113 During the period your company kept track of the actual expenses for each cost component. 114 We will use this information to calculate 'Usage Variances'. 115 If this had been tracked by product you would be able to analyze Usage Variances' at a product level. 116 However, to keep the administrative costs down, you had decided to do this only in aggregate. 117 Below are the Actual Expenses incurred by cost component. 118 119 120 Direct Labor 121 Direct Materials 122 Actual Expenses Variable Overhead 123 Fixed Overhead 124 Total 125 Bronze Silver Gold Total 15000 5000 3000 5500 28500 126 The Usage Variances are the difference between the Actual Expenses less the Actual Volumes at Standard Cost. 127 It represents the difference in expenses between Actual Expenses and what should have been expected given the volumes actually produced. 128 It isolates how efficient you were in the consumption of resources. 129 A negative value is favorable as it means that the Actual expenses were less than would be expected. 130 Write formulas in the green boxes below to calculate the Volume Variances. 131 132 133 Direct Labor 134 Direct Materials 135 Usage Variance 136 Variable Overhead Fixed Overhead 137 Total 138 Bronze Silver Gold Total 139 Across all products, which cost component had the most unfavorable Usage Variance? 140 141 142 In a manufacturing plant, typically accountants process the transactions that produce the standard cost reporting and financial analysts use this reporting to explain the performance. 143 As a financial analyst, it is your job to utilize this information to explain (and hopefully improve) the efficiency of the plant. 144 145 For all products and cost categories, during the first six months of the year what was the overall variance between Actual Expenses and Budget? 146 147 Is this variance 'Favorable' or 'Unfavorable'? 148 149 Based on the Usage Variances, which cost component has the greatest opportunity to reduce? 150 151 152 You are scheduled to meet with the President of the company. She is expecting you to propose decisions she might take and explain your thinking. 153 Let's focus on decisions with respect to Direct Labor: 154 The first 6 month budget for Direct Labor was $00,000 155 The 6 month actual volumes at standard cost for Direct Labor was $00,000 156 The 6 month volume variance for Direct Labor was $0,000 The 6 month actual expense for Direct Labor was $15,000 157 158 The 6 month usage variance for Direct Labor was $0,000 159 The original sales budget (the one made before the year began) for volumes for the second six months were exactly the same as for the first six months. 160 With the experience of the first six months you need to revise the volume forecast for the second six months. 161 You have prepared the following revised forecast and are proposing it be accepted as the revised budget. 162 163 Bronze Silver Gold Total 164 Original Budget Second Six Months 100 125 150 375 165 Actual Results First Six Months 170 100 120 390 166 Revised Forecast Second Six Months 140 110 130 380 167 168 Based on the Revised Forecast you need to project the Direct Labor at Standard Costs required. 169 170 171 172 Direct Labor Bronze Silver Gold Total 173 However, if your Direct Labor staffing remains at the same level as the first half of the year it will run at $15,000. 174 Your proposal to the President of the company should be to reduce staff to adjust for: 175 176 177 The required staffing for the forecasted volumes at standard costs during the second half of the year do not justify the staffing required at actual volumes during the first half. The direct labor usage variance during the first half of the year was unfavorable and that the company needs to implement efficiency improvements to achieve the standards. 34 Standard cost accounting can be highly granular and sophisticated. We present a simple example. 35 You are the financial analyst at a company that manufactures commemorative pins. 36 Your company produces three products: bronze pins, silver pins and gold pins. 37 Your company's industrial engineer has established the following standard costs per unit for each of the three products. 38 39 Industrial engineers find ways to eliminate wastefulness in production processes. They devise efficient systems that integrate workers, machines, materials, information, and energy to make a product or provide a service.' Bureau of Labor Statistics 40 The standard unit costs have been established for the following expense components: 41 42 43 44 45 46 47 48 Direct Labor Direct Materials Variable Overhead Fixed Overhead The full cost (payroll plus benefits) of the employees directly related to the production of a single unit of the product Purchased materials consumed in the production of a single unit of the product Overhead which is driven by the level of production such as electricity, direct supervision on the production line, uniforms for the production staff Overhead which is not driven by the level of production such as management, rent, office equipment. Direct Labor 49 Standard Cost Direct Materials 50 Per Unit Variable Overhead 51 52 Fixed Overhead Bronze Silver Gold 111 53 Standard Cost Accounting requires that a budget be created in advance of a period. 54 The budget is based on a forecasted volumes of production for each product. 55 The budgeted volumes permits the establishment of standard cost per unit of expenses that are not fully variable (fixed and semi-fixed). 56 For each product and cost component, the standard cost per unit is multiplied by the budgeted volumes to develop the budget. 57 58 You are now half way through the fiscal year and have the results of the first six months. 59 Let's first use the standard cost accounting framework to analyze the six-months of actual results. 60 We will then apply this fundamental understanding of the half-year actual results to develop a revised budget for the second half and to decide whether to: Adjust the budget for the second half of the year? 61 62 63 Increase/decrease factory workers (direct labor) to respond to your full-year outlook. 64 Write formulas in the green boxes below to calculate the budget. Adjust overhead to respond to your full-year outlook. 65 Use '$' in the formula to permit you to write one formula in the upper left box that can be copied down and across. 66 67 6 Month 68 Budget Sales Volumes Bronze 100 Silver Gold Total 125 150 375 69 70 Direct Labor 71 Budgeted Direct Materials 72 Volumes at Variable Overhead 73 Standard Cost Fixed Overhead 74 Total 75 76 On which product did your company anticipate spending the most (all cost components)? 77 78 79 At the end of the period the Actual Volumes produced are known. 80 81 6 Month 82 Actual Sales Volumes 83 Bronze 170 Silver 100 Gold 120 Total 390 84 At this time the 'Actual Volumes at Standard Costs' is calculated. 85 This represents the expenses that hypothetically should have been incurred, based on the Actual Volumes produced and the Standard Costs Per Unit. 86 Write formulas in the green boxes below to calculate the Actual Volumes at Standard Costs. 87 88 89 Direct Labor 90 91 Actual Volumes at Direct Materials Variable Overhead Bronze Silver Gold 92 Standard Cost Fixed Overhead 93 94 Total 95 On which product did your company actually spend the most (all cost components)? 96 97 Total 98 The Volume Variances' are the difference between the Actual Volumes at Standard Cost less the Budgeted Volumes at Standard Cost. 99 It represents the difference in expenses that would be expected because Actual Volumes were different than Budgeted Volumes. 100 A negative value is favorable as it means that the Actual expense was less than the Budgeted expense. 101 Write formulas in the green boxes below to calculate the Volume Variances. 102 103 104 Direct Labor 105 Direct Materials 106 Volume Variances 107 Variable Overhead Fixed Overhead 108 Total 109 Bronze Silver Gold Total 110 Across all products, which cost component has the most favorable Volume Variances? 111