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.
Feedback
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 $.
Feedback
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 .
In: Accounting
#7
Factory Overhead Cost Variance Report
Tannin Products Inc. prepared the following factory overhead cost budget for the Trim Department for July of the current year, during which it expected to use 16,000 hours for production:
| Variable overhead costs: | ||
| Indirect factory labor | $48,000 | |
| Power and light | 11,520 | |
| Indirect materials | 24,000 | |
| Total variable overhead cost | $ 83,520 | |
| Fixed overhead costs: | ||
| Supervisory salaries | $59,280 | |
| Depreciation of plant and equipment | 15,600 | |
| Insurance and property taxes | 29,120 | |
| Total fixed overhead cost | 104,000 | |
| Total factory overhead cost | $187,520 |
Tannin has available 20,000 hours of monthly productive capacity in the Trim Department under normal business conditions. During July, the Trim Department actually used 15,000 hours for production. The actual fixed costs were as budgeted. The actual variable overhead for July was as follows:
| Actual variable factory overhead costs: | |
| Indirect factory labor | $43,880 |
| Power and light | 10,610 |
| Indirect materials | 23,600 |
| Total variable cost | $78,090 |
Construct a factory overhead cost variance report for the Trim Department for July. Enter all amounts as positive numbers. If an amount box does not require an entry, leave it blank. Round your interim computations to the nearest cent, if required.
| Tannin Products Inc. | ||||
| Factory Overhead Cost Variance Report-Trim Department | ||||
| For the Month Ended July 31 | ||||
| Productive capacity for the month 20,000 hrs. | ||||
| Actual productive capacity used for the month 15,000 hrs. | ||||
| Budget (at actual production) | Actual | Favorable Variances | Unfavorable Variances | |
| Variable factory overhead costs: | ||||
| Indirect factory labor | $ | $ | $ | |
| Power and light | ||||
| Indirect materials | $ | |||
| Total variable factory overhead cost | $ | $ | ||
| Fixed factory overhead costs: | ||||
| Supervisory salaries | $ | $ | ||
| Depreciation of plant and equipment | ||||
| Insurance and property taxes | ||||
| Total fixed factory overhead cost | $ | $ | ||
| Total factory overhead cost | $ | $ | ||
| Total controllable variances | $ | $ | ||
| Net controllable variance-favorable | $ | |||
| Volume variance-unfavorable | ||||
| Idle hours at the standard rate for fixed factory overhead | ||||
| Total factory overhead cost variance-unfavorable | $ | |||
In: Accounting
Jake’s Roof Repair has provided the following data concerning its costs:
| Fixed Cost per Month |
Cost per Repair-Hour |
||||
| Wages and salaries | $ | 21,300 | $ | 15.00 | |
| Parts and supplies | $ | 7.80 | |||
| Equipment depreciation | $ | 2,740 | $ | 0.45 | |
| Truck operating expenses | $ | 5,700 | $ | 1.90 | |
| Rent | $ | 4,690 | |||
| Administrative expenses | $ | 3,880 | $ | 0.60 | |
For example, wages and salaries should be $21,300 plus $15.00 per repair-hour. The company expected to work 2,500 repair-hours in May, but actually worked 2,400 repair-hours. The company expects its sales to be $50.00 per repair-hour.
Required:
Compute the company’s activity variances for May. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)
In: Accounting
Red Bear Ltd. purchased several intangible assets, as follows:
| Asset | Purchase Cost | Asset | Purchase Cost | ||||
| Licence | $76,000 | Patent | $173,000 | ||||
| Customer list | 62,700 | Copyright | 252,000 |
The following information is also available:
| ● | In addition to the costs listed above, there were legal fees of $15,000 associated with the licence acquisitions. The licences are valid in perpetuity, and sales of the products produced under the licences have been strong and are expected to continue at the same level for many decades. | |
| ● | The customer lists are expected to be useful for the next six years. | |
| ● | The patent has a legal life of 20 years, but technological changes are expected to render it worthless after about 8 years. | |
| ● | The copyright is good for another 40 years, but nearly all the related sales are expected to occur during the next 10 years. |
a) Calculate the annual amortization expense, if any, that should be recorded for each of these intangible assets, assuming the straight-line method is appropriate. (Do not leave any answer field blank. Enter 0 for amounts.)
