How To Compute Direct Materials Variances

Figure 10.4 “Direct Materials Variance Analysis for Jerry’s Ice Cream” shows how to calculate the materials price and quantity variances given the actual results and standards information. Using the separate overhead variance calculations for variable and fixed costs, the total overhead variance is the same \$485 unfavorable. The total variable overhead cost variance is \$542 unfavorable, indicating actual variable costs were higher than standard variable costs and, therefore, the overhead is underapplied. The total fixed overhead variance is \$57 favorable, indicating overhead is overapplied, because the actual fixed costs are less than the standard fixed costs. The \$232 volume variance indicates an over‐application of fixed costs. This occurred because actual production is higher than the budget.

These thin margins are the reason auto suppliers examine direct materials variances so carefully. Any unexpected increase in steel prices will likely cause significant unfavorable materials price variances, which will lead to lower profits. Auto part suppliers that rely on steel will continue to scrutinize materials price variances and materials quantity variances to control costs, particularly in a period of rising steel prices.

The unfavorable variance for this line item is \$67,400. Company management has asked you to investigate the cause of the fixed overhead spending variance calculated in requirement a. Provide one possible explanation for this variance. Total production of 210,000 units × Standard cost of \$4.50 per unit equals \$945,000; the same amount you see in the entry presented CARES Act previously. † \$140,280 is the original budget presented in the manufacturing overhead budget shown in the last text. The flexible budget amount for fixed overhead does not change with changes in production, so this amount remains the same regardless of actual production. † \$273,000 standard variable overhead costs match the flexible budget presented earlier.

Analyzing An Unfavorable Dm Price Variance

Standard costs are also used to determine product costs. Companies using standard costing systems are able to estimate product costs without having to wait for actual product cost data, and they often record transactions using standard cost information.

• The result is Favorable, since the standard quantity is more than the actual quantity.
• Management should address why the actual labor price is a dollar higher than the standard and why 1,000 more hours are required for production.
• This chapter has focused on performing variance analysis to evaluate and control operations.
• Material Cost Variance gives an idea of how much more or less cost has been incurred when compared with the standard cost.
• As a result, companies can plan how much to spend on various projects or investments in the company.

To compute the direct labor price variance, subtract the actual hours of direct labor at standard rate (\$43,200) from the actual cost of direct labor (\$46,800) to get a \$3,600 unfavorable variance. If more materials are used than needed or budgeted for the job, an unfavorable efficiency variance results. Conversely, a favorable direct materials efficiency variance results when fewer materials are used than planned. A miscalculation in the accounting for materials may result in a one-time or temporarily unfavorable direct material efficiency variance. If the actual quantity used is less than the standard quantity, the variance is favorable since the company was able to save on materials. It suggests that the workers were efficient in using raw materials. However, a favorable variance could have a different implication.

The standard number of hours represents the best estimate of a company’s industrial engineers regarding the optimal speed at which the production staff can manufacture goods. The direct material quantity variance of Blue Sky Company is favorable because the actual quantity of material used is less than the standard quantity allowed. (\$41,000 debit), and materials quantity variance (\$12,000 credit). This illustration presumes that all raw materials purchased are put into production. If this were not the case, then the price variances would be based on the amount purchased while the quantity variances would be based on output.

The company used 980 elements in production for the month, and the flexible budget shows the company expected to use 960 elements. Assuming a standard price of \$40 per element, prepare a journal entry to record the usage of raw materials in production for the month. For direct labor, Hal’s Heating established a standard number of direct labor hours at 35 hours per furnace. A total of 10,000 direct labor hours were worked during January, at a cost of \$190,000, to produce 320 furnaces. A standard of 2 pounds of material is expected to be used for each box produced, at a cost of \$5 per pound.

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The budget used a rate of \$9.00 per direct labor hour. This \$0.75 per hour difference resulted in the unfavorable rate variance because actual costs were higher than budgeted costs. This could result from unplanned but negotiated wage rate increases or the use of a more skilled work force. Similarly, when considering labor hours, downtime from production due to maintenance or start up and break time must be included in the number of hours it takes to make a product. Once standards are established, they are used to analyze and determine the reasons for actual cost variances from standards. The variances may be in quantity of materials or hours used to manufacture a product or in the cost of the materials or labor. Fiber Optic, Inc., investigates all variances above 10 percent of the flexible budget.

The actual quantity of material used was less than the standard quantity of material used. The ________ “tells managers how much of the total direct materials variance is due to using more or less materials than anticipated the by standards.” The ________ tells managers how much of the overall variance id due to paying a higher or lower price than expected for the quantity of materials it purchased. Identify the highest favorable variance and highest unfavorable variance from the six listed in requirement d, and provide one possible cause of each variance. Company policy is to investigate all variances above 5 percent of the flexible budget amount for each activity.

Analysis

Prepare a journal entry to record direct labor costs for the month. Calculate the labor rate variance and labor efficiency variance using the format shown in Figure 4.6 “Direct Labor Variance Analysis for Jerry’s Ice Cream”. As shown in the following, the labor rate variance is \$ favorable, and the labor efficiency variance is \$234,000 unfavorable. Standard costs are costs management expects to incur to provide a good or service. Manufacturing companies often establish standard costs for direct labor, direct materials, and manufacturing overhead. Standard cost information comes from a number of sources such as historical data, product specifications outlined by product engineers, contracts with suppliers, and labor union contracts. The direct material price variance is one of two variances used to monitor direct materials.

