Chapter11-Variance Analysis & Control

7/31/2019 Chapter11-Variance Analysis & Control

1/35

KE1013 Chapter Eleven 1

Chapter Eleven

VARIANCE ANALYSIS

ANDSTANDARD COSTING


2/35


Outline

The usage of standard costing

Setting of standard cost and types of

standard

Calculation of variance:

Direct material

Direct labor

Factory overhead


3/35


Standard Costing

The cost that has been pre-determined afterconsidering other factors.

Those are estimated costs which are considered to

be ideal for each of the cost component ( directmaterial, direct labor and factory overhead ).

The standard cost system enable the managementto determine how much a product should cost.


4/35


The usage of standard costing

Planning and controlling:

Product costing:

Compare actual cost & budgeted cost

Improve performance

Increase efficiency

Provide readily available unit cost

information


5/35


Setting of Standard Cost

Analysis on the historical cost experience:

Provide initial guidelines for standard setting

Engineering studies:

Determine the most efficient way to operate

Input from operating personnel:Accountable for meeting the standards

Involve joint efforts on:


6/35


Types of Standards

Ideal standard

Normal standard

Maximum efficiency

Can be achieved if everything operates perfectly.

Currently attainable standard

Allowance is made for breakdown, interruptions etc..


7/35


Variance Analysis

Variances are the difference between the actual

manufacturing cost and the standard cost at the

actual level of production.

The significance of the variance for each element in

manufacturing cost needs further analysis todetermine the corrective actions.


8/35


Calculation of variance

Direct material

Direct labor

Factory overhead


9/35


Standard Cost

The expected cost per unit product

Illustration 1:

The followings are the standard cost for each unit

(bottle) of peanut butter produced by Syarikat Sedap

Selalu :


10/35


Standard Standard Standard Cost

Price Usage RM

Direct material:

Peanut

Butter

Sugar

Direct labor:

Machine operator

Packaging

FactoryOH:

Variable costs

Fixed costs

Standard cost per unit

2.80/kg 0.15kg 0.42

2.70/kg 0.10kg 0.27

1.20/kg 0.25kg 0.30

0.99

4.00/hour 0.02hour

3.00/hour 0.01hour

0.08

0.030.11

5.00/hour 0.01hour

12.00/hour 0.01hour

0.05

0.120.17

1.27

2.80/0.15=


11/35


If Wang Co. produces 10,000 bottles of peanut butter, the

expected total cost would be:

Direct material

Direct labor

Factory overhead

Total cost

10,000 x 0.99 9,900

10,000 x 0.11

10,000 x 0.17

1,100

1,700

12,700


12/35


Calculation of variance

Cost element Actual cost Standard cost Variance

Direct material

Direct labor

Factory overhead

9,900

1,100

1,700

9,500 400 (F)

1,050 50 (F)

2,000 300 (U)

F = (Favorable) U = (Unfavorable)


13/35


Direct Material Variance

Direct Material Price Variance

Direct Material Usage (Quantity) Variance

To measure the difference between the actual

cost and the standard cost of direct materials.


14/35


1. Direct material price variance

(Actual Price x Actual Quantity) - (Standard Price x Actual Quantity)

Simplified to be:

Actual Quantity (Actual PriceStandard Price)

AQ ( APSP )


15/35


2. Direct material usage (quantity) variance

(Standard Price x Actual Quantity) - (Standard Price x Standard Quantity)

Simplified to be:

Standard Price (Actual Quantity Standard Quantity)

SP ( AQSQ )


16/35

KE1013 Chapter Eleven16

ctual Price x Actual Qty Std Price x Actual Qty Std Price x Std Qty

Price Variance Usage Variance

Direct material variance


17/35


Illustration 2

The followings are the actual price and quantity for direct

material used by the company in producing 10,000 bottles ofpeanut butter:

Actual Price Actual Quantity

Peanut RM2.70/kg 1,400kg

Butter RM2.505/kg 1,200kg

Sugar RM1.18/kg 2,300kg


18/35


Direct material price variance:

Peanut: 1,400 (2.702.80) = 140 (F)

Butter: 1,200 (2.5052.70) = 234 (F)

Sugar: 2,300 (1.181.20) = 46 (F)

420 (F)

AQ ( APSP )


19/35


Direct material usage variance:

Peanut: 2.80 (1,4001,500) = 280(F)

Butter: 2.70 (1,2001,000)= 540 (U)

Sugar: 1.20 (2,300 2,500) = 240 (F)

20 (U)

Therefore ,

Total direct material variance = 420 (F) + 20 (U)

= 400 (F)

SP ( AQSQ )


20/35


Direct Labor Variance

Direct Labor Rate Variance

Direct Labor Efficiency Variance

Measures the differences between the actual cost and

the cost that suppose to be paid to the labor.