| Asset | Annual amortization expense | |||||
| Licences | $ | |||||
| Customer list | $ | |||||
| Patents | $ | |||||
| Copyrights | $ | |||||
b) Show how the intangible assets
section of the statement of financial position would be presented
four years after acquisition of these assets, assuming that there
has been no evidence that their values have been impaired. Assume
that a full year of amortization was taken in the year of
acquisition.
| Intangible assets, at cost less accumulated amortization | ||||
| Copyrights | $ | |||
| Patents | ||||
| Customer Lists | ||||
| Licences | ||||
| Total intangible assets | $ | |||
In: Accounting
1.Sparacino Corporation has provided the following information:
| Cost per Unit | Cost per Period | ||||||
| Direct materials | $ | 6.90 | |||||
| Direct labor | $ | 3.90 | |||||
| Variable manufacturing overhead | $ | 1.70 | |||||
| Fixed manufacturing overhead | $ | 25,200 | |||||
| Sales commissions | $ | 1.50 | |||||
| Variable administrative expense | $ | 0.55 | |||||
| Fixed selling and administrative expense | $ | 8,100 | |||||
If 5,000 units are produced, the total amount of manufacturing overhead cost is closest to:
2. Glew Corporation has provided the following information:
| Cost per Unit | Cost per Period | |||
| Direct materials | $ | 6.00 | ||
| Direct labor | $ | 3.35 | ||
| Variable manufacturing overhead | $ | 1.75 | ||
| Fixed manufacturing overhead | $ | 8,800 | ||
| Sales commissions | $ | 1.00 | ||
| Variable administrative expense | $ | 0.40 | ||
| Fixed selling and administrative expense | $ | 4,000 | ||
If 3,000 units are produced, the total amount of indirect manufacturing cost incurred is closest to:
3.Fasheh Corporation's relevant range of activity is 7,000 units to 11,000 units. When it produces and sells 9,000 units, its average costs per unit are as follows:
| Average Cost per Unit | ||
| Direct materials | $ | 5.50 |
| Direct labor | $ | 3.90 |
| Variable manufacturing overhead | $ | 1.30 |
| Fixed manufacturing overhead | $ | 13.50 |
| Fixed selling expense | $ | 2.25 |
| Fixed administrative expense | $ | 1.80 |
| Sales commissions | $ | 0.50 |
| Variable administrative expense | $ | 0.45 |
If 10,000 units are produced, the total amount of manufacturing overhead cost is closest to:
In: Accounting
Jake’s Roof Repair has provided the following data concerning its costs:
| Fixed Cost per Month |
Cost per Repair-Hour |
||||
| Wages and salaries | $ | 21,100 | $ | 15.00 | |
| Parts and supplies | $ | 7.10 | |||
| Equipment depreciation | $ | 2,740 | $ | 0.40 | |
| Truck operating expenses | $ | 5,710 | $ | 1.60 | |
| Rent | $ | 4,620 | |||
| Administrative expenses | $ | 3,880 | $ | 0.60 | |
For example, wages and salaries should be $21,100 plus $15.00 per repair-hour. The company expected to work 2,600 repair-hours in May, but actually worked 2,500 repair-hours. The company expects its sales to be $53.00 per repair-hour.
Required:
Compute the company’s activity variances for May
(Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive
values.)
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In: Accounting
Jake’s Roof Repair has provided the following data concerning its costs: Fixed Cost per Month Cost per Repair-Hour Wages and salaries $ 20,900 $ 15.00 Parts and supplies $ 7.50 Equipment depreciation $ 2,760 $ 0.45 Truck operating expenses $ 5,790 $ 1.70 Rent $ 4,690 Administrative expenses $ 3,820 $ 0.40 For example, wages and salaries should be $20,900 plus $15.00 per repair-hour. The company expected to work 2,900 repair-hours in May, but actually worked 2,800 repair-hours. The company expects its sales to be $49.00 per repair-hour. Required: Compute the company’s activity variances for May. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)
In: Accounting
explain how the current-cost model differs significantly from the other accounting models (IR cash, historical cost, and general price level adjusted). what is the physical capital concept? what are the strengths and wealnesses of the current cost accounting model?
