• Exam 1• Cost Variances for Direct Costs• Break• In-Class Exercise
ACTG 321ACTG 321Agenda for Lecture 5Agenda for Lecture 5
• Exam 1• Cost Variances for Direct Costs• Break• In-Class Exercise
ACTG 321ACTG 321Agenda for Lecture 5Agenda for Lecture 5
The derivation of the price and efficiency variances
AP
ACTUAL COST
AQ
AP = actual price per unit of input (e.g., price per yard). Q = quantity of inputs for total output (e.g., yards).
The flexible budget
SP
FLEXIBLEBUDGET
SQ
SP = budgeted price per unit of input (e.g., price per yard).
SQ = budgeted quantity of inputs required for total output achieved (e.g., total yards of fabric that should have been needed for actual production).
The variable cost flexible budget variance (in green)
Actual Price
Standard Price FLEXIBLE
BUDGET
Standard ActualQuantity Quantity
P = price per unit of input. Q = quantity of inputs for total output.
The price variance
Actual Price
Standard Price FLEXIBLE
BUDGET
PRICE VARIANCE
Standard ActualQuantity Quantity
S.Q. = standard quantity for actual outputs
AP = actual price per unit of input. SP = budgeted price per unit of input. Q = quantity of inputs for total output.
The efficiency (or quantity) variance
Actual Price
Standard Price FLEXIBLE
BUDGET
Standard ActualQuantity Quantity
QUANTITY VARIANCE
S.Q. = standard quantity for actual outputs
AP = actual price per unit of input. SP = budgeted price per unit of input. Q = quantity of inputs for total output.
The variable cost flexible budget variance decomposes into a “price”
variance and an “efficiency” variance
Actual Price
Standard Price FLEXIBLE
BUDGET
PRICE VARIANCE
Standard ActualQuantity Quantity
QUANTITY VARIANCE
S.Q. = standard quantity for actual outputs
AP = actual price per unit of input. SP = budgeted price. Q = quantity of inputs for total output.
The variable cost flexible budget variance decomposes into a “price”
variance and an “efficiency” variance
Actual Price
Standard Price FLEXIBLE
BUDGET
PRICE VARIANCE
Standard ActualQuantity Quantity
QUANTITY VARIANCE
S.Q. = standard quantity for actual outputs
AP = actual price per unit of input. SP = budgeted price. Q = quantity of inputs for total output (e.g., yards).
why price?
Abbreviations:
Price or Wage Rate or Spending Variance = PV
Quantity or Usage or Efficiency Variance = QV
Actual quantity of inputs = AQ
Standard quantity of inputs = SQ
Actual price per input unit = AP
Standard price per input unit = SP
The variable cost flexible budget variance decomposes into a “price”
variance and an “efficiency” variance
The variable cost flexible budget variance decomposes into a “price”
variance and an “efficiency” variance
Formulas:
PV = AQ x (AP - SP)
QV = SP x (AQ - SQ)
For direct materials, AQ sometimes refers to materials purchased, instead of materials used. In this case, the price variance and the efficiency variance will not sum to the flexible budget variance, due to the timing difference.
These variances apply to direct materials, direct labor, and variable overhead.
Cost Variances
The McBean Company
The McBean Company makes stars. The budgeted cost for each star is as follows:
Materials: 2 pounds of “star stuff” at $4 per lb. = $8 per starLabor: 1.5 hours at $12 per hour = $18 per star
In December, 1,200 stars were produced. 2,600 lbs. of “star stuff” were purchased at $4.25 per lb. Of this amount, 2,300 lbs. were used in production. Direct labor cost was $20,930 for 1,820 hours.
1. What is the direct material price variance, assuming that the company recognizes the price variance at the time the materials are purchased?2. What is the direct material usage (quantity) variance?3. What is the direct labor rate (price) variance?4. What is the direct labor efficiency variance?
Formulas:
PV = AQ x (AP - SP) QV = SP x (AQ - SQ)
PV = Price Variance QV = Quantity Variance
AQ (SQ) = Actual (Standard) quantity of inputs
AP (SP) = Actual (Standard) price per input
Standards for Direct materials:
2 lbs of “star stuff” at $4 per lb. = $8 per star
In December, 1,200 stars were produced. 2,600 lbs. of “star stuff” was purchased at $4.25/lb. Of this, 2,300 lbs. were used in production. What is the direct material price variance, assuming that the company recognizes the price variance at the time materials are purchased?