21/35


(Actual Hour x Actual Rate) - (Actual Hour x Standard Rate)

Actual Hour ( Actual Rate Standard Rate )

AH ( ARSR )

Direct Labor Rate Variance


22/35


(Standard Rate x Actual Hour) - (Standard Rate x Standard Hour)

Standard Rate ( Actual HourStandard Hour )

SR ( AHSH )


23/35


Actual Hour x Actual Rate Std Hour x Actual Rate Std Hour x Std Rate

Rate Variance Efficiency Variance

Direct Labor Variance


24/35


Illustration 3:

The followings are actual rate and labor hourin the production of 10,000 bottles of peanut

butter:

Actual labor rate Actual labor hour

Machine operator RM3.90/hour 190 hours

Packaging RM2.81/hour 110 hours


25/35


Direct Labor Rate Variance:

Machine Operator: 190 (3.904.00 ) = 19 (F)

Packaging: 110 (2.81 3.00) = 21 (F)

40 (F)

AH ( AR

SR )


26/35


Direct Labor Efficiency Variance:

Machine Operator: 4.00 (190200) = 40 (F)

Packaging: 3.00 (110100) = 30 (U)

10 (F)

SR ( AH

SH )

otal direct labor variance: = 40 (M) + 10 (M) = 50 (M)


27/35


Factory Overhead Variance

Variable Factory Overhead Controllable Variance

Fixed Factory Overhead Volume Variance

Measures the differences between

the actual cost and the supposed related

cost of factory overhead.


28/35


Western Rider Inc.Factory Overhead Cost Budget

For the Month Ended June 30, 2003

Direct Labor Hours4,000 4,500 5,00080% 90% 100%

Overhead is applied at $6.00 per direct laborhour based on estimated 5,000 total hours.

Total variable costs $14,400 $16,200 $18,000Variable costs per hour $ 3.60 $ 3.60 $3.60

Total fixed costs $12,000 $12,000 $12,000

Fixed costs per hour $ 3.00 $ 2.67 $ 2.40

Total costs per hour $ 6.60 $ 6.27 $ 6.00

% of Normal Capacity


29/35


Western Rider Inc.Factory Overhead Variances


Variable costs $14,400 $10,400 $4,000 F

($3.60 x 4,000 hours)Fixed costs 9,600 12,000 2,400 U

($2.40 x 4,000 hours)

Total costs $24,000 $22,400 $1,600 F

Revised ActualBudget Costs Variance

Factory overhead applied at$6.00 per direct labor hourbased on 4,000 actual hours.

Actual factoryoverhead pergeneral ledger.

Actual Hour

4,000


30/35





Variable costs $14,400 $10,400 $4,000 F


($2.40 x 4,000 hours)

Total costs $24,000 $22,400 $1,600 F

Controllable variancebased on variable costs


31/35





Volume variancebased on fixed costs

Variable costs $14,400 $10,400 $4,000 F


($2.40 x 4,000 hours)

Total costs $24,000 $22,400 $1,600 F


32/35


Variable Factory Overhead Controllable VarianceFor the Month Ended June 30, 2003

Actual variable overhead $10,400Budgeted variable overhead 14,400(4,000 actual hours x $3.60)Favorable controllable variance $(4,000)

Controllable variancemeasures the efficiencyof using variableoverhead resources.

A revisedbudgetbased onthe actualhours used


33/35


Fixed Factory Overhead Volume VarianceFor the Month Ended June 30, 2003

Budgeted volume (direct labor hours) 5,000Actual volume (direct labor hours) 4,000Capacity not used (direct labor hours) 1,000Standard fixed rate x $2.40Unfavorable volume variance $2,400

Volume variance measuresthe utilization of fixedoverhead resources.

Rate basedon 5,000direct laborhours.


34/35



35/35


Documents

Chapter11-Variance Analysis & Control