Mastery Problem: Manufacturing Cost Variance (Actual Costs Compared to Standard Costs) Manufacturing cost variances may come frpm material costs that are higher or lower than expected, rriaterial 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 Total Manufacturing Direct Labor Cost Cost Variance Variance Fa ctOIy Overhead Cost Variance Manufacturing cost variances are determined using a standard costing system. Standard costs are predetermined ' if costs that should be incurred under efcient operating conditions. Standard costing is most suited to manufacturing ' v/ 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 ' J costs and actual ' J 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. Feedba ck Check My Work Standards are set up as part ofthe budgeting process and are used when per unit costs can be estimated under efcient operating conditions. Remember that erXIbIe budgets account for changes In volume If actual costs are greater than standard costs, the variance is unfavorable V J , alternatively, if actual costs are less than standard costs, the variance is favorable V J , Direct Materials Cost Variance Calculating Direct Materials Cost Variance, you can see that the actual costs are higher ' u' than standard and the actual quantity purchased and used is less V w/ than standard. The two variances are combined for a total favorable V V/ direct material cost variance of 5:] . Direct Labor Cost Variance Calculating Direct Labor Cost Variance, you can see that the actual costs are higher V v/ than standard and the actual hours are less variances are combined for a total favorable Feedback Check My Work ' if direct labor cost variance oic 5:] . The illustrations provide the information to complete the problem. The standard cost sheet for a product is shown. Standard Cost Manufacturing Costs Standard price Standard Quantity per unit Direct materials $4.30 per pound 6.00 pounds 25 25.80 Direct labor $11.90 per hour 2.40 hours $ 28.56 Overhead $2.30 per hour 2.40 hours $ 5.52 $ 59.88 V v/ than standard. The two l'l. The company produced 3,000 units that required: c 18,500 pounds of material purchased at $4.15 per pound - 7,120 hours of labor at an hourly rate of $12.20 per hour - Actual overhead in the period was $16,890 :lll in the Budget Performance Repon: for the period. Some amounts are provided. Round your answers to the nearest dollar. However, do not round your intermediate calculations. Variance Manufacturing Costs: Actual Standard (Favorablef 3,000 units Costs Costs Unfavorable Direct materials $76,775 X $l:l > Direct labor :1 85,680 [:l Overhead 16,890 :] [:l E C] $889 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 Standard quantity) x actual ' '1' quantity standard ' if price $2 775 favorable ' J $2,150 unfavorable ' J 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 efciency 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 ' J (Actual hours , Standard hours) x hours standard V J labor rate $25136 unfavorable ' J $952 favorable V J Manufacturing variances are period costs that are rolled into cost of sales ' J and reported on the income statement V J . A favorable variance is recorded as a credit ' J and an unfavorable variance is recorded as a debit V J . )