Setting direct materials stds: price stds- final, delivered cost of materials, net of discounts; qty. stds- summarized in a bill of materials
Setting direct labor stds: rate stds- often a since rate is used that reflects the mix of wages earned; time stds: use time and motion studies for each labor operation
Standard cost card: std. qty/hrs x std. price/rate=std. cost per unit
Mgt by exception- deviations from stds. deemed significant are brought to the attn. of mgt.
Variance investigation should seek to determine if the circumstances causing the variance were controllable or uncontrollable and isolated or systemic
Variance analysis cycle: prepare perform. Report -> analyze variances -> identify ?’s -> receive explanations -> take corrective actions -> conduct next periods ops.
Price variance: diff. btw actual price & std. price – ex. Materials price variance, labor rate variance
Quantity variance: diff. btw actual qty & std. qty – ex. Materials qty variance, labor efficiency, (usage) variance
General model:
Actual qty. Actual qty. Std. qty. x x X
Actual price std. price std. price Price variance Quantity variance
Factored equations: (AQ x AP) – (AQ x SP) (AQ x SP) – (SQ-SP)
Price variances should be calculated when material is purchased not when it is used.
Quantity variance: SP(AQ-SQ)
Price variance: AQ(AP-SP)
Ex. How much per pound of material was actually pd? Material cost/pounds purchased & used
Purchasing manager forced to place rush orders for materials because production is inefficient -> unfavorable price variance
Production manager forced to use poor quality materials acquired at a cheap price -> unfavorable efficiency variance
Rate=price; efficiency=qty
Labor rate variance (LRV)= AQ(AR-SR); Labor efficiency variance (LEV)= SR(AH-SH); Materials qty. variance (MQV)= SP(AQ-SQ); Materials price variance (MPV)= AQ(AP-SP); Labor price(rate) variance (LRV)= AH(AR-SR)
Production mgrs.. are usually held acct. for labor variances b/c they can influence 1. Mix of skill levels assigned to work tasks, 2. Level of employee motivation, 3. Quality of production supervision, 4. Quality of training provided to employees.
Variance result from a diff btw actual cost and std. cost
An U efficiency variance for direct manufacturing labor might indicate that machines were not properly maintained.
A F price variance for direct manufacturing labor might indicate that underskilled employees are being hired.
Although computed separately, price variances and efficiency variances should not be analyzed in isolation. TRUE
The actual amount spend for Material A=standard cost + U variances – F variances.
Ex. Lion Company: actual total direct labor hrs= 20,000; std. total direct labor hrs= 21,000; direct labor rate variance- U= $3000; total direct labor cost= $126,000 -> LRV-> 3000U= 20,000 x (6.30 x SR)-> SR= 126k/20k=6.30-> 3000U/20000=.15 ->LEV= SR ( 20,000-21,000)-> 6.15(20,000-21,000)= $6150F
Ex. worksheet: actual direct labor hours worked (AQ)=61,500; Std. direct labor hours allowed (SQ)= 63,000; total payroll for direct labor= $774,900; direct labor efficiency variance= $18,000; The actual direct labor rate per hr (AP) is: $12.60 -> Actual wage rate/hr= total actual direct cost/ total actual direct labor hours worked= (AP x AQ) /AQ= $774,900 / 61,500= $12.60/hr
Ex.: The direct labor rate variance= (AQ-SQ) x SP. Standard direct labor rate, SP= efficiency variance / (AQ-SQ)= $18,000/ (61,500-63,000) =$12/hr. Actual direct labor rate, AP =total payroll for direct labor / actual direct labor hours worked= (AP x AQ) / AQ= $774,900/ 61,500=12.60/hr. Labor rate variance= (AP-SP) x AQ= (12.60-12) x 61,500= $36,900U.
Ex.: Given: Direct labor rate variance= $30,000F; direct labor efficiency variance= $50,000U; standard direct labor hours per unit produced= 5; standard direct labor hourly rate= $50; during the month, the co. used 25% more dlh than the standard allowed.
