Production Cost Variance Analyses Essay Example

Production Cost Variance Analyses Essay Typically, one number represents what actually happened, that is, measured performance. The other number is a performance standard, such as a standard cost, a budget, or historical performance (what happened in the past, such as last month or last year). A variance analysis involves the decomposition of the variance into the individual factors that caused the variance. There is no one way to do variance analyses; many types of variance analyses can be appropriate in certain situations. Some involve comparisons of actual and expected results for individual line items in the accounting records. For example, managers might be interested to know that actual expenses were greater than gutted expenses because travel expenses were higher than expected, or that sales were lower than expected because one large customer did not order its normal quantity of goods. Other variance analyses involve the simultaneous investigation of the effects of prices, volumes, production or sales mixes, and exchange rates. Managers perform these variance analyses because they provide important insights about problems (or opportunities) that might exist. This chapter describes techniques for analyzing production cost variances in a way that provides managers with useful insights in controlling the various organizational elements that affect the performance of the production function. Most manufacturing companies use the standard sets of production variance analyses that are described in this chapter. Chapter 21 discusses variance analyses for other income v. TTS s, Ii-r statement elements. 622 Part 2 Management Accounting Direct Material and Labor Variances TX Direct Material be. The standard direct material cost of one unit of product (I. E. , one unit of stout) is found by multiplying the quantity of material (input) that should be needed for producing one unit of put times the price that should be paid per unit of material input (e. G. , 9 pounds per remit of output at $4 per A standard cost represen ts what the cost should $36 per unit of output). We will write a custom essay sample on Production Cost Variance Analyses specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Production Cost Variance Analyses specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Production Cost Variance Analyses specifically for you FOR ONLY $16.38 $13.9/page Hire Writer T}nor total standard direct material cost for an accounting period is the standard material cost per unit of output multiplied by the number of units produced in that period (e. 9. , if 100 units are produced, the total standard material cost is $3,600). This total standard material cost ($3,600) also can be calculated by multiplying the total standard quantity of material (900 pounds) by the standard cost per unit of material $4 per pound). The total standard quantity of 900 pounds is 100 units produced times 9 pounds per unit. Similarly, the actual direct material cost of one unit of stout is the actual quantity of material input used in producing that unit times the canal price paid per unit of material. The total actual direct material cost for a period is the sum of these actual costs for all the units produced in the period The differ,once between the total standard material cost and the total actual material cost of the goods actually prà ©cised direct material cost variance. That means that dirt mated variances are based on the actual putout quantity of a period; planned or budgeted output less play no part in the Ana$Russ. Because both the standard and accrual material cost totals were computed by multiplying a physical input quantity (e. G. , if pounds) by a price per unit of input (e. G- $4 per pound), it is possible decomposability material costarring into aquantitycomponentandaprice component,NT Specifically, these component,ants are as felons: pound 1 . The fact that the actual quantity of material used for the stout produced offered from the standard quantity causes the material usage finance (also called the yield variance or simply the quantity variance). . Theft TNT the curia price of each unit of material input tittered from the standardize causes the materialistic variance The algebraic sum of these two variances is the total marital variance{hat is, the difference between total actual direct material costs for the period and total standard direct mated costs. Fifth companys standard cost eastern includes only one account -f for material variance, is sum is the mammoth that would appease in that count. Favorable and Unfavorable Wariness If actual cost is Lorene than standard cost, the variance is said to ; if the reverse, the variance? is said table unfavorable. As explained in Chapter 19, favorable variances layer as credits in variance accords whereas irremovable variances appear as debits. We shall use fees adjectives in the description that follows. Hewer, it should be recognized deferrable in this sense does not necessarily mean that performance was good; it means only that actual costs were laurel +Han standard costs. The As pointed out in Chapter 19, some compartmentalized cost $items have two material variance accounts. Such slotted identify material price variance when the. Inertial is received into materials inventory. When this is done, the material price variance is baaed on the quantity of materials received doing the period rather than the quantity that was USDA during the period. In these systems the material usage variance is developed when materials are sued to production, as shown in Illustration 19-2. 0 Unction Astringencys$sees 623 interpretation of these variances, once they have been identified, is discussed eater. Lower costs can even indicate a problem because they might be the result, for example, of using inferior quality materials. Formulas The commonly used rules for finding the two direct material variances are as follows: 1 . The material usage Viviane is the difference between total standard quantity and total actual quantity femoral input, with each total quantity partici pated standard price per unit of material. Both total quantities are based on the number of units of output actually produced. 2. The malarial price variance is the difference between the standard price ND the actual price per unit of material input, multiplied by the actual quantity of material used- Using the symbol A (delta) to stand for the difference between an actual amount and a standard amount, these rules can be stated as : A Quantity * Standard price price variance : A price * Actual quantity Usage variance Example Each unit of Product X is supposed to require 9 pounds of direct material costing $4 per pound.