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Cost Accounting 2

Cost Accounting 2

An efficiency, or usage, variance for materials occurs when more or less material than the standard is used. Unfavorable variances are when actual is more than standard. Labor that is skilled commensurate with materials usage standards should achieve standard materials usage; i.e., little or no variance should arise. Answers , and , are incorrect because each is a possible cause of an unfavorable materials quantity usage variance. A favorable price variance indicates that the materials were purchased at a price less than standard. The unfavorable quantity variance indicates that the quantity of materials used for actual production exceeded the standard quantity for the good units produced.

This example extends the Expando Company illustration to include direct labor. The information needed to record and analyze direct labor cost is given below. While the short form of each equation is used in Exhibit 10-3, the longer form of each equation is used below in the Flexible budget diagram approach. Calculate and explain the meaning of direct material mix and yield variances. Discuss the meaning of the fixed overhead variances. Explain the usual, or traditional interpretation of the variable overhead variances and discuss the validity of this interpretation. This variance is truly outstanding, given that it is less than 2% of the company’s budgeted labor cost.

Data Input:

Similarly, if budgeted price per unit of actual mix is more than the budgeted price per unit of budgeted mix, favourable variance will arise. In the reverse situation, variance will be unfavourable.

The fact that point A does not fall on the flexible budget line means that the actual price must be different from the standard price. Therefore, the vertical difference between points A and B represents the material price variance based on quantity purchased. The vertical difference between points C and D represents the material quantity variance.

Iii Overhead Variances:

These variations in the materials mix are influenced by the substitutability and availability of the various materials, as well as the skill and experience of the workers involved3. Rogers, Inc., had an unfavorable labor efficiency variance and an unfavorable materials quantity variance. If customers orders are insufficient to keep the workers busy, the work center manager has two options, either accept an unfavorable labor efficiency variance or build up inventories. The second option is opposite to the basic principle of just in time . Inventories with no immediate prospect of sale is a bad idea according to just in time approach.

  • The difference between the actual hours used and the standard hours allowed for the actual output is used in the calculation of the labor ____________ variance.
  • What are some of the problems or conflicts caused by material price and quantity variances?
  • This generic standard cost account structure appears in Exhibit 10-2.
  • Exhibit 10-2 includes eight variance accounts along with the usual generic accounts used in normal historical costing.
  • If a direct materials price variance is not recorded until the materials are issued to production, the direct materials are carried on the books at their actual purchase prices.

Justin Company recently purchased materials from a new supplier at a very attractive price. According to manufacturing specifications, each unit is anticipated to take two hours to complete.

A higher skilled worker with a higher labor pay rate is assigned to a job that requires a worker with a lower skill rate. Any information contained within this essay is intended for educational purposes only. It should not be treated as authoritative or accurate when considering investments or other financial products. The transfer of completed units to finished goods. Assume the factory payroll has already been recorded.

Is Price Variance The Same As Cost Variance?

This variance indicates the difference between the actual fixed overhead cost and standard fixed overhead cost allowed for the actual output. It is the difference between actual variable overhead cost and standard variable overhead allowed for the actual output achieved. The production manager is usually responsible for the materials quantity variance. Material quantity variances due to inferior materials are the responsibility of the purchasing department. Material quantity variances are always unfavorable and can never be favorable. When the standard price is higher than the actual price, the materials price variance is ______.

The total direct materials cost variance is also found by combining the direct materials price variance and the direct materials quantity variance. By showing the total materials variance as the sum of the two components, management can better analyze the two variances and enhance decision-making. In this case, the actual quantity of materials used is 0.20 pounds, the standard price per unit of materials is $7.00, and the standard quantity used is 0.25 pounds.

Calculate the following and indicate if each variance is favorable or unfavorable. When are material mix and yield variances appropriate and what do they show? Why are favorable variances not necessarily good and unfavorable variances not necessarily bad?

Managerial Accounting

It may simply mean that the system is poorly designed. In such cases, reducing the variances requires changing the system. In summary, Method 1 provides more complete, more timely and more relevant information concerning the purchasing function than Method 2.

