Question
Mastery Problem: Manufacturing Cost Variance (Actual Costs Compared to Standard Costs) Question Content Area Manufacturing cost variances may come from material costs that are higher
Mastery Problem: Manufacturing Cost Variance (Actual Costs Compared to Standard Costs)
Question Content Area
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.
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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.
Question Content Area
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 $fill in the blank
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 $fill in the blank
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Feedback
The illustrations provide the information to complete the problem.
Question Content Area
The standard cost sheet for a product is shown.
Manufacturing Costs | Standard price | Standard Quantity | Standard Cost per unit | |
Direct materials | $4.40 per pound | 5.60 pounds | $ | 24.64 |
Direct labor | $12.18 per hour | 2.00 hours | $ | 24.36 |
Overhead | $2.30 per hour | 2.00 hours | $ | 4.60 |
$ | 53.60 |
The company produced 3,000 units that required:
17,300 pounds of material purchased at $4.25 per pound
5,940 hours of labor at an hourly rate of $12.58 per hour
Actual overhead in the period was $14,110
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 | $73,525 | 73920 | -395 |
Direct labor | 74725 | 73,080 | 1645 |
Overhead | 14,110 | 13800 | 310 |
162360 | 160800 | $1,560 |
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 |
$2595 favorable | $2200 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 |
$2376 unfavorable | $731 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
What is the total direct material cost variance?
What is the total direct labor cost variance?
.
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