class 13 -- optional variances
DESCRIPTION
Variance of labor and materialTRANSCRIPT
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Variances
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Cost Variancesin a
Cost Centermyeducator.com
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Responsibility Centers
Cost center• Manager has control over which costs are
incurred
• Example: Department supervisor in a
factoryProfit center
• Manager has control over the generation of revenues and costs.• Example: Store manager for a fast-food franchise
Investment center
• Manager has control over revenues, costs, and amounts invested.
• Example: Manager of the Chinese operations of a large U.S. multi-
national company
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Controlling Costs
Standard Costing
• Standard costs can be thought of as the BUDGETed cost for theproduction of a unit or the completion of a service.
• Comparison of standard cost to actualcost reveals cost variances.
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Controlling Costs
Standard Costing
1. Develop standard costs2. Collect actual costs3. Compare standard to actual, identify variances
4. Record actual and standard costs, and variances5. Report results, including variances, to managers6. Analyze causes of controllable variances7. Take action
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Standard Cost Card
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DeterminingStandard Costs
• Standard costs can be thought of as the BUDGETed cost for theproduction of a unit or the completion of a service.
• Involves managers, engineers, purchasing agents, accountants• Look at past cost data• Consider changes in operations• Behavioral/motivational dimension
Engineer’s Organizational Behavior
Budget Budget
|-------------------------------------------------|
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Cost VariancesManagement by Exception
• A manager canNOT spend the timeto look at everything.
Actual Cost – Standard Cost = Cost Variance
•
Investigate and correct significantvariances.
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Example
Actual Materials Cost of 100 Boats
Direct materials purchased:
Wood 9,800 feet at $9.60 per foot
Fiberglass 5,400 feet at $5.20 per footDirect materials used:
Wood 10,150 feet
Fiberglass 3,925 feetBoats produced 100
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Example
Materials Price Variance
Who is responsible for the Materials Price Variance?
The Purchasing Agentmyeducator.com
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Example
Materials Price Variance
Who is responsible for the Materials Price Variance?
The Purchasing Agent
Potential Dangers?Do we really want the cheapest materials?
Be careful when setting the materials quality specifications.
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Example
Materials Quantity Variance
Who is responsible for the Materials Quantity Variance?
The Production Managermyeducator.com
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Example
Materials Variances
Materials PRICE variance• Based on quantity of materials PURCHASED• Variance arises when materials are purchased
Materials QUANTITY variance• Based on quantity of materials USED• Variance arises when materials are used
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Example
Controlling Materials Variances
Who is responsible for the Materials Price Variance?
The Purchasing Agent•
Cash discounts, aggressive negotiating• Low quality?
Who is responsible for the Materials Quantity Variance?
The Production Manager• Bad materials, bad workers, bad machines
The variances do NOT answer questions; instead, the variances point you inthe right direction to ask the right questions of the right people.
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Example Accounting for Materials Variances
Materials Price Variance:
Direct Materials Inventory ($10.00 × 9,800 feet) 98,000
Materials Price Variance [($10.00 - $9.60) × 9,800 feet] 3,920
Cash (or Accounts Payable) ($9.60 × 9,800 feet) 94,080
Purchased 9,800 feet of wood at $9.60 per foot and entered the materials in inventory
at the standard price of $10.00 per foot; reflecting a favorable price variance of
$0.40 per foot.
Materials Quantity Variance:
Work-in-Process Inventory (10,000 feet × $10.00) 100,000
Materials Quantity Variance [(10,000 feet - 10,150 feet) × $10.00] 1,500
Direct Materials Inventory (10,150 feet × $10.00) 101,500
Transferred 10,150 feet of wood out of inventory at standard price and recorded
standard usage on the factory floor of 10,000 feet of wood to produce 100 boats;
reflecting an unfavorable quantity variance of 150 feet.
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Example Accounting for Materials Variances
Journal Entry Tips• Inventories are recorded at STANDARD
costs.• Materials Inventory at standard purchase price• Materials component of Work-in-Process Inventory at
standard purchase price and standard quantity use
• An UNFAVORABLE variance is like an
expense; it is recorded as a DEBIT.• An FAVORABLE variance is like a revenue; it
is recorded as a CREDIT.
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Example
Interpreting Cost Variances
1. Is the variance FAVORABLE orUNFAVORABLE?
2. Identify the difference causing thevariance. -- What is the pricedifference? How many extra units ofmaterials were used?
3. Calculate the financial impact.
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Standard Cost Card
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Example
Labor Variances
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Example
Labor Rate Variance
Who is responsible for the Labor Rate Variance?
Production Manager/Schedulermyeducator.com
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Example
Labor Variances
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Example
Labor Efficiency Variance
Who is responsible for the Labor Efficiency Variance?
