Mastery Problem: Manufacturing Cost Variance (Actual Costs Compared to Standard Costs)

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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:

Total Manufacturing Cost Variance	Direct Materials Cost Variance	Direct Materials Price Variance
		Direct Materials Quantity 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.

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 $ ANSWER HERE.

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 $ ANSWER HERE.

The standard cost sheet for a product is shown.

Manufacturing Costs	Standard Price	Standard Quality	Standard Cost Per Unit
Direct Materials	$4.40 per pound	5.70 pounds	$25.08
Direct Labor	$12.23 per pound	2.10 hours	$25.68
Overhead	$2.30 per pound	2.10 hours	$4.83
			$55.59

The company produced 3,000 units that required:

17,600 pounds of material purchased at $4.25 per pound

6,210 hours of labor at an hourly rate of $12.63 per hour

Actual overhead in the period was $14,970

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: 3000 units	Actual Costs	Standard Costs	Variance (Favorable)/Unfavorable
Direct Materials	$74,800	ANSWER HERE	ANSWER HERE
Direct Labor	ANSWER HERE	77,049	ANSWER HERE
Overhead	14,970	ANSWER HERE	ANSWER HERE
	ANSWER HERE	ANSWER HERE	$1,423

Split the direct materials cost variance into the materials price variance 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.