Unit 6: Module 11
What is a common cause for a labor rate variance?
Labor rate variances are likely to be due to (1) certain tasks being performed by workers with different pay rates or (2) working overtime at rates higher than the normal wage rate
Which variance should include an analysis of the indirect materials, indirect labor, utilities, and other miscellaneous manufacturing expenses when investigating why expenses are too high?
Manufacturing overhead spending variance
When the difference between the actual quantity and the standard quantity is multiplied by the standard price, what is the result known as?
Material quantity variance
What is being calculated when the difference between the actual price and the standard price of materials is multiplied by the actual quantity purchased?
Materials price variance
What could cause a materials quantity variance?
Materials quantity variances are usually caused by quality defects, poor workmanship, substandard or unsuitable materials, inexperienced workers, machines that need repairs, or an inaccurate quantity standard.
Determining standard costs
-determined on the basis of careful analysis and the experience of many people, including managers, engineers, purchasing agents, and accountants -look at past cost data -consider changes in operations -balance behavioral and motivational dimensions: a good budget has to combine the elements of both an engineer's budget (motivate people to work hard) and the organizational behavior budget (consideration of the human element)
Three general types of responsibility centers:
1. Cost center- the manager can control costs e.g. department supervisor in a factory 2. Profit center- the manager can control revenues and costs e.g. store manager for a fast-food franchise 3. Investment center- the manager can control revenues, costs, and amounts invested e.g. manager of the Chinese operations of a large U.S. multinational company
Three-step conceptual approach to variance analysis:
1. Determine whether the variance is favorable or unfavorable 2. Compute the underlying difference that actually determines the variance 3. Calculate the financial impact of the underlying difference on the company. This variance must be accounted for in the company's accounting system.
Steps in a standard costing system used to control costs:
1. Develop standard costs- standard to make a unit 2. Collect actual costs- accounting system 3. Compare standard to actual, identify variances 4. Record actual and standard costs, and variances 5. Report results, including variances, to cost center managers and up the chain 6. Analyze causes of controllable variances 7. Take action- getting the cost under control or developing better standards
Journal entry tips:
1. Inventories are recorded at STANDARD costs. 2. An unfavorable variance is like an expense; it is recorded as a debit 3. An favorable variance is like a revenue; it is recorded as a credit
Three major cost elements when a product is made by a manufacturing firm:
1. direct materials costs e.g. metal, aluminum, and rubber to make bicycles 2. labor costs e.g. skilled laborers who work on the manufacturing lines 3. overhead costs e.g. infrastructure that needs to be in place to support production; miscellaneous factory costs such as smaller materials; indirect materials to make the bike such as screws and bolts; indirect labor such as individuals who work in the factory but not directly on the product; factory depreciation; factory utilities; factory maintenance
There are two elements in the control of materials cost:
1. the materials purchase price: under the control of the purchasing department 2. the quantity of materials used: determined by how efficiently the production supervisor organizes the manufacturing work
Management accounting has 3 purposes:
1. to assist in planning 2. to help control operations 3. provide useful information for management decision-making
Standard cost card layout
A standard price for each resource (direct materials, direct labor, and manufacturing overhead) is established and the standard input quantity allowed is determined so that the standard price can be multiplied by the standard quantity to arrive at a standard dollar cost for the product or service. (1) standard quantity of direct material, direct labor, and overhead (2) standard price or rate (3) standard cost = (1) x (2)
What is the formula for the labor rate variance?
Actual hours worked times the difference between the actual wage rate and the standard wage rate
As with all production variances, labor variances are generally closed to cost of goods sold at the end of the period.
By closing variances into cost of goods sold, the actual cost of goods sold will be reported on the income statement, and work-in-process inventory and finished goods inventory will include only the standard costs of labor.
Who is responsible for the labor rate variance?
Production manager or hiring manager; responsibility of the person in charge of assigning workers (and their associated wage rate) to projects. Labor rate variances are likely to be due to certain tasks being performed by workers with different pay rates or working overtime at rates higher than the normal wage rate.
Which group is typically responsible for the materials price variance?
