Question

explain and examples about 1. report on production 2. idle time report 3. Overhead variance report 4. report on labour rate and efficiency 5. report on material price and usage variances

Answer 1

Cost of Production Report also called Process Cost Sheet is the key document. At the end of costing period, generally a month, a Cost of Production Report is prepared. It summarizes the data of quantity produced and cost incurred by each producing department. It also serves as a source document for passing accounting entries at the end of costing period. A cost of production report shows:

• Total unit costs transferred to it from a preceding department
• Materials, labor, and factory overhead added by the department
• Unit cost added by the department
• Total and unit costs accumulated to the end of operations in the department.
• The cost of the beginning and ending work in process inventories
• Cost transferred to a succeeding department or to a finished goods storeroom

Cost of production report is divided into five sections. Each section is meant to provide specific information. A brief description of these sections is presented below:

1. Quantity Schedule
2. Cost Charged to the Department
3. Equivalent units produced
4. Cost Per Unit
5. Cost Accounted for as Follows

Example # 1:

A manufacturing company makes a single production in one department; you are required to make a Cost of Production Report (CPR) from the following data:

Cost Data                                                                                              Production Data

Material Cost                       Rs. 24,500 Unit started for production                50,000 Units

Labor Cost                            29,450    Unit completed                                    45,000

Factory overhead Cost       28,500    Unit in process                                      5,000

At the end of month Raw material 100% completed and Labor and FOH 50%.

Solution:

Quantity Schedule

The first section Quantity Schedule contains input and output data in terms of quantities. The information is presented in the following order.

Quantity Schedule:
Units started in process		50,000 ======
Units completed and transferred to next department	45,000
Units still in process (All materials – 50% Labor and FOH)	5,000
		50,000 ======

In the production process, lost time may occur for several reasons. The idle time is the difference between hours paid and hours worked. Where the workers are paid on time basis, the idle time is the difference between the time for which the workers were paid and that which they actually spent of production process. It is the labour time paid for but not utilized in production.

Causes of Idle Time:

The idle time is classified into two types:

(i) Normal idle time, and

(ii) Abnormal idle time.

Causes of Normal Idle Time:

A part of idle time is unavoidable and is considered as a normal occurrence in the factory.

Illustrative list is given below:

(1) Travelling time from one job or department to another,

(2) The distance covered between the factory gate and actual place of work,

(3) Elapse of time between finishing one job and starting another job,

Causes of Abnormal Idle Time:

The important causes for the abnormal time are given below:

(a) Temporary lack of work,

(b) Machine breakdown,

(c) Power failures,

(d) Shortage of raw materials,

(e) Waiting for tools,

(f) Waiting for jobs due to unplanned production,

(g) Stoppage of work due to managerial policy decisions,

(h) Strikes and lockouts, and

(i) Floods, earthquakes, etc.

Accounting Treatment of Idle Time:

Normal Idle Time:

The wages paid for the normal idle time period is treated as production overhead and absorbed into cost of product by adopting an absorption rate. The normal idle time in tool setting etc. can be charged at inflated rate. Jobs are charged at inflated rate.

Abnormal Idle Time:

The wages paid for the abnormal idle time can be avoided by taking proper care and caution. It is not treated as part of cost and excluded from cost accounts and it is straight away debited to Costing Profit and Loss Account.

The reasons for the idle time are to be analyzed and the management needs to know the reasons for avoidable idle time so that correction can be formulated to reduce and minimize the idle time.

Factory Overhead Components

Factory overhead expenses are divided into fixed and variable costs. Factory overhead costs are also known as manufacturing overhead costs and indirect production costs. Fixed factory overhead expenses are long-term costs that do not change no matter how many units are produced. Typical fixed factory overhead costs include rent, depreciation and property taxes. Variable factory overhead costs can change with each production run. Variable factory overhead costs include indirect labor, utilities, supplies and parts.

Actual Overhead Costs

The actual factory overhead costs are the dollars and cents of indirect expenses you incur to manufacture your product. You must calculate the actual total costs and the actual cost per unit and include them on your factory overhead variance report. For example, your total actual variable costs are $5,000, the actual fixed costs are $10,000 and you produce 5,000 units for the period. Divide the $5,000 variable overhead costs by 5,000 units to get the actual variable factory overhead cost of $1 per unit. Divide the $10,000 fixed costs by 5,000 units to get the actual $2 fixed factory overhead cost per unit.

