Question

Can you please help me with answering Requirement #2 using the numbers above and explaining what everything means?

Answer 1

1) Variance refers to the difference between anticipated results (costs expected to be incurred/revenues expected to be earned) and actual results achieved. For costs, variances are favorable if the costs actually incurred are less than anticipated costs and unfavorable if the results are vice versa.

Now explaining each of the above variances:

1) Material Price Variance - $ 58000 UNF - i.e. Material price variance is unfavorable by $ 58000, meaning that there is overspending on materials to the extent of $ 58000 only due to change in price vis-a-vis budgeted price.

2) Material Efficiency Variance - $ 1,325 FAV - i.e. Material costs have been saved to the extent of $ 1,325 due to efficiency in usage.

3) Direct Labour Price Variance - $ 940,500 FAV - i.e. Direct Labour costs have been saved to the extent of $940,500 due to lower rate per hour charged by labor.

4) Direct Labour Efficiency Variance - $ 112,500 UNF - i.e. There is an excess cost incurred due to inefficiency of labors i.e. labors took more hours than expected hours.

5) Total Variable Overhead Variance -

Actual overhead costs (less) Absorbed Overhead costs = 673000 - 640200

= 32800 UNF.

6) Spending Variance = $ 20675 UNF i.e. for the given volume of production entity has overspent by $ 20675 on variable overheads.

7) Efficiency Variance = $12125 UNF i.e. the entity has produced fewer units in the total time as worked and therefore per unit overhead absorption has gone up resulting in low-efficiency rate.

8) Total Fixed Overhead Variance -

Actual cost incurred - Absorbed cost = 1458000 - 1361905

= 96095 UNF

9) Spending Variance = $158000 UNF, i.e. total amount spent on fixed overhead costs is in excess of the budgeted amount by $ 158000.

10) Production Volume Variance = $ 61905 FAV, i.e. total no. of units produced is in excess of anticipated volume and hence there is excess absorption of costs as compared to actual cost.

Conclusion:

From the above explanation, it can be concluded that the entity has exceeded its budget performance in few areas whereas it has underperformed in a few cases. Wherever there are unfavorable variances entity can improve by increasing its efficiency or by improving its bargaining power.