What were the total actual direct labor hours worked? Excess hours worked, based on units produced = $50,000U variance / $50 per hour= 1,000hrs. This excess represents 25% of std. hrs. allowed…std. hrs. allowed= 1,000/.25= 4,000 hrs; actual hours= 4,000 std. hrs _+ excess 1,000 hrs= 5,000 hrs.
What were the total standard hours allowed (SQ) for the units manufactured during the month? Excess hrs worked, based on units produced= $50,000U variance/ $50 per hr= 1,000 hrs. This excess represents 25% of std. hrs. allowed..std. hrs allowed=1,000 hrs/.25=4000 hrs.
What was the actual hourly rate for direct labor? Direct labor rate variance=30,000F; rate variance/hr=total rate variance/actual hrs worked= [(AP-SP)x AQ] /AQ= $30,000F/5000 actual hours= $6/hr F variance; SP= 50/hr. given; actual wage rate/hr (AP)= std. wage rate/hr (SP) – favorable rate variance/hr= $50/hr-$6/hr=$44/hr.
How many units of the product were produced during the last month? Excess hrs worked, based on units produced=$50,000U variance / $50/hr=1,000 hrs; Excess represented 25% of std. hrs. allowed; standard hrs allowed=1,000 hrs /.25=4,000 hrs; std. # of labor hrs per unit produced= 5; actual units produced= 4,000 std. hrs allowed/ 5 std. hrs/unit=800 units.
Ex. Given: standard costing system that allows 2lbs of direct materials for 1 finished unit. During month, co. purchased 40,000lbs of DM for $210,000 and manufactured 12,000 finished units. Standard DM cost allowed for the units manu. Is $120,000. Unfavorable DM usage variance of $5,000. Co. records any price variance for materials at time of purchase.
What is the standard price per pound of DM? std. DM cost per unit produced= $120,000/12,000 units= $10.00/unit; std. # of lbs. of material per unit produced= 2(given); std. price per lb. of material= $10 per unit/ 2 lbs per unit= $5.00/lb.
What is the # of lbs of DM used to produce July’s output? Materials usage variance= (AQ-SQ) x AP; std. DM cost per unit produced= $120,000/12,000 units= $10 per unit; std. # of lbs of material per unit produced= 2; std. price per lb of material= SP= $10 per unit/ 2lbs per unit= $5.00 per lb; $5,000U= (AQ-24,000) lbs x $5 per lb; solving for AQ we have AQ= 24,000 + 1,000=25,000 lbs. (1,000 is added to the 24,000 bc the effiency/quantity variance is U. AQ>SQ)
What is the DM purchase price variance in July? Actual price/lb purchased= AP= $210,000/ 40,000lbs=$5.25 per lb; std. DM cost per unit produced= $120,000/ 12,000 units produced= $10 per unit; std cost per lb of material=SP=$10 per unit/ 2 lbs of material per unit of output(given)=$5 per lb; materials purchase price variance= (AP-SP) x AQ= ($5.25-5.00) per pount x 40,000 lbs= 10,000U.
Ex. Given: DM SQ= .10lbs; DM SP= $30 per lb; DL SQ= .05 hrs; DL SP= $15 per hr. produced and sold 10,000 containers using 980 lbs of DM at avg. cost per lb of $32 and 500 direct manu. Labor hrs. at an avg. wage of $15.25 per hr. What is June’s direct manufacturing efficiency variance? 500- (10,000 x .05) x 15=0
Ex. Given: The stds. for DM in making a certain product are 20lbs @ $.75per lb. During the past period, 56,000 units of product were made and the material qty variance was $30,000U. The # of lbs of DM used during the period amounted to: MQV= SP (AQ-SQ); 30,000U= .75 x (AQ-SQ); SQ=56,000 units x 20lbs=1,120,000 diff.; 30,000/.75= 40,000 lbs. (diff btw actual and std.); AQ= 1,120,000+40,000=1,160,000