Let us take the same example except now the actual hours worked are 0. In this case, the actual hours worked per box are 0. This is an unfavorable outcome because the actual hours worked were more than the standard hours expected per box. As a result of this unfavorable outcome information, the company may consider retraining its workers, changing the production process to be more efficient, or increasing prices to cover labor costs. UPS drivers are evaluated on how many miles they drive and how quickly they deliver packages.
The drivers are given the route and time they are expected to take, so they are expected to complete their route in a timely and efficient manner. They also work until all packages are delivered. A GPS tracking system tracks the trucks throughout the day. The system keeps track of how much they back up and if they take any left turns because right turns are much more time efficient. Can the driver service the customer and drive the route in the time and distance allotted?
Which is more important: customer service or driving the route in a timely and efficient manner? Watch this video presenting an instructor walking through the steps involved in calculating direct labor variances to learn more.
When a company makes a product and compares the actual labor cost to the standard labor cost, the result is the total direct labor variance. If the outcome is unfavorable, the actual costs related to labor were more than the expected standard costs.
If the outcome is favorable, the actual costs related to labor are less than the expected standard costs. The total direct labor variance is also found by combining the direct labor rate variance and the direct labor time variance. By showing the total direct labor variance as the sum of the two components, management can better analyze the two variances and enhance decision-making.
Figure shows the connection between the direct labor rate variance and direct labor time variance to total direct labor variance. The company expected to use 0. The total direct labor variance is computed as:. In this case, two elements are contributing to the unfavorable outcome. The same calculation is shown as follows using the outcomes of the direct labor rate and time variances.
As with the interpretations for the labor rate and time variances, the company would review the individual components contributing to the overall unfavorable outcome for the total direct labor variance, and possibly make changes to production elements as a result. Biglow Company makes a hair shampoo called Sweet and Fresh. Each bottle has a standard labor cost of 1. During May, Biglow manufactured 11, bottles. They used 16, hours at a cost of? Calculate the labor rate variance, labor time variance, and total labor variance.
Labor Costs in Service Industries In the service industry, labor is the main cost. Doctors, for example, have a time allotment for a physical exam and base their fee on the expected time.
Insurance companies pay doctors according to a set schedule, so they set the labor standard. They pay a set rate for a physical exam, no matter how long it takes. If the exam takes longer than expected, the doctor is not compensated for that extra time.
This would produce an unfavorable labor variance for the doctor. Doctors know the standard and try to schedule accordingly so a variance does not exist. If anything, they try to produce a favorable variance by seeing more patients in a quicker time frame to maximize their compensation potential.
Figure What are some possible reasons for a labor rate variance? Figure When is the labor rate variance unfavorable? Figure When is the labor rate variance favorable? Figure What are some possible reasons for a direct labor time variance?
Figure When is the direct labor time variance favorable? Figure When is the direct labor time variance unfavorable? Figure What is the direct labor rate variance?
A direct labor rate variance is the actual rate paid being different from the standard rate. Figure What is the direct labor time variance?
Figure What are some possible causes of a direct labor rate variance? Employees have a different level of experience than standards; the labor market is tighter or looser than expected; contract renegotiation. Figure What are some possible causes of a direct labor time variance? Figure How is the total direct labor variance calculated? Figure Queen Industries uses a standard costing system in the manufacturing of its single product.
It requires 2 hours of labor to produce 1 unit of final product. In February, Queen Industries produced 12, units. The standard cost for labor allowed for the output was? Question: How do we record the costs associated with products that are sold? Note that the entry shown previously uses standard costs, which means cost of goods sold is stated at standard cost until the next entry is made.
These accounts must be closed out at the end of the period. How is this accomplished? Answer: These accounts are closed out to cost of goods sold, after which point cost of goods sold will reflect actual manufacturing costs for the products sold during the period. The following entry is made to accomplish this goal:. Thus the journal entry to transfer these production costs from work in process to finished goods is:.
