Projecto variance

Analyzing and Reporting

Variances From Standards

Introducction

Each variance we computed is the difference between an amount based on an actual result and the corresponding budgeted amount – that is , the actual amount of something and the amount it was supposed to be according to the budget (Horngren,Datar,Foster,2003).

By Nicolas Huguet

Static Budget VarianceFavorable variance- has the effect of

increasing(Horngren,Datar,Foster,2003) operating income relative to the budget amount.

Unfavorable variance- has the effect of decreasing operating income relative to the budget amount(Horngren,Datar,Foster,2003).

Flexible- Budget Variance and Sales Volumen Variance

Sales Volumen Variance- is the (Horngren,Datar,Foster,2003) difference between a flexible- budget amount and the corresponding static budget amount.Sales volumen flexible- budget static budget variance for = amount - amount the operating income

Flexible- Budget Variance- is the difference between an actual result and the corresponding flexible- budget amount based on the output level in the budget period. flexible- budget Actual flexible budget

variance = results - amount

$1,000 units should have cost (x $50) 50,000

But did cost 46,075

Direct material total variance 3, 925

Direct Material Variances

The direct (Globusz, 2001-2010) material total variance is the difference between what the output actually cost and what it should have cost, in terms of material.From the example above the material total variance is given by:

$ 4,850 kgs should have cost (x $10) 48,500

But did cost 46,075

The Direct Material Price Variance

This is the difference (Globusz, 2001-2010) between what the actual quantity of material used did cost and what it should have cost.

Direct Labour Total Variance

The direct labour total variance is the difference between what the output should have cost and what it did cost, in terms of labour (Globusz, 2001-2010).

$ 1,000 units should have cost (x $20) 20,000

But did cost 21,210

Direct material price variance 1,210

$ 1,000 units should have taken (x 4 hrs) 4,000 hrs

But did take 4,200 hrs

Variance in hrs 200 hrs

Valued at standard rate per hour x $5

Direct labour efficiency variance $1,000

The Direct Labor Efficiency Variance

The is the (Globusz, 2001-2010) difference between how many hours should have been worked for the number of units actually produced and how many hours were worked, valued at the standard rate per hour.

$ 1,000 units should have cost (x $8) 8,000

But did cost 9,450

Variable production o/hd expenditure variance 1,450

Variable Production Overhead Total Variances

The variable (Globusz, 2001-2010) production overhead total variance is the difference between what the output should have cost and what it did cost, in terms of variable production overhead.

The variable production overhead expenditure variance

Labor efficiency variance in hours 200 hrs

Valued @ standard rate per hour x $2

Variable production o/hd efficiency variance $400

The Variable Production Overhead Efficiency

Variance

This is the same (Globusz, 2001-2010) as the direct labour efficiency variance in hours, valued at the variable production overhead rate per hour.

Actual production at std rate (1,000 x $24) 24,000

Budgeted production at std rate (1,200 x $24) 28,800

4,800

Fixed Production Overhead Volume

VarianceThis is the (Globusz, 2001-2010) difference between actual and budgeted production volume multiplied by the standard absorption rate per unit.

Direct Materials VarianceBy J.

Santana

Setting Standard Costs—A Difficult TaskSetting Standard Costs—A Difficult Task

Direct Materials

The direct materials price standard is the cost per unit of direct materials that should be incurred.

Setting Standard Costs—A Difficult TaskSetting Standard Costs—A Difficult TaskDirect Materials

The direct materials quantity standard is the quantity of direct materials that should be used per unit of finished goods.

The standard direct materials cost is $12.00

($3.00 × 4.0 pounds).

Illustration: Inman Corporation manufactures a single product. The standard cost per unit of product is shown below.

Analyzing and Reporting VariancesAnalyzing and Reporting Variances

Direct materials—2 pounds of plastic at $5.00 per pound 10.00$

Direct labor—2 hours at $12.00 per hour 24.00

Variable manuf acturing overhead 12.00

Fixed manuf acturing overhead 6.00 Total standard cost per unit 52.00$

The predetermined manufacturing overhead rate is $9 per direct labor hour ($18.00/2). It was computed from a master manufacturing overhead budget based on normal production of 180,000 direct labor hours for (90,000 units) .

$18.00

The master budget showed total variable costs of $1,080,000 ($6.00 per hour) and total fixed overhead costs of $540,000 ($3.00 per hour). Actual costs for November in producing 7,600 units were as follows.


Direct materials (15,000 pounds) 73,500$

Direct labor (14,900 hours) 181,780

Variable overhead 88,990

Fixed overhead 44,000 Total manuf acturing costs 388,270$

The purchasing department buys the quantities of raw materials that are expected to be used in production each month. Raw materials inventories, therefore, can be ignored.

Direct Materials Variances

In producing 7,600 units, the company used 15,000 pounds of direct materials. These were purchased at a cost of $4.90 per unit ($73,500/15,000 pounds). The standard quantity of materials is 15,200 pounds (7,600 ×

2). The total materials variance is computed from the following formula.