Standard Overhead Costs

Your standard factory overhead costs are budgeted factory overhead amounts. The standard factory overhead costs remain fixed over the long term and serve as a benchmark for measuring your actual overhead cost variances. You calculate your standard per unit cost using your budgeted figures. For example, your budgeted fixed costs are $12,000, budgeted variable costs are $4,000, and the budgeted production is 4,000 units. Your standard fixed factory overhead cost is the $12,000 budgeted cost divided by 4,000 projected units, or $3 per unit. The standard variable factory overhead cost is the $4,000 budgeted cost divided by 4,000 projected units, or $1 per unit.

Variance Report Uses

The factory overhead cost variance report compares the actual and standard fixed and variable factory overhead cost per unit. The standard fixed and variable factory overhead costs per unit are usually listed underneath the actual costs. For example, if the actual factory overhead costs are $3.50 per unit and the standard factory overhead costs are $3.80 per unit, you have a favorable factory overhead cost variance of 30 cents. If the actual factory overhead costs are more than the standard factory overhead costs, you have an unfavorable cost variance. In this case, you want to investigate why your actual costs are more than your standard costs.

Direct Labor Efficiency Variance is the measure of difference between the standard cost of actual number of direct labor hours utilized during a period and the standard hours of direct labor for the level of output achieved.

Formula

Direct Labor Efficiency Variance:

=	Actual Hours x Standard Rate	-	Standard Hours x Standard Rate
=	Standard Cost of Actual Hours	-	Standard Cost

Note: As the effect of difference between standard rate and actual rate of direct labor is accounted for separately in the direct labor rate variance, the efficiency variance is calculated using the standard rate.

Analysis

A favorable labor efficiency variance indicates better productivity of direct labor during a period.

Causes for favorable labor efficiency variance may include:

• Hiring of more higher skilled labor (this may adversely impact labor rate variance)
• Training of work force in improved production techniques and methodologies
• Use of better quality raw materials which are easier to handle
• Higher learning curve than anticipated in the standard

An adverse labor efficiency variance suggests lower productivity of direct labor during a period compared with the standard.

Reasons for adverse labor efficiency variances may include:

• Hiring of lower skilled labor than the standard (this should be reflected in a favorable labor rate variance)
• Lower learning curve achieved during the period than anticipated in the standard
• Decrease in staff morale and motivation
• Idle time incurred during a period caused by disruption or stoppage of activities (idle time variance may be calculated separately from the labor efficiency variance to reflect the underlying increase or decrease in labor productivity during a period)

Labor Rate Variance

The labor rate variance measures the difference between the actual and expected cost of labor. It is calculated as the difference between the actual labor rate paid and the standard rate, multiplied by the number of actual hours worked. The formula is:

(Actual rate - Standard rate) x Actual hours worked = Labor rate variance

An unfavorable variance means that the cost of labor was more expensive than anticipated, while a favorable variance indicates that the cost of labor was less expensive than planned. This information can be used for planning purposes in the development of budgets for future periods, as well as a feedback loop back to those employees responsible for the direct labor component of a business. For example, the variance can be used to evaluate the performance of a company's bargaining staff in setting hourly rates with the company union for the next contract period.

Material Price Variance

Material Price Variance is the difference between the standard price and the actual price for the actual quantity of materials used for production. The cause for material price variance can be many including changes in prices, poor purchasing procedures, deficiencies in price negotiation, etc.

Material Price Variance Formula

Material Price Variance can be calculated using the following formula:

MPV = (Standard Price – Actual Price) x Actual Quantity

Let us understand this formula with the help of an example.

	Standard	Actual
Price	$ 10 per kg.	$ 8 per kg.
Quantity	200 kgs.	150 kgs.

Here, the Material Price Variance can be calculated as follows:

MPV = (10 – 8) x 150

= 300 (F)

Here (F) stands for favorable. The variance is favorable because the actual price is less than the standard price. In cases where the actual price is more than the standard price, the result is (A) which means adverse.

Material Usage Variance

Material Usage Variance is the difference between the standard quantity specified for actual production and the actual quantity used at the standard purchase price. There can be many reasons for material usage variance including the use of sub-standard or defective products, pilferage, wastage, the differences in material quality, etc.

Material Usage Variance Formula

MUV = (Standard Quantity – Actual Quantity) x Standard Price

With the help of the above example, let us now calculate Material Usage Variance.

MUV = (200 – 150) x 10

= 500 (F)

The result is Favorable, since the standard quantity is more than the actual quantity. In cases where the actual quantity is more than the standard quantity, the result is in (A) which means Adverse.