Production Foremanmyeducator.com
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Example
Labor Variances
Who is responsible for the Labor Rate Variance?
Production Manager/SchedulerWho is responsible for the Labor Efficiency Variance?
Production Foremanmyeducator.com
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Example
Controlling Labor Variances
Who is responsible for the Labor Rate Variance?
The Production Manager/Scheduler• Work done by workers other than those intended• Overtime
Who is responsible for the Labor Efficiency Variance?
The Production Foreman•
Lazy or absent workers, machine breakdowns, bad supervision
The variances do NOT answer questions; instead, the variances point you inthe right direction to ask the right questions of the right people.
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Example Accounting for Labor Variances
Work-in-Process Inventory (8,000 hours × $20.00) 160,000
Labor Rate Variance [($20.00 - $20.50) × 7,880 hours] 3,940
Labor Efficiency Variance [(8,000 hours - 7,880 hours) × $20.00] 2,400
Wages Payable (7,880 hours × $20.50) 161,540
To charge Work-in-Process Inventory for standard labor hours at the standard wage
rate to produce 100 boats; to set up unfavorable labor rate and favorable efficiency
variances to reflect the use of 120 hours below standard at an average wage rate that
was $0.50 above standard.
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Example Accounting for Labor Variances
Journal Entry Tips• Inventories are recorded at STANDARD
costs.• Direct Labor component of Work-in-Process Inventory at
standard labor rate and standard labor hours• An UNFAVORABLE variance is like an expense; it is recorded
as a DEBIT.• An FAVORABLE variance is like a revenue; it is recorded as a
CREDIT.
Cost variances are closed toCOST OF GOODS SOLD at the end of the period.
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Revenue Variances
Profit center• Manager has control over the generation
of revenues and costs.
Cost variances? – Yes, we know about these.
Revenue variances? – Why not?
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Revenue Variances
Expected (Standard) Sales• Sales price per boat $10,000
• Number of boats 100 boats
Actual Sales•
Sales price per boat $10,500• Number of boats 90 boats
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Revenue Variances
Sales PRICE varianceDifference in sales caused by sales price different from expected
Sales VOLUME varianceDifference in sales caused by sales volume different from expected
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C t lli
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ControllingRevenue Variances
Who is responsible for the Sales Price Variance?
Marketing Executives/Salespeople• General pricing strategy
• Individual negotiations by salespeople
Who is responsible for the Sales Volume Variance?
Marketing Executives/Salespeople•
Proper incentives?• Reasonable target?• Effective advertising? Effective customer relations?The variances do NOT answer questions; instead, the variances point you inthe right direction to ask the right questions of the right people.
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Variable
Overhead
Variancesmyeducator.com
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Standard Cost Card
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Variable Overhead
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Actual Variable Overhead
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V i bl M f i O h d
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Variable Manufacturing Overhead
Cost Variances
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DETAILED
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DETAILED
Spending Variances
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V i bl M f t i O h d
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Variable Manufacturing Overhead
Efficiency Variance
Assumption: Direct Labor creates variable overhead cost.
Variable overhead efficiency variance: Additional benefit (orcost) of the efficiency of the use of direct labor.
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Fixed
Overhead
Variancesmyeducator.com
Bu gete
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Bu gete
Fixed Overhead
• Budgeted fixed cost is $168,000, independent of
production volume.
• Fixed overhead is APPLIED to production at the
rate of $20.00 per direct labor hour.
Fixed
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Actual Fixed Overhead
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Fi d M f t i O h d
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Fixed Manufacturing Overhead
Cost Variances
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DETAILED
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DETAILED
Budget Variances
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Fixed Overhead
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Fixed Overhead Volume Variance
Volume variance arises ONLY because actualproduction differs from budgeted production.
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Fixed Overhead
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Fixed Overhead Volume Variance
Interpretation of Volume Variance
UNFAVORABLE: Didn’t apply enough fixed
overhead to production because the
production level was lower than expected.
FAVORABLE: Applied too much fixed overhead
to production because the production level washigher than expected.
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Manufacturing Overhead
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Manufacturing Overhead
Account
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Over/Under Applied Overhead and
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Over/Under Applied Overhead and
Variances
Variable Overhead Spending VarianceVariable Overhead Efficiency Variance
Fixed Overhead Budget VarianceVolume Variance
The TOTAL of these four variances
is equal to over/under appliedoverhead.
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Over/Under Applied Overhead and
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Over/Under Applied Overhead and
Variances
• This entry closes Manufacturing Overhead.• Variances are then closed to Cost of Goods Sold.
• Unfavorable variances are debits, like expenses.• Favorable variances are credits, like negative expenses.