 per lb. 10,600 hours for a total of $217,300 63,000 1,600 hour. 29.9 5. IS DE $217,300 Budgeted standards for each unit produced are 0.50 pound of direct material at $5.75 per pound and 10 minutes of direct labor at $21.50 per hour. AH = Actual Hours SH = Standard Hours AR = Actual...
Problem 5 - Materials and Labor Manufacturing Variances and Analysis Background: The following information is for the standard and actual costs for Happy Corporation. Standard Costs: Budgeted units of production - 16000 Standard labor hours per unit - 4 hours Standard labor rate - $26 per hour Standard material per unit - 8 pounds Standard material cost - $12 per pound Actual Costs: Actual production - 16,500 units Actual materials purchased and used - 130000 pounds Actual total material cost...
Ander's Clothing manufactures embroidered jackets. The company uses a standard cost system to control manufacturing costs. The following data represent the standard unit cost of a jacket: i Data Table $4.15 per sq. ft.) Direct materials 3.0 sq. ft x 12.45 Direct labor $9.70 per hour) ( 2,0 hours x 19.40 Manufacturing overhead: Variable 2.0 hours x $0.68 per hour) 1.36 4.40 5.76 2.0 hours x $2.20 per hour) Fixed 37.61 Total standard cost per jacket Fixed overhead in total...
E9-13 Determining Actual Costs, Standard Costs, and Variances [LO 9-3, 9-4] Amber Company produces iron table and chair sets. During October, Amber's costs were as follows: Actual purchase price Actual direct labor rate Standard purchase price Standard quantity for sets produced Standard direct labor hours allowed Actual quantity purchased in October Actual direct labor hours Actual quantity used in October Direct labor rate variance $ 2.20 per Ib. $ 7.40 per hour $ 2.00 per lb. 960,000 lbs. 10,000 1,105,000...
The following describes production activities of Mercer Manufacturing for the year. Actual direct materials used Actual direct labor used Actual units produced 29,000 lbs. at $5.10 per lb. 8,100 hours for a total of $164,430 48,000 Budgeted standards for each unit produced are 0.50 pound of direct material at $5.05 per pound and 10 minutes of direct labor at $22.00 per hour AH = Actual Hours SH = Standard Hours AR = Actual Rate SR = Standard Rate AQ =...
E9-13 Determining Actual Costs, Standard Costs, and Variances [LO 9-3, 94] Amber Company produces iron table and chair sets. During October, Amber's costs were as follows $160 per lb. 56.80 per hour $1.40 perib 900,000 Actual purchase price Actual direct labor rate Standard purchase price Standard quantity for sets produced Standard direct labor hours allowed Actual quantity purchased in October Actual direct labor hours Actual quantity used in October Direct labor rate variance 1.045,000 lbs. 10,000 930.000 lbs $4,800 F...
The following describes production activities of Mercer Manufacturing for the year. Actual direct materials used 22,000 lbs. at $4.35 per lb. Actual direct labor used 6,575 hours for a total of $128,870 Actual units produced 36,000 Budgeted standards for each unit produced are 0.50 pound of direct material at $4.30 per pound and 10 minutes of direct labor at $20.60 per hour. AH = Actual Hours SH = Standard Hours AR = Actual Rate SR = Standard Rate AQ =...