Manufacturing Cost Variances (Actual costs compared to Standard costs) Manufactu

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Manufacturing Cost Variances (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:

Manufacturing cost variances are determined using a standard costing system. Standard costs are ?(actual/predetermined)? costs that should be incurred under efficient operating conditions. Standard costing is most suited to ?(manufacturing/professional services)? 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 ?(actual/standard)? costs and ?(actual/standard)? 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.

If actual costs are greater than standard costs, the variance is ?(favorable/unfavorable)?, alternatively, if actual costs are less than standard costs, the variance is ?(favorable/unfavorable)?.

Click here for an illustration of the materials variances.

Materials Price & Usage Variances

In the Materials Price & Usage Variances illustration, you can see that the actual costs are ?(higher/lower)? than standard and the actual quantity purchased and used is ?(higher/less)? than standard. The two variances are combined for a total ?(favorable/unfavorable)? material variance of $??.

Click here for an illustration of the labor variances.

Labor Price & Efficiency Variances

In the Labor Price & Efficiency Variances illustration, you can see that the actual costs are ?(Higher/lower)? than standard and the actual hours are ?(higher/less)? than standard. The two variances are combined for a total ?(favorable/unfavorable)? labor variance of $??.

The standard cost sheet for a product is shown.

The company produced 3,000 units that required:

• 17,300 pounds of material purchased at $4.65 per pound

• 6,530 hours of labor at an hourly rate of $12.57 per hour

• Actual overhead in the period was $17,000

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.

Split the direct materials variance into the materials price varaince and the materials usage 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 material variance

Materials price variance:                                                             Materials usage variance:

(Actual price -Standard price) x                                                   (Actual quantity -Standard quantity) x

?(actual/standard)? quantity                                                         ?(actual/standard)? price

$ ?? (favorable/unfavorable)                                                        $ ?? (favorable/unfavorable)

Split the direct labor variance into the labor price variance and the labor efficiency 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 labor variance.

Labor price variance:                                                             Labor effciency variance:

(Actual rate -Standard rate) x                                                (Actual hours -Standard hours) x

?(actual/standard)? hours                                                      ?(actual/standard)? labor rate

$ ?? (favorable/unfavorable)                                                   $ ?? (favorable/unfavorable)

Manufacturing variances are period costs that are rolled into ?(revenue/cost of sales/assests/liabilities)? and reported on the ?(balance sheet/income statement)? . A favorable variance is recorded as a ?(Debit/credit)? and an unfavorable variance is recorded as a ?(Debit/credit)?.

Manufacturing cost variance
Materials variance


Materials price variance

Materials usage variance
Labor variance


etc

Explanation / Answer

Budget performance report

1) Material price variance = ( Std rate - actual rate) Actual purchase

                                           = ($4.80 - $4.65) 17,300

                                          = 2595(F)

2) Qty variance           = (5.6*3000 - 17,300)4.8

                                     = 3265(U)

3)Labor rate variance = (12.07 - $12.57)6530 = 3265(U)

4) Direct labor efficiency variace = (2.20 *3000 - 6530)12.07

                                                        = 675(U)

Manufacturing costs 3000 units Actual costs Standard costs Variance Direct Materials $80,445 $80,640 195(F) Direct labor $82,082.10 $79,662 2420.10(U) Overhead $17,000 $16,500 500(U) $179,527.10 $176,802 $2725.10

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