Standards for Direct materials:
2 lbs. of “star stuff” at $4 per lb. = $8 per star
In December, 1,200 stars were produced. 2,600 lbs. of “star stuff” were purchased at $4.25/lb. Of this, 2,300 lbs. were used in production. What is the direct material price variance, assuming that the company recognizes the price variance at the time materials are purchased?
PV = AQ x (AP - SP)
= 2,600 lbs. x ($4.25 per lb. - $4.00 per lb.)
= 2,600 lb. x $0.25 per lb.
= $650 Unfavorable
Formulas:
PV = AQ x (AP - SP) QV = SP x (AQ - SQ)
PV = Price Variance QV = Quantity Variance
AQ (SQ) = Actual (Standard) quantity of inputs
AP (SP) = Actual (Standard) price per input
Standards for Direct materials:
2 lbs. of “star stuff” at $4 per lb. = $8 per star
In December, 1,200 stars were produced. 2,600 lbs. of “star stuff” were purchased at $4.25/lb. Of this, 2,300 lbs. were used in production.
2. What is the direct material usage (quantity) variance?
Standards for Direct materials:
2 lbs. of “star stuff” at $4 per lb. = $8 per star
In December, 1,200 stars were produced. 2,600 lbs. of “star stuff” were purchased at $4.25/lb. Of this, 2,300 lbs. were used in production.
2. What is the direct material usage (quantity) variance?
QV = SP x (AQ - SQ)
= $4 per lb. x (2,300 lbs. - 2,400 lbs.*)
= $4 per lb. x 100 lbs. = $400 favorable
* 2 lbs. per star x 1,200 stars
Formulas:
PV = AQ x (AP - SP) QV = SP x (AQ - SQ)
PV = Price Variance QV = Quantity Variance
AQ (SQ) = Actual (Standard) quantity of inputs
AP (SP) = Actual (Standard) price per input
Standards for Direct labor:
1.5 hours at $12 per hour = $18 per star
In December, 1,200 stars were produced. 2,600 lbs. of “star stuff” were purchased at $4.25/lb. Of this, 2,300 lbs. were used in production. Direct labor cost was $20,930 for 1,820 hours.
3. What is the direct labor rate (price) variance?
Standards for Direct labor: 1.5 hours at $12 per hour = $18 per star
In December, 1,200 stars were produced. 2,600 lbs. of “star stuff” were purchased at $4.25/lb. Of this, 2,300 lbs. were used in production. Direct labor cost was $20,930 for 1,820 hours.
3. What is the direct labor rate (price) variance?
PV = AQ x (AP - SP)
= 1,820 hr.s x (11.50 per hr* - $12 per hr)
= 1,820 hr.s x $0.50 per hr = $910 favorable
* $20,930 ÷ 1,820 hours = $11.50 per hr.
Formulas:
PV = AQ x (SP - AP) QV = SP x (AQ - SQ)
PV = Price Variance QV = Quantity Variance
AQ (SQ) = Actual (Standard) quantity of inputs
AP (SP) = Actual (Standard) price per input
Standards for Direct labor:
1.5 hours at $12 per hour = $18 per star
In December, 1,200 stars were produced. 2,600 lbs. of “star stuff” were purchased at $4.25/lb. Of this, 2,300 lbs. were used in production. Direct labor cost was $20,930 for 1,820 hours.
4. What is the direct labor efficiency variance?
Standards for Direct labor: 1.5 hours at $12 per hour = $18 per star
In December, 1,200 stars were produced. 2,600 lbs. of “star stuff” were purchased at $4.25/lb. Of this, 2,300 lbs. were used in production. Direct labor cost was $20,930 for 1,820 hours.
4. What is the direct labor efficiency variance?
QV = SP x (AQ - SQ)
= $12 per hour x (1,820 hrs - 1,800 hrs*)
= $12 per hour x 20 hrs. = $240 Unfav.
* 1,200 stars x 1.5 hours per star = 1,800 hr.s
• Exam 1• Cost Variances for Direct Costs• Break• In-Class Exercise
ACTG 321ACTG 321Agenda for Lecture 5Agenda for Lecture 5
• Exam 1• Cost Variances for Direct Costs• Break• In-Class Exercise
ACTG 321ACTG 321Agenda for Lecture 5Agenda for Lecture 5
Top Related