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

actualpredeterminedpredetermined

costs that should be incurred under efficient operating conditions. Standard costing is most suited to

manufacturingprofessional servicesmanufacturing

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

actualstandardstandard

costs and

actualstandardactual

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.

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

favorableunfavorableunfavorable

, alternatively, if actual costs are less than standard costs, the variance is

favorableunfavorablefavorable

.

Direct Materials Cost Variance

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

higherlowerhigher

than standard and the actual quantity purchased and used is

higherlessless

than standard. The two variances are combined for a total

favorableunfavorablefavorable

direct material cost variance of $fill in the blank 06cccff56fb503c_6.

Direct Labor Cost Variance

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

higherlowerhigher

than standard and the actual hours are

higherlessless

than standard. The two variances are combined for a total

favorableunfavorablefavorable

direct labor cost variance of $fill in the blank 06cccff56fb503c_10.

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The illustrations provide the information to complete the problem.

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The standard cost sheet for a product is shown.

Manufacturing Costs	Standard price	Standard Quantity	Standard Cost per unit
Direct materials	$4.30 per pound	6.00 pounds	$	25.80
Direct labor	$11.81 per hour	2.20 hours	$	25.98
Overhead	$2.20 per hour	2.20 hours	$	4.84
			$	56.62

The company produced 3,000 units that required:

18,500 pounds of material purchased at $4.15 per pound

6,540 hours of labor at an hourly rate of $12.11 per hour

Actual overhead in the period was $14,940

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	$76,775	$fill in the blank 82004a03cfac03d_1	$fill in the blank 82004a03cfac03d_2
Direct labor	fill in the blank 82004a03cfac03d_3	77,946	fill in the blank 82004a03cfac03d_4
Overhead	14,940	fill in the blank 82004a03cfac03d_5	fill in the blank 82004a03cfac03d_6
	$fill in the blank 82004a03cfac03d_7	$fill in the blank 82004a03cfac03d_8	$1,048

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 actualstandard quantity	(Actual quantity - Standard quantity) x actualstandard price
$2,150 favorable$2,600 favorable$2,775 favorable$2,775 unfavorable	$2,600 favorable$2,150 favorable$2,150 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 total direct labor cost variance.

Direct labor rate variance:	Direct labor time variance:
(Actual rate - Standard rate) x actualstandard hours	(Actual hours - Standard hours) x actualstandard labor rate
$1,962 favorable$1,962 unfavorable$2,150 favorable$2,150 unfavorable	$709 favorable$709 unfavorable$2,150 unfavorable$2,775 favorable

Manufacturing variances are period costs that are rolled into

revenuecost of salesassetsliabilities

and reported on the

balance sheetincome statement

. A favorable variance is recorded as a

debitcredit

and an unfavorable variance is recorded as a

debitcredit

.

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