Purchasing department
Accounting for labor variances
Debits: Work-in-process Inventory Labor rate variance Credits: Labor efficiency variance Wages payable
Manufacturing cost elements and what variances are examined:
Direct materials: direct materials price variance, direct materials quantity variance Direct labor: labor rate variance, labor efficiency variance Manufacturing overhead: manufacturing overhead efficiency variance, manufacturing overhead rate variance
Accounting for material variances
Materials price variance: Debit: Direct Materials Inventory Credits: Materials Price Variance Cash or Accounts Payable Materials quantity variance: Debit: Work-in-process inventory Materials quantity variance Credit: Direct Materials Inventory
Materials are always entered and removed from inventory at
STANDARD COST. (work-in-process, direct materials)
What kind of businesses use a standard cost management system?
Service, merchandising, and manufacturing firms
What is a common cause for a labor efficiency variance?
Some typical causes of labor inefficiency variances are absenteeism, machinery breakdowns, poor-quality materials, poor work environment, inadequate machinery, lack of employee skills on a given job, poor employee attitudes, lazy employees, and inaccurate standards.
What is the formula for the labor efficiency variance?
Standard wage rate times the difference between the actual hours worked and the standard hours worked
Who is responsible for the variable overhead efficiency variance?
The manager responsible for the control of direct labor hours or the activity by which manufacturing overhead is assigned to products
Who is responsible for the materials quantity variance?
The production manager/supervisor Materials quantity variances are usually caused by quality defects, poor workmanship, substandard or unsuitable materials, inexperienced workers, machines that need repairs, or an inaccurate quantity standard.
Materials price variances are usually under the control of the purchasing department.
The purchasing function involves getting a variety of price quotations, buying in economic lot sizes to take advantage of quantity discounts, paying on a timely basis to obtain cash discounts, and evaluating alternative forms of delivery to minimize shipping costs.
There are 2 kinds of material variances:
These happen at two different times. 1. Materials PRICE variance - based on the actual quantity of a materials purchased - variances arise when materials are purchased 2. Materials QUANTITY variance - based on the quantity of materials used - variance arises when materials are used
What is the term for the difference between the actual hours worked and the standard hours worked at the standard rate?
Variable overhead efficiency variance
What is the actual amount spent on variable overhead minus the actual hours worked times the standard rate for variable overhead?
Variable overhead spending variance
standard costing system
a cost-accumulation process based on costs that should be incurred rather than costs that are incurred; isolates differences between actual and standard (or budgeted) costs to determine whether costs are too high or too low as well as whether costs are improving (decreasing) or getting worse (increasing); standard costs are compared to actual costs and variances between the two are computed; managers are held responsible for the variances; standards for direct materials, direct labor, and the various manufacturing overhead expenditures are established
cost variance
a fundamental measure of cost control; the difference between the actual cost and the standard cost; these are calculated so that managers over costs can be held responsible for making sure costs are as low as possible while still making high-quality products that meet customer demands cost variance = actual cost- standard cost (budgeted cost) if significant=a signal to management that action should be taken to eliminate the variance
responsibility accounting
a system of evaluating performance; managers are held accountable for the costs, revenues, assets, or other elements over which they have control; in a cost center, a manager should be held accountable for only those costs over which the manager has substantial control; each cost variance is the responsibility of a different manager or set of managers
standard quantity allowed
amount of materials that should have been used to manufacture products in a specific time period Standard Quantity per Unit × Actual Units Produced = Standard Quantity Allowed
variance
any deviation from standard -Variances do NOT answer questions. They point you in the right direction to ask the right question of the right people.