In: Accounting
Exercise 5-3A Allocating product cost between cost of goods sold and ending inventory: multiple purchases LO 5-1
Cortez Company sells chairs that are used at computer stations.
Its beginning inventory of chairs was 120 units at $55 per unit.
During the year, Cortez made two batch purchases of this chair. The
first was a 142-unit purchase at $62 per unit; the second was a
220-unit purchase at $66 per unit. During the period, it sold 286
chairs.
Required
Determine the amount of product costs that would be allocated to
cost of goods sold and ending inventory, assuming that Cortez
uses
a. FIFO:
b. LIFO:
c. Weighted average: (Round your intermediate calculations and final answers to the nearest whole dollar amount.)
a. FIFO:
In: Accounting
Calculate (i)Cost of Production and Profitability Statement .(ii) Cash flow Statement.(iii)Calculate the cost of Capital; (iv) NPV of the Project;(v)DSCR.
Zinc Unit Installed Capacity First Year Second Year
Third Year…
Tonnes 1000000 750000 800000
1000000
SRevenue Projection : Zinc is expected to be sold at Rs per ton Rs2.1 lakh.
Cost of the Project: The cost of the project works out as
below:
a) Fixed Assets or Long Term Loan: Rs 3145 crores
b) Working Capital : The working capital requirements were Rs 431
crores at 75% capacity; Rs 459.73 crores at 80% capacity and Rs
574.67 crores at full capacity utilization. Interest rate for
working capital were @12.5 %.
Means of Financing: The project would be financed by equity of Rs
942 crores and rest by term loan financing amounting to Rs 2203
crores . Interest on term loan was @11.50 %. The company’s share is
listed in NSE . The risk-free rate of return is 8.00% assumed by
the company and the market rate of return is 18%. The Beta of the
company, as reported in the pink press was 1.17. Marginal tax rate
of the company is @ 27 %. The project does not enjoy any tax
exemption. It is expected the project will be implemented in an
years time.
Life of the Project : For all estimation purposes life of the project would be 8 (eight) years. The project enjoys 2 (two)years moratorium in terms of repayment of instalment payment .
In rest of the six years, instalments of the principal will be paid uniformly. However interest payment will be from the first year of operation.
Salvage Value of the Project : Rs 310.
Manpower of the Project: Since company is already running a plant of similar type and of bigger capacity , the company is confident to draw competent human resources required for the project.
Availability of Raw Material : The company is in possession of mine rights of Zinc Mine , there will be no difficulty to obtain needed raw material .
Technology and Process Knowhow :The company will be using Bayer–Hall-Herout commercial technology, for the production of Zinc.
Fuel Usage: To ensure reliable low-cost power for the units operations and to achieve self-sufficiency of energy needs, the company proposes to set up captive power plants (CPPs) to cater to the power requirements of its smelters and mines. Besides a large part of coal for the CPPs is high GCV imported coal. The price of coal since remains to be volatile the company is examining critically ,setting up installed thermal captive power plants (CPPs). As of now it would buy power from outside.
Risk Analysis- an indicative list only :(a)Changes in the market prices of Zinc, could adversely affect the results of operations;(b)Operating results are affected by movements in exchange rates; (c) The company’s energy requirements are met by power supply of electricity boards , any changes in the state government’s policy could increase production costs. (d) The company has to obtain a steady supply of Zinc ore at reasonable costs otherwise results of operations may be affected.
Domestic Industry Outlook: Domestic Zinc consumption has been witnessing strong growth spurred by investments and industrial growth. The outlook for future demand remains upbeat as economic activity in key Zinc consuming sectors continued to be fast paced. The company estimates with this capacity expansion its share in global market will be around 7%.
Project Implementation :A combination of cutting-edge technology-driven equipment and know-how of global mining experts will help us develop the mines. These initiatives will ensure high productivity levels at low costs, enabling us to maintain our position as one of the lowest-cost producers globally.
Revenues and Cost Structure (%)
Cost Components as % of Revenue
Raw Material 0.049
Salaries 0.034
Finance Cost 0.14
Depreciation 0.18
Power Fuel Water 0.050
Other Expenses 0.250
Sub Total .703
In: Finance