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The fixed factory overhead volume variance is the difference between the budgeted fixed overhead at normal capacity and the standard fixed overhead for the actual units produced. The following calculations are performed. The variable factory overhead controllable variance is the difference between the actual variable overhead costs and the budgeted variable overhead for actual production. To apply this method to the Band Book example, take a look at the next diagram. Direct materials actually cost $297,000, even though the standard cost of the direct materials is only $289,800. The actual quantity of direct materials at standard price equals $310,500.

Assume 20 percent of the payroll is withheld for federal income taxes and FICA. Calculate the following and indicate if each variance is favorable or unfavorable. When are material mix and yield variances appropriate and what do they show? How do standard process cost problems differ from the examples in this chapter? Why are favorable variances not necessarily good and unfavorable variances not necessarily bad? What is the difference between a complete standard cost system and a partial system? Explain the advantages of a complete system.

Examples include wood in furniture, steel in automobiles, fabric in clothes, etc. How does the production volume variance differ from the idle capacity variance?

Next, we calculate and analyze variable manufacturing overhead cost variances. The traditional spending and efficiency variances are calculated on the left-hand side of Exhibit using the flexible budget based on the actual quantity of the allocation basis . Theoretically, the price and quantity variances on the right-hand side of Exhibit could be calculated using a flexible budget based on the actual quantities and budgeted prices of the indirect resources .

Variance analysis is the quantitative investigation of the difference between actual and planned behavior. (Drury, C.,2012 ) It is used to maintain business control. Firstly, this essay will make an analysis that the reason of variance of sales, materials, labor and overhead separately, and the second part is the interrelationship between these variances. Factory overhead variances can be separated into a controllable variance and a volume variance.

Direct Materials are the most important element in the production, as it converts into the finished goods. Costing for the same is the prime thing as it contributes to the major part of the production cost.

The labor rate variance calculation presented previously shows the actual rate paid for labor was $15 per hour and the standard rate was $13. This results in an unfavorable variance since the actual rate was higher than the expected rate. This variance is the responsibility of the purchasing department. Recall from Figure 10.1 “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 10.6 “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. Review this figure carefully before moving on to the next section where these calculations are explained in detail.

None of these choices are correct. The price variance is favorable if actual costs are less than flexible budget costs. The quantity variance is favorable if flexible budget costs are less than standard costs. The total variance is favorable if the the standard price and quantity of direct materials are separated because: actual costs are less than standard costs. The original static budget for fixed overhead is used to separate the $42,500 total variance in fixed overhead costs into two parts, spending and production volume, or controllable and uncontrollable.

It is calculated by subtracting the budgeted fixed overhead per month of $3,625 from the $3,800 actual fixed overhead. The $232 favorable volume variance indicates fixed overhead costs are overapplied. This occurred because there were more units produced than planned. It is calculated by subtracting the applied fixed overhead based on standard cost for units produced of $3,857 (13,300 sets × $0.29 per unit) from budgeted fixed overhead of $3,625. The total fixed overhead cost variance of $57 favorable is the combination of the $175 unfavorable spending variance and the $232 favorable volume variance.

For example, Band Book’s standard price is $10.35 per pound. The standard quantity per unit is 28 pounds of paper per case. This year, Band Book made 1,000 cases of books, so the company should have used 28,000 pounds of paper, the total standard quantity .

- Recall from Chapter 9 that the Expando Company uses a type of pressed wood referred to as particle board to produce entertainment centers.
- Although these traditional interpretations are intuitively appealing, the spending and efficiency variances are not precise measures and can be very misleading.
- Variance analysis was designed to help management uncover the various problems mentioned above before they become too disruptive to efficient operations.
- The materials usage or quantity variance can be separated into mix variance and yield variance.
- Conceptually, the purpose of variance analysis is to constantly monitor whether or not this goal is being achieved.

Exhibit 10-2 includes eight variance accounts along with the usual generic accounts used in normal historical costing. There are two variances for direct materials . These include the direct materials price variance and the direct materials quantity variance. Since a cost always involves a price and a quantity, the idea is to isolate the effects of differences between actual and standard prices from the effects of differences between actual and standard quantities. The same idea is used to analyze direct labor costs, although the DL variances are frequently referred to as the DL rate variance and DL efficiency variance. However, there are a variety of ways to analyze factory overhead costs.

Once the variances are calculated, management completes the analysis by obtaining explanations for why the variances occurred. For example, a question raised is “Why did materials cost less than planned? ” As an answer, management may learn there was a price decrease, or the direct materials were acquired from another source, or lower quality materials were obtained. The explanations for price variances must relate to the cost of the direct materials, not the quantity of the materials used. https://online-accounting.net/ Similarly, the reasons for the quantity variance need to relate to the amount of materials used, not the price paid for the materials. The material quantity or usage variance results when actual quantities of raw materials used in production differ from standard quantities that should have been used to produce the output achieved. It is that portion of the direct materials cost variance which is due to the difference between the actual quantity used and standard quantity specified.

- The difference between a budgeted, planned, or standard cost and the actual amount incurred/sold is referred to as a variance in budgeting.
- 8 If the number of units produced is higher or lower than desired because of labor efficiency, then the effect of labor efficiency is not entirely removed from the production volume variance calculation.
- The first entry records the actual factory overhead costs of $364,000 and shows a credit to miscellaneous accounts.
- This is difficult to understand at first, so before we examine this interpretation in more depth, consider how the variance is calculated.
- First, a T-account approach is presented to provide a comprehensive view of the product costing and variance analysis involved.
- A four variance approach appears on the right-hand side of the exhibit and a two variance approach appears on the left side.
- 6 Quantity discounts should be negotiated, as the production materials are ordered in high numbers.