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 - Select your answer -actualpredeterminedCorrect 1 of Item 1 costs that should be incurred under efficient operating conditions. Standard costing is most suited to - Select your answer -manufacturingprofessional servicesCorrect 2 of Item 1 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 - Select your answer -actualstandardCorrect 3 of Item 1 costs and - Select your answer -actualstandardCorrect 4 of Item 1 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 - Select your answer -favorableunfavorableCorrect 1 of Item 2 , alternatively, if actual costs are less than standard costs, the variance is - Select your answer -favorableunfavorableCorrect 2 of Item 2 .
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 - Select your answer -higherlowerCorrect 3 of Item 2 than standard and the actual quantity purchased and used is - Select your answer -higherlessCorrect 4 of Item 2 than standard. The two variances are combined for a total - Select your answer -favorableunfavorableCorrect 5 of Item 2 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 - Select your answer -higherlowerCorrect 7 of Item 2 than standard and the actual hours are - Select your answer -higherlessCorrect 8 of Item 2 than standard. The two variances are combined for a total - Select your answer -favorableunfavorableCorrect 9 of Item 2 labor variance of $.
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The illustrations provide the information to complete the problem.
The standard cost sheet for a product is shown.
The company produced 3,000 units that required:
• 19,100 pounds of material purchased at $4.55 per pound
• 6,500 hours of labor at an hourly rate of $12.00 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.
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.
Manufacturing variances are period costs that are rolled into - Select your answer -revenuecost of salesassetsliabilitiesCorrect 17 of Item 3 and reported on the - Select your answer -balance sheetincome statementCorrect 18 of Item 3 . A favorable variance is recorded as a - Select your answer -debitcreditCorrect 19 of Item 3 and an unfavorable variance is recorded as a - Select your answer -debitcreditCorrect 20 of Item 3 .
Manufacturing cost variance
Materials variance
Materials price variance
Materials usage variance
Labor variance
etc
Explanation / Answer
Material Price variance
= (Actual price - standard price) x Materials purchased
= ($4.55/pound-$4.70/pound) x 19100 pounds
= $2865 Favourable
standard Material allowed for actual production = 6.20 pound/unit x 3000 units= 18600 pounds
Material Quantity Variance
= (Actual quantity - Standard quantity) x Standard price per pound
= (19100 - 18600) x $4.70 = $2350 Unfavourable
Labour Price Variance
= (Actual Rate - Standard Rate) x Actual hours worked
= ($12 -$11.50) x 6500 = $3250 Unfavourable
Labour efficiency variance
= (actual hours - standard hours allowed) x standard labour rate
= (6500 hours - 3000 x 2.20 hours) x $11.50/hour
= $1150 Favourable
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
an unfavorable variance is recorded as a Debit
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