Total Materials Variance (TMV)

Actual Quantity × Actual Price [(AQ) × (AP)]

Standard Quantity × Standard Price [(SQ) × (SP)]

- =

$2,500 F$73,500 (15,000 × $4.90)

$76,000 (15,200 × $5.00)

- =


Next, the company analyzes the total variance to determine the amount attributable to price (costs) and to quantity (use). The materials price variance is computed from the following formula.


Materials Price Variance (MPV)

Actual Quantity x Actual Price [(AQ) × (AP)]

Actual Quantity x Standard Price [(AQ) × (SP)]

- =

$1,500 F$73,500 (15,000 × $4.90)

$75,000 (15,000 × $5.00)

- =


The materials quantity variance is determined from the following formula.


Materials Quantity Variance (MQV)

Actual Quantity × Standard Price [(AQ) × (SP)]

Standard Quantity × Standard Price [(SQ) × (SP)]

- =

$1,000 F$75,000 (15,000 × $5.00)

$76,000 (15,200 × $5.00)

- =

Companies sometimes use a matrix to analyze a variance.

Price Variance

$73,500 – $75,000 = $1,500 F

Quantity Variance

$75,000 – $76,000 = $1,000 F

Total Variance

$73,500 – $76,000 = $2,500 F

Matrix for Direct Materials VariancesMatrix for Direct Materials Variances1 2 3

1 2- 2 3-

1 3-

Actual Quantity× Actual Price[(AQ) × (AP)]

15,000 × $4.90 = $73,500

Standard Quantity× Standard Price[(SQ) × (SP)]

15,200 × $5.00 = $76,000

Actual Quantity× Standard Price[(AQ) × (SP)]

15,000 × $5.00 = $75,000

Causes of Material Variances

Materials Price Variance – Factors that affect the price paid for raw materials include the availability of quantity and cash discounts, the quality of the materials requested, and the delivery method used. To the extent that these factors are considered in setting the price standard, the purchasing department is responsible.


Materials Quantity Variance – If the variance is due to inexperienced workers, faulty machinery, or carelessness, the production department is responsible.

Analyzing and Reporting Variances From Standards (Direct Labor Variances)

By Marcos J. Morales

One of the major management uses of standard costs is to identify variances from standards.

Variances are the differences between total actual costs and total standard costs.



Causes of Labor Variances

Labor Price Variance – Usually results from two factors:

(1) paying workers higher wages than expected

(2) misallocation of workers. The manager who authorized the wage increase is responsible for the higher wages. The production department generally is responsible variances resulting from misallocation of the workforce.


Labor Quantity Variances - Relates to the efficiency of workers. The cause of a quantity variance generally can be traced to the production department.

When actual costs exceed standard costs, the variance is unfavorable.

When actual costs are less than standard costs, the variance is favorable.

To interpret properly the significance of a variance, you must analyze it to determine the underlying factors. Analyzing variances begins by determining the cost elements that comprise the variance.


Setting Standard Costs—A Difficult TaskSetting Standard Costs—A Difficult Task

Direct Labor

The direct labor price standard is the rate per hour that should be incurred for direct labor.

Setting Standard Costs—A Difficult TaskSetting Standard Costs—A Difficult TaskDirect Labor

The direct labor quantity standard is the time that should be required to make one unit of the product.

The standard direct labor cost is $20 ($10.00 × 2.0 hours).

Illustration: Inman Corporation manufactures a single product. The standard cost per unit of product is shown below.

Analyzing and Reporting Variances (Cost Breakdown)Analyzing and Reporting Variances (Cost Breakdown)

Direct materials—2 pounds of plastic at $5.00 per pound 10.00$

Direct labor—2 hours at $12.00 per hour 24.00

Variable manuf acturing overhead 12.00

Fixed manuf acturing overhead 6.00 Total standard cost per unit 52.00$

The predetermined manufacturing overhead rate is $9 per direct labor hour ($18.00/2). It was computed from a master manufacturing overhead budget based on normal production of 180,000 direct labor hours for (90,000 units) .

$18.00

Standard Cost Accounting Procedure for Labor:

Actual hours worked (AH) 1,880

Actual rate paid per hour (AR) $ 6.50

Standard hours allowed for actual production (SH) 1,590

Standard rate per hour (SR) $ 6.00

The following journal entry is passed to record the actual direct labor payroll, assuming that

there were no payroll deductions. Dr. Cr.

