Variance Analysis Assignment. Fixed Overhead Efficiency
Standard costs are estimates of the cost of creating a product or providing a service under normal conditions. They are established by considering historical data and motion studies. Standard costs assist companies in planning for production expenses. Whenever Standard Costs differ from the actual cost of production, Management Accountants report Variances. ABC Manufacturing Company has already established standard costs for its products. This case study involves analyzing the actual costs reported in a period versus the already established standard costs.
Direct material Price and Usage Variance
Direct material price usage is the difference between the standard Direct Material price and the actual price at the time of manufacture. It can either be favorable, meaning the price was lower than anticipated or adverse where the price is higher than anticipated. In the case of ABC, the variance was favorable by $2870.
The Direct Material Usage variance refers to the difference between the quantity of direct materials that was budgeted for the actual quantity produced and the actual quantity of material used. In case of ABC, the variance is unfavorable by 250 Feet. This means that though the units produced consumed more material than budgeted. In terms of Dollars, the extra 250 Feet cost $1250.
Direct Labor Rate and Efficiency Variance
Direct labor rate variance refers to the difference in the standard and actual labor cost caused by the price of labor in the producing period. It is caused by increases or decreases in the labor rate. The table above shows the computation for both rate and efficiency variances. In the case of ABC, the labor rate was higher than the standard budgeted cost, thus resulting in an unfavorable variance of $3580. The Direct Labor Efficiency Variance refers to the difference in the budgeted productivity of labor and the actual productivity of labor. ABC reported a favorable variance of 100 hours, which translates to $1000. This could be explained by the unfavorable Labor rate variance. The company is likely to have hired workers who were more skilled, hence more expensive, but helped to save $1000.
Variable Overheads Spending and efficiency variances
Variable Overheads spending variance refers to the difference in the amount budgeted for Variable overheads in the standard cost sheet and the actual amount spent during the period. The difference is caused by price differences during the planning time and production time. The table above shows the computation for both spending and efficiency variances. ABC has a favorable variance of $3000. This indicates that the company was able to procure the Variable Overheads at a lower cost than planned. ABC reported Unfavorable variance on Variable Overhead Efficiency during the period. The variance was 1000 hours, which translate to $6000. This means that whatever the company saved on buying cheap items was over compensated by low efficiency.
Fixed Overhead Spending and Volume Variances
Fixed Overheads spending variance refers to the difference in the amount budgeted for fixed overheads in the standard cost sheet and the actual amount spent during the period. The table above shows the computation for both spending and volume variances. The difference is caused by price differences during the planning time and production time. ABC has a favorable variance of $3000. This indicates that the company was able to procure the Fixed Overheads at a lower cost than planned. ABC reported unfavorable variance on Fixed Overhead Efficiency during the period. The variance was 1000 hours, which translate to $2000. This indicates that the inefficiency of the cheap fixed overheads was worthwhile because the overall variance is favorable at $1000.