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Presented by Juan F. Pujol, Jr.
Most manufacturing companies divide manufac-turing costs into three broad categories: direct materials, direct labor, and manufacturing overhead.
Calculating Variance- Direct Materials, Direct Labor, and Overhead
Direct materials The materials that go into the final product are called raw materials. Actually, raw materials refer to any materials that are used in final product; and the finished product of one company can be the raw materials of another company.
. and Overhead The term direct labor is served for those labor costs that can be easily traced to individual unit of product. Direct Labor Calculating Variance. Direct labor is sometimes called touch labor. since direct labor workers typically touch the product while it is being made.Direct materials are those materials that become an integral part of the finished product and that can be physically and conveniently traced to it.Direct Materials. Direct Labor.
Manufacturing Overhead Calculating Variance. the third element of manufacturing cost. Direct Labor. and Overhead Manufacturing overhead.Direct Materials. included all cost of manufacturing except direct materials and direct labor. Manufacturing overhead includes items such as: indirect materials indirect labor maintenance and repair production equipment .
. Direct materials price variance is calculated either at the time of purchase of direct materials or at the time when the direct materials are used.Direct Materials Price Variance property taxes depreciation insurance on manufacturing facilities Direct materials price variance is the difference between the actual purchase price and standard purchase price of materials.
Direct Materials Price Variance When this variance is computed at the time of purchase of materials it is called - direct materials purchase price variance. . When this variance is computed at the time of usage this is typically called – direct materials price usage variance.
.Direct Materials Price Variance Direct materials price variance formula: Following formula is used to calculate materials price variance: [Materials Price Variance = (Actual quantity purchased × Actual price) − (Actual quantity purchased × Standard price)] This formula is usually preferred and used by managers because it permits calculation of materials purchase price variance very quickly.
All the materials purchased have been used and an output of 2000 units were produced during the period.500 pounds of materials have been purchased at a cost of $3.00 per pound and 6.80 per pound.Direct Materials Price Variance Example: Colonial Pewter Company provides the following information: Standard price of material is $4. . This cost figure includes freight and handling and is net of quantity discount.
700 − $26. .500 pounds × $4.Direct Materials Price Variance Required: Calculate materials price variance Calculation of direct materials price variance: = (6.500 pounds × $3.80) − (6.300 Favorable A favorable material price variance of $1.00) = $24.300 exists because the actual price of materials purchased is less than the standard price of materials purchased.000 = $1.
Examples include employees who set up or maintain the equipment. Rate Variance.) . Efficiency Variance "Direct labor" refers to the work done by those employees who actually make the product on the production line. but do not work on the production line. ("Indirect labor" is work done by employees who work in the production area.Direct Labor: Standard Cost.
January 2012 Let's begin by determining the standard cost of direct labor for the good output produced in January 2012: . we can compute the direct labor rate variance. direct labor is obtained and used at the same time. Efficiency Variance Unlike direct materials (which are obtained prior to being used).Direct Labor: Standard Cost. Rate Variance. This means that for any given good output. and the standard direct labor cost at the same time. the direct labor efficiency variance.
payroll taxes 100 60 0. 0. $10 $120 42 hr. Rate Variance. $10 $300 12 hr. $10 $420 Standard cost of direct labor in the good output . 30 hr.Direct Labor: Standard Cost.3 hr.2 hr. Efficiency Variance Large Small Total Aprons Aprons Actual aprons manufactured Standard hours of direct labor per apron manufactured Total standard hours of direct labor for actual aprons manufactured Standard cost per direct labor hour incl.
our analysis will look like this: . Efficiency Variance Assuming that the actual direct labor in January adds up to 50 hours and the actual hourly rate of pay (including payroll taxes) is $9 per hour.Direct Labor: Standard Cost. Rate Variance.
Act Hr) x Payable for the LaborRate Var dard hourly should have Std Cost actual direct iance pay rate been used to labor cost. Actual ory-FG for 3.Direct Labor: Standard Cost. Direct hoursof direct the standard LaborEfficienc 4. labor hours of direct yVariance(Std Credit Wages 5.Act output x thesta Rate) ndard hourly pay rate. DebitInvent 2. Act Hr x (Std make the good Rate . Act Hr x Act Rate 50 act hr x $9 $450 Difference 50 hr x $1 Act Hr x Std Rate 50 act hr x $10 $500 Difference (8 hr) x $10 Std Hr x Std Rate 42 std hr x $10 $420 $50Favorable $80 Unfavorable . Efficiency Variance Direct Labor Variance Analysis for January 2012: 1. Rate Variance. Direct used x thestan labor that Hr .
the direct labor efficiency variance (#3 above) is unfavorable because the company actually used 50 hours of direct labor—this is 8 hours more than the standard quantity of 42 hours allowed for the good output. (The direct labor efficiency variance could be called the direct labor quantityvariance or usage variance. Efficiency Variance In January. Rate Variance. The additional 8 hours is multiplied by the standard rate of $10 to give us an unfavorable direct labor efficiency variance of $80.Direct Labor: Standard Cost.) .
This $1 difference—multiplied by the 50 actual hours—results in a $50 favorable direct labor rate variance. Efficiency Variance Note that DenimWorks paid $9 per hour for labor when the standard rate is $10 per hour. Rate Variance.) . (The direct labor rate variance could be called the direct labor price variance.Direct Labor: Standard Cost.
