Direct Labor Variance Analysis

The information needed to record direct materials purchases and usage is given below. Solve standard costs problems in a process costing environment. Discuss the meaning of the fixed overhead variances. Explain the usual, or traditional interpretation of the variable overhead variances and discuss the validity of this interpretation.

The entries to record materials purchases and usage for the example above are presented in Exhibit 10-4. We must quantify material price variance and material quantity variance to assign responsibility to each department. The difference between a budgeted, planned, or standard cost and the actual amount incurred/sold is referred to as a variance in budgeting. Cost and revenue variances can also be calculated. In this example, assume the selling price per unit is $20 and 1,000 units are sold. The standard cost per unit of $113.60 calculated previously is used to determine cost of goods sold – at standard amount.

the standard price and quantity of direct materials are separated because

Explain how fixed overhead costs are recorded and analyzed in a standard costing. Describe two ways to record and analyze direct materials price variances. https://online-accounting.net/ Explain how direct materials costs are recorded and analyzed in a standard costing, including the required variance calculations and journal entries.

• What is the usual interpretation of the V.O.
• Before looking at the variances, a summary of the overhead information for Bases, Inc., might be helpful.
• Why can’t we calculate a variable overhead efficiency variance in normal historical costing?
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• On the other hand, the ROA% for HGHL increases from 16.86% in 2009 to 22.52% by 2013.
• The diagram in Exhibit emphasizes the flexible budgets involved in the direct labor variance analysis.
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2 Productivity is a measure of output per input. Yield refers to the productivity measure for materials. Many changes are affecting the market for oil. Predict how each of the following events will affect the equilibrium price and quantity in the market for oil. Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. Direct materials refer to basic materials that form an integral part of a finished product.

Example of Relationship Between Direct Materials Variances and Direct Labor Variances

When budgets are prepared, the costs are usually computed at two levels, in total dollars so an income statement can be prepared, and cost per unit. The cost per unit is referred to as a standard cost. A standard cost can also be developed and used for pricing decisions and cost control even if a budget is not prepared.

Assume selling expenses are $18,300 and administrative expenses are $9,100. We have demonstrated how important it is for managers to be aware not only of the cost of labor, but also of the differences between budgeted labor costs and actual labor costs. This awareness helps managers make decisions that protect the financial health of their companies. As mentioned earlier, the cause of one variance might influence another variance. For example, many of the explanations shown in Figure 10.7 “Possible Causes of Direct Labor Variances for Jerry’s Ice Cream” might also apply to the favorable materials quantity variance. Direct materials, in contrast to indirect materials, refer to the materials that form an integral or major part of the finished product.

What does a spending variance measure?

The efficiency variance is essentially the difference between two point estimates on a regression line (see Figure 10-4). Sometimes these estimates are overstated and sometimes they are understated. The result can be very misleading. This under, or overstatement might easily be misinterpreted, although it is not interpretable at all. Thus, the main point of this discussion is that the traditional analysis can only provide a rough estimate of the nature of the total variance for a particular type of variable overhead.

Actual production was 800 hours below the average monthly denominator level. Therefore, the variance represents the cost of unused capacity and under-utilizing capacity is viewed as unfavorable. Although these traditional interpretations are intuitively appealing, the spending and efficiency variances are not precise measures and can be very misleading. This is because there are two invalid assumptions underlying the traditional analysis. Precise enough so that it accurately measures the effect of the efficiency of the allocation basis on the quantities of indirect resources consumed.

Variance Analysis Template

In Method 2, the price variance is only calculated for the material used. However, obtaining the best price for materials is a purchasing function, not a responsibility of the production manager. Therefore, it is logical to calculate the price variance on the basis of the entire quantity purchased. This is consistent with the concept of responsibility accounting discussed in Chapter 9. The following symbols are used below to illustrate how direct material costs are recorded and analyzed in standard costing. A favorable cost variance occurs when the actual cost is less than the standard cost .An unfavorable cost variance occurs when the actual cost exceeds the standard cost.

Compare the standard cost control methodology to the statistical process control methodology and discuss how you believe each should be used. What is the usual interpretation of the V.O. Spending and efficiency variances? Does the traditional standard cost system described in this chapter recognize the concept of variability that is the basis of the statistical control chart methodology? (See the Introduction and the Onsi article mentioned above in footnote 1.

Recall from Chapter 9 that the Expando Company uses a type of pressed wood referred to as particle board to produce entertainment centers. Other materials, such as glue and screws are viewed as insignificant and are charged to overhead as indirect materials.

Using variance analysis for direct materials and direct labor, Jerry’s Ice Cream was able to identify strong points in its operations , and perhaps more important, Jerry’s was able to identify problem areas . This information gives the management a way to monitor and control production costs.

Variances may occur for both the variable and fixed cost components of manufacturing overhead. Before looking at the variances, a summary of the overhead information for Bases, Inc., might be helpful. The original plan was for 12,500 units per the standard price and quantity of direct materials are separated because: month, and the actual production for October was 13,300 units. The direct labor efficiency variance is recorded when the direct labor is assigned to work‐in‐process inventory. The direct labor rate variance is recorded when payroll is accrued.

• This is not a very meaningful or useful comparison.
• The slope of the flexible budget line is the standard price .
• Unfavorable Material Variance is the responsibility of the Purchases Department.
• Explain the usual, or traditional interpretation of the variable overhead variances and discuss the validity of this interpretation.
• Two flexible budgets are used to analyze direct labor costs, but one of them is the standard costs charged to work in process .
• Explain how variable overhead costs are recorded and analyzed in a standard costing.