Payroll (AH x AR) (1880 x $6.50) $

12,220.00

Accrued Payroll (AH x AR) (1880 x $6.50)

$12,220.0

0 Actual hours worked

(AH) 1,880.00


Standard hours allowed for actual production

(SH) 1,590.00


Labor Price Variance

$12,220 – $11,280 = $940.00 U

Labor Quantity Variance

$11,280 – $9,540 = $1,740 U

Total Variance

$12,220 – $9,540 = $2,680 U

Matrix for Direct Labor VariancesMatrix for Direct Labor Variances1 2 3

1 2- 2 3-

1 3-

Actual Hours× Actual Rate(AH) × (AR)

1,880 x $6.50 = $12,220

Standard Hours× Standard Rate(SH) × (SR)

1,590 x $6.00 = $9540

Actual Hours× Standard Rate(AH) × (SR)

1,880 x $6.00 = $11,280

Actual hours worked (AH) 1,880.00



(SH) 1,590.00


Journal Entry for Direct Labor Variance (Format)

Work in Process (SH x SR) XXX

Labor Rate Variance [(AR-SR)AH] XXX or XXX

Labor Efficiency Variance [(AH-SH)SR] XXX or XXX

Wages Payable (AH x AR) XXX

Journal Entry for Direct Labor Variance

Dr. Cr.Work in Process ($1,590 x $6.00) $ 9,540.00 Labor Rate Variance [($6.50-$6.00) x 1880] $ 940.00 Labor Efficiency Variance [(1880-1590) x $6.00] $ 1,740.00

Wages Payable (1880 x $6.50) $ 12,220.00

Actual hours worked (AH) 1,880.00



(SH) 1,590.00


“Favorable” Variances May be UnfavorableThe fact that a variance is favorable does not

mean that it should not be investigated. Indeed, a favorable variance may be

indicative of poor management decisions. For example:

A favorable material price variance may be arisen from purchasing goods of inadequate

quality for production.A favorable overhead volume variance could

mean that excessive inventory has been produced beyond customer demand.

Manufacturing Overhead Variance

By Mario Félix

Manufacturing Overhead Variances- overhead variance

overhead variance is generally analyzed through a price variance and a quantity variance.

- overhead controllable variance

overhead Controllable Variance shows whether overhead costs are effectively controlled. (varianza de precio)

- overhead volume variance

overhead Volume Variance relates to whether fixed costs were under- or over-applied during the year. (varianza de cantidad)

Before computing overhead always remember

- The controllable variance generally is for the variable costs.

- Standard hours allowed are used in each of the variances.

- Budgeted costs for the controllable variance are derived from the flexible budget.

Total Overhead varianceWhat is the total overhead variance?

The difference between actual overhead costs and overhead costs applied to work done.

Ex.Total overhead costs:

Variable overhead $ 50,000

+

Fixed overhead $50,000 = 100,000

Overhead applied:

Standard hours allowed 10,000

*

Rate per direct labor hour 9 =90,000

Total Overhead Variance = 10,000

Overhead Volume Variance What is the Volume Variance?Is the difference normal capacity hours and

standard hours allowed time the fixed averhead.Ex.Budget Overhead:Normal capacity in hours 500 -Standard hours allowed 450= 50 *Fixed overhead rate ($8/4) 2Overhead volume variance= 100

Overhead Controllable Variance

What is the overhead controllable variance?Compare the actual overhead cost in budget

cost for the standar hours allowed.Ex.Budget overhead: 10,000 -Actual overhead costs: 8,000Overhead controllable variance= 2,000

In Controllable Variance: unfavorable variance in the

production department may be caused by increase use of:

-Indirect manufacturing costs-Factory Supplies-Indirect labor-Indirect material

In the overhead Volume Variance: unfavorable variance in the production department may be caused by:

-inefficient use of direct labor or machine breakdowns

Reporting Variances

All variances should be reported to appropriate levels of management as soon as possible.

The form, content, and frequency of variance reports vary considerably among companies.

Facilitate the principle of “management by exception.”

Top management normally looks for significant variances.


Reporting Variances

Reporting Variances


Materials price variance report for Xonic, Inc., with the materials for the Weed-O order listed first.

Statement Presentation of Variances

Statement Presentation of VariancesIn income statements prepared for management under a standard cost accounting system, cost of goods sold is stated at standard cost and the variances are disclosed separately.


ReferencesHorgren,Datar,Foster,(2003) Cost Accounting A Managerial Emphasis, Eleventh Edition, Prentice Hall Upper Saddle River , NJ 07458

www.globusz.com/ebooks/costing/00000015.htm

Managerial Accounting: Tools for Business Decision Making, 5th Edition, Jerry J. Weygandt (University of Wisconsin, Madison), Paul D. Kimmel (University of Wisconsin-Milwaukee), Donald E. Kieso (Northern Illinois University) October 2009, ©2010

http://www.principlesofaccounting.com/chapter%2017.htm#SCHEDULE OF COST OF GOODS MANUFACTURED

http://www.wiley.com/WileyCDA/Section/id-302475.html?query=Jerry+J.+Weygandt

http://www.wiley.com/WileyCDA/Section/id-302475.html?query=Jerry+J.+Weygandt

http://www.wiley.com/WileyCDA/Section/id-302475.html?query=Paul+D.+Kimmel

http://www.wiley.com/WileyCDA/Section/id-302475.html?query=Donald+E.+Kieso

http://www.wiley.com/WileyCDA/Section/id-302475.html?query=Donald+E.+Kieso

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Projecto variance

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