  • Another approach involves using standard cost as a control device without recording the standard costs in the accounts.
  • Standards are used as a norm against which actual results may be compared.
  • An unfavorable labor efficiency variance can result from ______.
  • Suggested answer Total labor variance The total actual labor cost is determined by multiplying the actual labor rate times the actual labor hours.
  • Now you can plug in the numbers for the Band Book Company.
  • Discuss the various types of standard costing in terms of the timeliness and completeness of the information provided.

Standard cost allowed for units produced was $9,000. The analysis of operating income indicates that a significant amount of the increase in operating income resulted from Westwood’s successful implementation of its product-differentiation strategy. The company was able to continue to charge a premium price for KE8 while increasing market share. Westwood was also able to earn additional operating income from improving its productivity. Calculate the following variances and indicate if each variance is favorable or unfavorable. Does variance analysis identify these causes of the variances?

Material Yield Variance

Actual labor hours worked exceed standard hours allowed. The direct-labor efficiency variance is unfavorable. Favorable labor rate variance and unfavorable total labor variance. The combination of the two variances can produce one overall total direct materials cost variance.

  • Still unsure about material and labor variances, watch this Note Pirate video to help.
  • Therefore, for control purposes, flexible budgets are used.
  • This means that direct materials purchases are charged to materials control at actual prices.
  • An alternative approach is presented in Appendix 10-1 using the idle capacity variance.
  • Cycle time is defined as processing time divided by the sum of processing, moving, waiting, and inspection time.
  • The difference between the actual materials used in production and the standard amount allowed for the actual output is reflected in the materials variance.
  • But if the quality of materials used varies with price, the accounting and purchasing departments may perform special studies to find the right quality.

Notice that the meaning of the fixed overhead spending variance is different from the meaning of the variable overhead spending variance. The fixed overhead spending variance does not include an estimating error because the analysis does not include as estimate of the actual quantities of fixed resources consumed. However, it does include a variance resulting from any variation in the quantities of the resources represented in the fixed overhead costs. For example, a quantity effect occurs when a salaried employee resigns during the period, and when there are increases or decreases in the company’s fixed assets during the period. A graphic approach for variable overhead analysis is presented in Figure 10-4. The vertical difference between points A and B represents the variable overhead spending variance.

The traditional spending and efficiency variances are calculated on the left-hand side of Exhibit using the flexible budget based on the actual quantity of the allocation basis . Theoretically, the price and quantity variances on the right-hand side of Exhibit could be calculated using a flexible budget based on the actual quantities and budgeted prices of the indirect resources .

5 Describe How Companies Use Variance Analysis

Labour yield variance is also known as labour efficiency sub-variance which is computed in terms of inputs, i.e., standard labour hours and revised labour hours mix . Managers should not use standards to assign blame. Standard cost reports may be too outdated to be useful. Meeting standards is sufficient to remain competitive. Favorable variances are always better than unfavorable variances.

The spending variance is the difference between actual variable factory overhead based on the application of a predetermined rate to actual hours worked. Exhibit 10-2 includes eight variance accounts along with the usual generic accounts used in normal historical costing. These include the direct materials price variance and the direct materials quantity variance.

How To Compute A Labor Variance

The calculation of labour efficiency or usage variance follows the same pattern as the computa­tion of materials usage variance. Labour efficiency variance occurs when labour operations are more efficient or less efficient than standard performance. A material usage variance is favourable when the total actual quantity of direct materials used is less than the total standard quantity allowed for the actual output. The difference https://accounting-services.net/ between the standard cost of direct labor and the actual hours of direct labor at standard rate equals the direct labor quantity variance. The total of both variances equals the total direct labor variance. To estimate how the combination of wages and hours affects total costs, compute the total direct labor variance. As with direct materials, the price and quantity variances add up to the total direct labor variance.

Causes Of Material Price Variance

The variance shows that some costs need to be addressed by management because they are exceeding or not meeting the expected costs. Which of the following is a purpose of standard costing? Eliminate the need for subjective decisions by management. For March a materials price variance is equivalent to a labor 1988 performance, budgeted overhead is ` 98,000 for the standard labour hours allowed. The following additional information pertains to the month of March 1988. Could we calculate a production volume variance in normal historical job order costing?

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