The standard amount of materials allowed for the actual output is closest to
During the period just ended, Ferrars produced 15,000 units using 80,000 pounds of material and 23,000 direct labor hours. Total payroll cost was $288,000. The materials cost $3.70 per pound. Actual variable overhead cost was $220,000 and actual fixed overhead cost was $640,000. Show
You own a woodworking shop and have figured out a price you will pay and how many pounds of wood you will need to make tables. What happens if you use more or less wood, or it costs more or less than you budgeted at standard price and quantity? What might cause a variance between the standard unit price and the actual price? Quality of product purchased, market issues including unavailability of product or competition for the same materials could all be factors here. Let’s look at a couple of examples. So what if we go back to our original budget, our total raw material cost should be $21,000, but when we compare to the actual, we see this: TotalRequired production in pairs2050Units of raw material needed per pair5Units of raw material needed to meet production10250Plus desired ending raw material inventory500Total units of raw materials needed10750Less units in beginning raw material inventory250Units of raw materials to be purchased10500Cost of raw material per unit$3Cost of raw material to be purchased$31,500Now we can calculate our variance as follows:
Creating a spending variance of $10,500. So now, our units remained the same at 5 per pair, but our cost went up by $1 per unit! So our production department did good work, but perhaps our purchasing department either had problems finding the raw material and had to pay a higher price, or they may not have done proper negotiating with suppliers! How would you go about providing this information to management? What things might you do to fix these problems? A.Standard Costs-Management by Exception. A standard is a benchmark or "norm" for measuring performance. In managerial accounting, standards relate to the cost and quantity of inputs used in manufacturing goods or providing services. 1.Quantity standards. Quantity standards indicate how much of an input, such as labor time or raw materials, should be used in manufacturing a unit of product or in providing a unit of service. To measure performance, actual quantities used are compared to standard quantities allowed. B. Setting Standard Costs. Standards should be set so that they encourage efficient operations. 1. Ideal versus practical standard. Standards tend to fall into one of two categories-either ideal or practical. C. A General Model for Variance Analysis. A variance is the difference between standard prices and quantities on the one hand and actual prices and quantities on the other hand. A general model can be used to describe the variable cost variances. This model, which isolates variances into price variances and quantity variances, is found in Exhibit 10-3. 1. Price variance. The price variance is the difference between the actual quantity of inputs at the actual price and the actual quantity of inputs at the standard price. As discussed later, the "actual quantity of inputs" ordinarily refers to the actual quantity of inputs purchased, which may differ from the actual quantity of inputs used. D. Computation and Interpretation of Standard Cost Variances. Since direct material, direct labor, and variable overhead are all variable manufacturing costs, the process of computing price and quantity variances for each cost category is the same. The general model can be used in each case to compute the variances. The only complication is deciding in each case whether the actual quantity of inputs refers to the actual quantity purchased or the actual quantity used. 1. Direct material variances.a. The materials price variance is the difference between what is paid for a given quantity of materials and what should have been paid according to the standard. Most firms compute the material price variance when materials are purchased rather than when the materials are placed into production. Generally speaking, the purchasing manager has control over the price to be paid for goods and is therefore responsible for any price variance. E. Variance Analysis and Management by Exception. Management by exception means that the manager's attention should be directed towards areas where things are not proceeding according to plans. Standard cost variances signal performance different from what was expected. Since not all variations require the attention of management, some method of identifying those variations that do require attention is required. Statistical analysis can be useful in this task and the basics of this approach are sketched in the text. F. Potential Problems with Using Standard Costs. Some of the potential disadvantages of standard costs have been mentioned in passing above. A more complete list follows: 1. Standard cost variance reports are usually prepared on a monthly basis and are released long after the end of the month. As a consequence, the information in the reports may be so stale that it is almost useless. It is better to have timely, frequent reports that are approximately correct than to have untimely, infrequent reports that are very precise but too old to be of much use. Some companies are now reporting variances and other key operating data daily or even more frequently. G. Balanced Scorecard. A balanced scorecard consists of an integrated set of performance measures that are derived from the company's strategy and that support the company's strategy throughout the organization. Since each company's strategy and operating environment is different, each company's balanced scorecard will be unique. However, they will have some common characteristics. 1. Common characteristics of balanced scorecards.a. It should be possible, by examining a company's balanced scorecard, to infer its strategy and the assumptions underlying that strategy. (See Exhibit 10-13 for an example.) |