Skip to main content. Module Cost Variance. Search for:. Appendix: Recording Standard Costs and Variances Learning Objective Explain how to record standard costs and variances using journal entries. Materials Price Variance The entry to record the purchase of direct materials and related price variance shown in Figure Materials Quantity Variance The entry to record the use of direct materials in production and related quantity variance shown in Figure Labor Rate and Efficiency Variances The entry to record the cost of direct labor and related variances shown in Figure Recording Finished Goods Transactions Question: Review all the debits to work-in-process inventory throughout this appendix and you will see the following costs all recorded at standard cost :.
Recording Cost of Goods Sold Transactions Question: How do we record the costs associated with products that are sold? Answer: When finished product is sold, the following entry is made:. Key Takeaway In a standard costing system, all inventory accounts reflect standard cost information. The difference between standard and actual data are recorded in the variance accounts and the manufacturing overhead account, which are ultimately closed out to cost of goods sold at the end of the period.
Review Problem Using the solution to Note Using the solutions to Note Based on the entries shown in items 1 through 5 , prepare a journal entry to transfer all work-in-process inventory costs to finished goods inventory. Review the following graphic and notice that more is spent on actual variable factory overhead than is applied based on standard rates.
As monies are spent on overhead wages, utilization of supplies, etc. When more is spent than applied, the balance zz is transferred to variance accounts representing the unfavorable outcome. The next illustration is the opposite scenario. When less is spent than applied, the balance zz represents the favorable overall variances. A good manager will want to explore the nature of variances relating to variable overhead.
It is not sufficient to simply conclude that more or less was spent than intended. As with direct material and direct labor, it is possible that the prices paid for underlying components deviated from expectations a variable overhead spending variance.
This means that the amount debited to work in process is driven by the overhead application approach. This will become clearer with the following illustration. This may lead to the conclusion that performance is about on track.
But, a closer look reveals that overhead spending was quite favorable, while overhead efficiency was not so good. Remember that 12, hours were actually worked. The variable overhead efficiency variance can be confusing as it may reflect efficiencies or inefficiencies experienced with the base used to apply overhead. These welders may have used more welding rods and had sloppier welds requiring more grinding. While the overall variance calculations provide signals about these issues, a manager would actually need to drill down into individual cost components to truly find areas for improvement.
Actual fixed factory overhead may show little variation from budget. This results because of the intrinsic nature of a fixed cost. For instance, rent is usually subject to a lease agreement that is relatively certain. Depreciation on factory equipment can be calculated in advance.
The costs of insurance policies are tied to a contract. Even though budget and actual numbers may differ little in the aggregate, the underlying fixed overhead variances are nevertheless worthy of close inspection. Work in Process should reflect the standard fixed overhead cost for the actual output. Assume that Blue Rail had planned on producing 4, rail systems during the month; only 3, systems were actually produced.
This reflects the standard cost allocation of fixed overhead i. Following is an illustration showing the flow of fixed costs into the Factory Overhead account, and on to Work in Process and the related variances. Following is the entry to apply fixed factory overhead to production and record related volume and spending variances:. The following spreadsheet summarizes the Blue Rail case study.
Carefully trace amounts in the spreadsheet back to the illustrations. Not all variances need to be analyzed. One must consider the circumstances under which the variances resulted and the materiality of amounts involved. One should also understand that not all unfavorable variances are bad. For example, buying raw materials of superior quality at higher than anticipated prices may be offset by reduction in waste and spoilage.
Likewise, favorable variances are not always good. Was this the reason for the unfavorable outcomes in efficiency and volume? The challenge for a good manager is to take the variance information, examine the root causes, and take necessary corrective measures to fine tune business operations. In closing this discussion of standards and variances, be mindful that care should be taken in examining variances.
If the original standards are not accurate and fair, the resulting variance signals will themselves prove quite misleading. Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
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