materials quantity variance
based on the quantity of materials used compared to the quantity that should have been used according to the standard (standard quantity allowed - actual quantity used) x standard price quantity variances are based on the standard quantity allowed, which is standard input quantity per unit of production × Total actual production volume Unfavorable variance= more materials were used than expected
materials price variance
based on the the materials PURCHASED; the extent to which the standard price varies from the actual price for the quantity of materials purchased or used; It is usually best to determine the price variance when materials are purchased; a price variance is signaling—that the actual price is different than the standard or expected price (Standard Price - Actual Price) × actual quantity purchased or quantity used in production Favorable variance =if the actual price is less than the expected price Unfavorable variance= if the actual price is more than the expected price Some companies, however, prefer to compute materials price variances at the time the materials are transferred to work-in-process inventory (i.e., when these materials are actually used in production)Ma
Labor efficiency variance (time-based variance)
focusing on hours worked; measures the cost (or benefit) of using labor for more, or fewer, hours than prescribed by the standard; shows how efficiently the workers performed; the difference between the standard cost of labor given (the actual number of hours worked) and the labor cost that should have been used given the established production standard (standard hours - actual hours worked) x standard rate favorable variance= using less hours than the standard unfavorable= poorly trained employees, poor-quality materials that require extra processing time, old or faulty equipment, and improper supervision of employees
Labor rate variance
focusing on wages; the difference between standard rates and actual wage rates (standard rate - actual rate) x actual hours worked Unfavorable labor rate variances = skilled workers with high hourly pay rates are placed in jobs intended for less skilled or lower wage-rate employees or when employees work overtime at premium pay (such as time and a half or double time). favorable labor rate variances = less skilled or lower wage-rate employees perform duties intended for higher-paid workers.
Variable manufacturing overhead
indirect materials, indirect labor, utilities, and repairs and maintenance; measured and controlled by establishing standard costs, measuring actual costs, analyzing variances from standard costs, and reporting the variances to managers so they can take necessary corrective action; costs vary with direct labor hours; costs should be assigned to activities based on cost drivers that reflect the actual usage of costs for each activity
labor variances
labor rate variance and labor efficiency variance; when a standard cost system is being used in a manufacturing or service firm, a direct labor rate variance and a direct labor efficiency variance are determined for employees directly involved in the creation of the organization's product or service labor rate variance:
cost managers
must have control over costs, have relevant information about costs incurred in their center, and have a system that focuses on and supports effective cost controls (accounting)
Who is responsible for the labor efficiency variance?
production foreman; responsibility of the person who oversees the work of the laborers. Some typical causes of labor inefficiency variances are absenteeism, machinery breakdowns, poor quality materials, poor work environment, inadequate machinery, lack of employee skills on a given job, poor employee attitudes, lazy employees, and inaccurate standards.
Who is responsible for the variable overhead spending variance?
responsibility of all managers throughout the production facility with ultimate responsibility belonging to the plant manager
standard costs
the BUDGETED cost for the production of a unit or the completion of a service; what it should cost if everything went as planned and operations were efficient; calculated for all 3 manufacturing cost elements: direct materials, direct labor, and manufacturing overhead; compared to actual manufacturing costs; budgeted costs that serve as benchmarks for judging what actual costs should be
The standard quantity of materials should reflect
the amount needed for each completed unit of product but should allow for normal waste, spoilage, and other unavoidable inefficiencies
variable overhead efficiency variance
the difference between the actual hours worked and the standard hours worked times the standard rate (total manufacturing overhead per direct labor hour) (AH-SH) x SR When direct labor hours are used as the basis for assigning manufacturing overhead, the variable manufacturing overhead efficiency variance simply indicates whether the standard number of hours allowed for production are more (favorable) or less (unfavorable) than the actual hours used for production. Remember that the variable manufacturing overhead efficiency variance does not provide insight on how efficiently overhead costs are being used. Rather, this variance captures the efficiency of the activity (i.e., the cost driver) used to assign standard overhead costs..
variable overhead spending variance
the difference between the amount predicted (standard) by the actual activity level and the actual variable manufacturing overhead costs incurred (actual amount spent) Actual amount spent- (actual hours x standard rate) Unfavorable variances can indicate that spending is out of control or that standards are unreasonably low. Recall that labor hours are often considered to be a variable overhead cost driver.
There are two elements in the control of labor cost:
the labor rate- assigning the correct workers with the appropriate skill and wage level the number of labor hours worked- careful supervision and the motivation of the workers
There are two elements in the control of variable overhead costs:
the overall variable overhead spending: responsibility of all managers throughout the production facility, with ultimate responsibility belonging to the plant manager the number of labor hours worked: labor hours are a commonly used variable overhead cost driver; controlling the number of hours worked through careful worker supervision and motivation also controls variable overhead costs
Who is responsible for the materials price variance?
the purchasing agent They may have spent less because they got a cash discount or there was aggressive negotiating. Maybe they also bought stuff at low quality. Market prices change after the standard was set.
management by exception
using variances from a standard to isolate problem areas; a manager CAN'T spend the time to look at everything; investigate and correct significant variances