† Variable overhead costs are applied to products based on direct labor hours. In managerial accounting, variance means deviation of actual costs from standard costs. Materials price variance is the result of deviation of actual price paid for materials from what has been set as standard. Direct materials price and quantity standards are set after keeping in mind the current market prices and anticipated changes in materials prices in near future.

A ________ is a carefully predetermined cost that is usually expressed on a per unit basis. Unemployment can be the result of several economic factors, some of which are predictable, like business closers bookkeeping necessitated by a pandemic, while others are not. Learn about cyclical, frictional, and structural unemployment and discover how economists define and categorize the three types of unemployment.

Accounting For Managers

Both the factors on this formula has been explained above. The overhead budgeted what does a favorable direct materials cost variance indicate? is the same as the amount used in computing the controllable variance .

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In this illustration, AH is the actual hours worked, AR is the actual labor rate per hour, SR is the standard labor rate per hour, and SH is the standard hours for the output achieved. Note that there are several ways to perform the intrinsic variance calculations. One can compute the values for the red, blue, and green balls and note the differences. Or, one can perform the algebraic calculations for the price and quantity variances. Note that unfavorable variances offset favorable variances. A total variance could be zero, resulting from favorable pricing that was wiped out by waste.

For instance, rent is usually subject to a lease agreement that is relatively certain. Depreciation on factory equipment can be calculated in advance.

The Actual Quantity Of

The result, shown as a monetary amount, permits management to adjust production or purchases as needed to conform to the standards the business wishes to meet. To calculate a direct materials efficiency variance, the formula is (actual quantity used × standard price) − (standard quantity allowed × standard price). The materials quantity variance is recorded when direct materials are requested by production. Direct materials are taken out of raw materials inventory at the same cost they were put in , and work‐in‐process inventory is increased based on the units produced at standard cost. The direct materials price variance is recorded when the direct materials are purchased. The materials are recorded using actual quantity and standard cost. Material Price Variance is the difference between the standard price and the actual price for the actual quantity of materials used for production.

Variance Analysis for Direct Materials, Direct Labor, and Variable Overhead. The master budget shows the following standards information and indicates the company expected to produce and sell 28,000 units for the year. Explain how to record standard costs and variances using journal entries. Companies often establish criteria to use in determining which variances to investigate.

The management has asked for your input in establishing the standard number of direct labor hours required to complete one golf cart. Assume Mammoth Company produced 40,000 units last quarter. Prepare a variance analysis using the format shown in Figure 4.11 “Variable Overhead Variance Analysis for Jerry’s Ice Cream Using Activity-Based Costing”. The company purchased 1,000 elements during the month for \$38 each. Assuming a standard price of \$40 per element, prepare a journal entry to record the purchase of raw materials for the month. Calculate the fixed overhead spending and production volume variances using the format shown in Figure 4.13 “Fixed Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream”. Suggest several possible reasons for the variable overhead spending and efficiency variances.

My production crew was as efficient with their time and materials as they’ve ever been. Carol just received last year’s actual results showing sales of 390,000 units. An expense or expenditure variance is the difference between a budgeted expense and the actual amount.

The standard cost of materials purchased was less than the actual cost of materials purchased. The actual cost of materials purchased was greater than the standard cost of materials purchased. Variance analysis can be carried out for both costs and revenues. If production exceeds normal capacity, fixed overhead costs will be overapplied. 5,600 direct labor hours were used during the month at a total cost of \$134,400.

More expensive, superior materials requiring more than the standard amount were used in production. Less expensive, inferior materials requiring more than the standard amount were used in production. Less expensive, inferior materials requiring less than the standard amount were used in production. More expensive, superior materials requiring less than the standard amount were used in production. BusinessAccountingQ&A LibraryA favorable direct materials price variance and an unfavorable direct materials quantity variance might indicate which of the following? To compute the direct materials price variance, subtract the actual cost of direct materials (\$297,000) from the actual quantity of direct materials at standard price (\$310,500).

Fixed factory overhead might include rent, depreciation, insurance, maintenance, and so forth. As a result, variance analysis for overhead is split between variances related to variable overhead and variances related to fixed overhead.

As stated earlier, variance analysis is the control phase of budgeting. This information gives the management a way to monitor and control production costs. Next, we calculate and analyze variable manufacturing overhead cost variances. Recall from Figure 4.1 “Standard Costs at Jerry’s Ice Cream” that the standard rate for Jerry’s is \$13 per direct labor hour and the standard direct labor hours is 0.10 per unit. Figure 4.6 “Direct Labor Variance Analysis for Jerry’s Ice Cream” shows how to calculate the labor rate and efficiency variances given the actual results and standards information.

For Jerry’s Ice Cream, the standard allows for 0.10 labor hours per unit of production. Thus the 21,000 standard hours is 0.10 hours per unit × 210,000 units produced. A flexible budget is a revised master budget that represents expected costs given actual sales. Costs in the flexible budget are compared to actual CARES Act costs to evaluate performance. Total costs for direct labor and direct materials were higher than budgeted, even after considering the increase in sales. Adding the budget variance and volume variance, we get a total unfavorable variance of \$1,600. Once again, this is something that management may want to look at.