Chapter 4: Cost Variances For Direct Materials And Labor Flashcards
Reasons for flexible budget variance for variable costs
- difference between budgeted and actual input prices
- difference in efficiency, actual amount of direct materials used vs budgeted
Inputs
Materials used in the production process
Outputs
Units of finished product
Flexible budget
Standard quantity x standard price
Standard quantity
Flexible budget concept. Quantity of inputs that would have been budgeted had the budget correctly anticipated the actual volume of output
Standard price
Budgeted price per unit
Flexible budget variance
(Actual quantity x actual price) - (standard quantity x standard price)
Actual quantity x standard price
What company “should” have spent for the actual quantity used at the budgeted price
Price variance
Actual quantity x (actual price - standard price)
Total impact on the cost of production caused by the fact that the actual price per unit of input differed from the budgeted price
If AP- SP is positive then price variance is unfavorable (paid more than budgeted)
If AP-SP is negative then price variance is favorable (paid less than budgeted)
Quantity variance
= Standard price x (Actual Quantity - Standard Quantity)
Aka: usage variance
The total impact on the cost of production caused by the fact that the quantity of inputs used to make each unit of output differed from the budget.
If AQ-SQ is positive then variance is unfavorable (quantity used was more than “should” have been used)
If AQ-SQ is negative then the variance is favorable (quantity used was less than “should” have been used)
Flexible budget variance
The difference between the flexible budget and the actual costs
= Price variance + quantity variance
Interactive price quantity variance
Occurs when both actual price and actual quantity differ from standard price and standard quantity
Customarily assigned to price variance or reported elsewhere
Actual Quantity and timing
Depending on when the price variance is recognized AQ could be AQ purchased or AQ used.
Recognition of price variance at purchasing is more timely.
Sum of price variance + quantity variance may not = total flexible budget variance
Rate or wage rate variance
= AQ x (AP - SP)
= Actual labor hours used x (actual wage rate - budgeted wage rate)
Efficiency variance
For direct labor
= SP x (AQ - SQ)
= Budget wage rate x (actual labor hours - flexible budget labor hours)
