Question

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

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.

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Standards are set up as part of the budgeting process and are used when per unit costs can be estimated under efficient operating conditions. Remember that flexible budgets account for changes in volume.

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 $.

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 higher  than standard. The two variances are combined for a total favorable  direct labor cost variance of $.

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The illustrations provide the information to complete the problem.

The standard cost sheet for a product is shown.

Manufacturing Costs	Standard price	Standard Quantity	Standard Cost per unit
Direct materials	$4.70 per pound	5.60 pounds	$	26.32
Direct labor	$12.28 per hour	2.30 hours	$	28.24
Overhead	$2.20 per hour	2.30 hours	$	5.06
			$	59.62

The company produced 3,000 units that required:

• 17,300 pounds of material purchased at $4.55 per pound

• 6,810 hours of labor at an hourly rate of $12.68 per hour

• Actual overhead in the period was $15,580

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 Costs	Variance (Favorable)/ Unfavorable
Direct materials	$78,715	$	$
Direct labor		84,732
Overhead	15,580
	$	$	$1,774

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
$2,595 favorable	$2,350 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
$2,724 unfavorable	$1,105 favorable

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

Answer 1

Standard per unit
Direct Material		5.6	pound
Direct labor		2.3	hr
Variable Overhead		2.3	hr

Standard DATA for		3000	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 5.6 pound x 3000 units)=16800 pound	$          4.70	$       78,960.00
Direct labor	( 2.3hr x 3000 units)=6900hr	$        12.28	$       84,732.00
Variable Overhead	( 2.3hr x 3000 units)=6900hr	$          2.20	$       15,180.00

Actual DATA for		3000	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	17300	$              4.550	$           78,715.00
Direct labor	6810	$              12.68	$           86,350.80
Variable Overhead	6810	$                2.29	$           15,580.00

Standard DATA for		3000	units
	Quantity (SQ)	Rate (SR)	Standard Cost
Direct Material	16800	$                4.70	$           78,960.00
Direct labor	6900	$              12.28	$           84,732.00
Variable Overhead	6900	$                2.20	$           15,180.00

Budget Performance Report
			Variance
Manufacturing Costs:	Actual	Standard	(Favorable)/
3,000 units	Costs	Costs	Unfavorable
Direct materials	$78,715	78960	($245)
Direct labor	86350.8	84,732	$1,619
Overhead	15,580	15180	$400
	$180,646	$178,872	$1,774

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                        4.70	-	$                       4.55	)	x	17300
	2595
	Variance		$              2,595.00			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	16800	-	17300	)	x	$                           4.70
	-2350
	Variance		$              2,350.00			Unfavourable-U

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                     12.28	-	$                    12.68	)	x	6810
	-2724
	Variance		$              2,724.00			Unfavourable-U
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	6900	-	6810	)	x	$                        12.28
	1105.2
	Variance		$              1,105.20			Favourable-F

Note no.	Explanation
1	Standard data is calculated by considering budgeted data and using actual data.
2	Variance refers to the difference between Standard cost and Actual cost.
3	If Actual cost is MORE than Standard Cost, the Variance is said to be UNFAVOURABLE.
4	If Actual cost is LESS than Standard Cost, the Variance is said to be FAVOURABLE.