class 13 -- optional variances

7/21/2019 Class 13 -- OPTIONAL Variances

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Variances

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Cost Variancesin a

Cost Centermyeducator.com



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



Example

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



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


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



Example

Labor Variances

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Example

Labor Efficiency Variance

Who is responsible for the Labor Efficiency Variance?

Production Foremanmyeducator.com



Example

Labor Variances


Production Manager/SchedulerWho is responsible for the Labor Efficiency Variance?

Production Foremanmyeducator.com



Example

Controlling Labor Variances


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



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



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



Variable Manufacturing Overhead

Cost Variances

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DETAILED



DETAILED

Spending Variances

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V i bl M f t i O h d



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



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



Fixed Manufacturing Overhead

Cost Variances

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DETAILED



DETAILED

Budget Variances

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Fixed Overhead



Fixed Overhead Volume Variance

Volume variance arises ONLY because actualproduction differs from budgeted production.

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Fixed Overhead



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



Manufacturing Overhead

Account

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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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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.

class 13 -- optional variances

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