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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.

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 $30,000.

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 30,000.

Question Content Area

The standard cost sheet for a product is shown.

Manufacturing Costs Standard price Standard QuantityStandard Cost per unit
Direct materials$4.60 per pound6.10 pounds$28.06
Direct labor$11.65 per hour2.30 hours$26.79
Overhead$2.30 per hour2.30 hours$5.29
$60.14

The company produced 3,000 units that required:

? 18,800 pounds of material purchased at $4.45 per pound

? 6,850 hours of labor at an hourly rate of $11.95 per hour

? Actual overhead in the period was $16,210

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 CostsVariance (Favorable)/ Unfavorable
Direct materials$83,660$fill in the$fill in the blank
Direct labor

fill in the blank

80,385

fill in the blank cab6f7011f8dfb3_4

Overhead16,210

fill in the blank

fill in the blank

$fill in the blank$fill in the blank$1,293

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

$2,820 favorable$2,300 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

$2,055 unfavorable$583 favorable

Manufacturing variances are period costs that are rolled into revenue cost of sales assets liabilities cost of sales and reported on the balance sheet income statement income statement. A favorable variance is recorded as a credit and an unfavorable variance is recorded as a debit.

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