Efficiency Variance The journal entry for the direct labor portion of the January production is: Date Account Name Debit Credit Jan. Rate Variance. 2012 Inventory-FG Direct Labor Efficiency Variance Direct Labor Rate Variance Wages Payable 420 80 50 450 .Direct Labor: Standard Cost. 31.
Direct Labor: Standard Cost. The standard cost of direct labor for the good output produced in February 2012 is computed as: . Rate Variance. Efficiency Variance February 2012 In February your company manufactures 200 large aprons and 100 small aprons.
Rate Variance.Direct Labor: Standard Cost. Efficiency Variance Large Small Total Aprons Aprons Actual aprons manufactured Standard hours of direct labor per apron manufactured Total standard hours of direct labor for actual aprons manufactured Standard cost per direct labor hour incl. $10 $200 80 hr. $10 $800 . $10 $600 20 hr.3 hr.2 hr. 0. 60 hr. payroll taxes Standard cost of direct labor in the good output 200 100 0.
Rate Variance. Efficiency Variance If we assume that the actual labor hours in February add up to 75 and the hourly rate of pay (including payroll taxes) is $11 per hour. The analysis for February 2012 looks like this: . the total equals $825.Direct Labor: Standard Cost.
Direct used x thestan labor that Hr .Direct Labor: Standard Cost. DebitInvento 2. Act Hr x Act Rate 75 act hr x $11 $825 $75 Unfavorable Direct Labor Variance Analysis for February 2012: Difference 75 hr x ($1) Act Hr x Std Rate 75 act hr x $10 $750 Difference 5 hr x $10 Std Hr x Std Rate 80 std hr x $10 $800 $50 Favorable .Act Rate) output x thesta ndard hourly pay rate. Rate Variance.Act Hr) x Payable for the LaborRate Vari dard hourly should have Std Cost actual direct ance pay rate been used to labor cost. Actual ry-FG for 3. Direct hoursof direct the standard LaborEfficienc 4. Act Hr x (Std make the good Rate . labor hours of direct yVariance(Std Credit Wages 5. Efficiency Variance 1.
Direct Labor: Standard Cost. Rate Variance. the total actual labor costs amounted to $825 and the total standard cost of direct labor amounted to $800. Efficiency Variance Notice that for the good output in February. This unfavorable difference of $25 agrees to the sum of the two labor variances: Direct labor efficiency variance $50 Favorable Direct labor rate variance Total Direct Labor Variance $75 Unfavorable $25 Unfavorable .
Efficiency Variance The journal entry for the direct labor portion of the February production is: Date Account Name Debit Credit Feb. . Rate Variance. 2012 Inventory-FG Direct Labor Rate Variance Direct Labor Efficiency Variance Wages Payable 800 75 50 825 Tips Divide the direct labor used by the number of units produced to get the direct labor per unit.Direct Labor: Standard Cost. 28.
We view overhead as two types of costs and define them as follows: 1. .Manufacturing Overhead In the world of manufacturing–as competition becomes more intense and customers demand more services–it is important that management not only control its overhead but also understand how it is assigned to products and ultimately reported on the company's financial statements. factory burden. and manufacturing support costs) refers to indirect factory-related costs that are incurred when a product is manufactured. Manufacturing overhead (also referred to as factory overhead.
the cost of manufacturing overhead must be assigned to each unit produced so that Inventory and Cost of Goods Sold are valued and reported according to generally accepted accounting principles (GAAP).Manufacturing Overhead Along with costs such as direct material and direct labor. Manufacturing overhead includes such things as:the electricity used to operate the factory • equipment • depreciation on the factory equipment and • building supplies and factory personnel (other factory than direct labor) .
. General and Administrative (SG&A) expenses. In accounting and financial terminology.Manufacturing Overhead How these costs are assigned to products has an impact on the measurement of an individual product's profitability. and Interest Expense. the nonmanufacturing costs include Selling. Nonmanufacturing costs (sometimes referred to as ―administrative overhead‖) represent a manufacturer’s expenses that occur apart from the actual manufacturing function. 2.
Instead. they are not assigned to inventory or to the cost of goods sold. Nonmanufacturing costs include activities associated with the Selling and General Administrative functions. nonmanufacturing costs are simply reported as expenses on the income statement at the time they are incurred.Manufacturing Overhead Since accounting principles do not consider these expenses as product costs. Examples include: • the compensation of nonmanufacturing personnel .
light. . property taxes.Manufacturing Overhead • occupancy expenses for nonmanufacturing facilities (rent. maintenance.) • depreciation of nonmanufacturing equipment • expenses for automobiles and trucks used to sell and deliver products • interest expenses Note: factory administration expenses are considered part of manufacturing overhead. heat. etc.
Manufacturing Overhead Although nonmanufacturing costs are not assigned to products for purposes of reporting inventory and the cost of goods sold on a company’s financial statements. they should always be considered as part of the total cost of providing a specific product to a specific customer. . its selling price must be greater than the sum of the product cost (direct material. and manufacturing overhead) plus the nonmanufacturing costs and expenses. For a product to be profitable. direct labor.