while the number of possible periods is displayed in a row across the top of the grid.
For the double-variable calculation to function properly, the present value result cell must be placed in the top-left corner of the results table, where the column and row headings intersect. The point of this intersection is cell B12, which in turn references the present value result cell, which is located at cell C8.
The next step is to reformat cell B12 to identify it as ‘‘Interest Rate,’’ even while the underlying formula is still present. To achieve this step, click on cell B12 and then access the Format, Cell commands in Excel. This will bring up the Format Cells screen, which is shown in Exhibit 5.11. As shown in the exhibit, click on the
‘‘Custom’’ field under the Category heading, then select the ‘‘General’’ option under the Type heading, and enter ‘‘Interest Rate’’ in the Type data entry field. The number in cell B12 will be replaced with the words ‘‘Interest Rate,’’ though the underlying formula will still be present.
Next, highlight cells B12 through G33, which places cell B12 in the upper- left corner of the results table. This tells Excel the location of the present value calculation that it will replicate throughout the results table. Then access the Data, Table command in Excel. This creates a data entry pop-up screen, as shown in Exhibit 5.12, which asks for the source of the number of periods in the present value calculation (which is cell C5), as well as the source of the interest rates to be used in the same calculation (which is cell C4).
After completing the data entry pop-up screen and clicking on OK, Excel automatically populates the results table with a complete set of present values for all interest rates and periods listed in the table. The final result is shown in Exhibit 5.13.
The materials were purchased on a rush basis.
The materials were purchased at a premium, due to a supply shortage.
Labor price variance. This is based on the actual price paid for the direct labor used in the production process, minus its standard cost, multiplied by the number of units used. It is typically reported to the managers of both production and human resources—the production manager because this person is responsible Exhibit 5.11 Cell Reformatting in the Double-Variable Table
for staffing jobs with personnel at the correct wage rates, and the human resour- ces manager because this person is responsible for setting the allowable wage rates that employees are paid. This tends to be a relatively small variance, as long as the standard labor rate is regularly revised to match actual labor rates in the production facility. Since most job categories tend to be clustered into rela- tively small pay ranges, there is not much chance that a labor price variance will Exhibit 5.12 Data Table Input for a Double-Variable Table
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become excessive. Here are some areas to investigate if there is a labor price variance:
The standard labor rate has not been recently adjusted to reflect actual pay changes.
The actual labor rate includes overtime or shift differentials that were not included in the standard.
Exhibit 5.13 Results of Calculation in Double-Variable Table
The staffing of jobs is with employees whose pay levels are different from those used to develop standards for those jobs.
Variable overhead spending variance. To calculate this variance, subtract the standard variable overhead cost per unit from the actual cost incurred, and multiply the remainder by the total unit quantity of output. This is very similar to the material and labor price variances, since there are some overhead costs that are directly related to the volume of production, as is the case for materials and labor. The detailed report on this variance is usually sent to the production manager, who is responsible for all overhead incurred in the production area.
This variance can require considerable analysis, for there may be a number of costs that fall into this category, all of which may be hiding significant variances. Here are some areas to investigate if there is a variable overhead spending variance:
The cost of activities in any of the variable overhead accounts has been altered by the supplier.
The company has altered its purchasing methods for the variable overhead costs to or from the use of blanket purchase orders (which tend to result in lower prices due to higher purchase volumes).
Costs are being misclassified between the accounts, so that the spending variance appears too low in one account and too high in another.
Fixed overhead spending variance. This is the total amount by which fixed overhead costs exceed their total standard cost for the reporting period. Notice that, unlike the preceding price variance definitions, this one is not multiplied by any type of production volume. There is no way to relate this price variance to volume, since it is not directly tied to any sort of activity volume. The detailed variance report on this topic may be distributed to a number of people, depending on who is responsible for each general ledger account number that it contains.
Investigation of variances in this area generally centers on a period-to-period comparison of prices charged to suppliers, with particular attention to those experiencing recent price increases. It may be beneficial to link this investigation to a summary of all contractual agreements with suppliers, since these documents will reveal any allowable pricing changes; only those not allowed by such agreements will still require further investigation.
Theefficiency varianceis the difference between the actual and standard usage of a resource, multiplied by the standard price of that resource. The efficiency variance applies to materials, labor, and variable overhead. It does not apply to fixed overhead costs, since these costs are incurred independently from any resource usage. Here is a closer examination of the efficiency variance, as applied to each of these areas:
Materials yield variance. Though its traditional name is slightly different, this is still an efficiency variance. It measures the ability of a company to manufacture
5-8 How Do I Calculate Cost Variances? 125
a product using the exact amount of materials allowed by the standard. A variance will arise if the quantity of materials used differs from the preset standard. It is calculated by subtracting the total standard quantity of materials that are supposed to be used from the actual level of usage, and multiplying the remainder by the standard price per unit. This information is usually issued to the production manager. Here are some of the areas to investigate to correct the material yield variance:
Excessive machine-related scrap rates
Poor material quality levels
Excessively tight tolerance for product rejections
Improper machine setup
Substitute materials that cause high reject rates
Labor efficiency variance. This measures the ability of a company’s direct labor staff to create products with the exact amount of labor set forth in the standard. A variance will arise if the quantity of labor used is different from the standard; note that this variance has nothing to do with the cost per unit of labor (which is the price variance), only the quantity of it that is consumed. It is calculated by subtracting the standard quantity of labor consumed from the actual amount, and multiplying the remainder times the standard labor rate per hour. As was the case for the material yield variance, it is most commonly reported to the production manager. Here are the likely causes of the labor efficiency variance:
Employees have poor work instructions.
Employees are not adequately trained.
Too many employees are staffing a workstation.
The wrong mix of employees is staffing a workstation.
The labor standard used as a comparison is incorrect.
Variable overhead efficiency variance. This measures the quantity of variable overhead required to produce a unit of production. For example, if the machine used to run a batch of product requires extra time to produce each product, there will be an additional charge to the product’s cost that is based on the price of the machine, multiplied by its cost per minute. This variance is not concerned with the machine’s cost per minute (which would be examined through a price variance analysis), but with the number of minutes required for the production of each unit. It is calculated by subtracting the budgeted units of activity on which the variable overhead is charged from the actual units of activity, times the standard variable overhead cost per unit. Depending on the nature of the costs that make up the pool of variable overhead costs, this variance may be reported to several managers, particularly the production manager. The causes of this variance will be tied to the unit of activity on which it is based. For example,
if the variable overhead rate varies directly with the quantity of machine time used, then the main causes will be any action that changes the rate of machine usage. If the basis is the amount of materials used, then the causes will be those just noted for the materials yield variance.
An example of a cost variance report is shown in Exhibit 5.14, where actual and budgeted costs are extracted from the general ledger and posted in the upper-left corner, with all variance calculations in the exhibit being derived from that information.
Actual Budget Variance
Cost of Goods Sold 265,000 203,275 (61,725) Material Price Variance:
Total actual price/unit paid 10.25 – Total std. price/unit paid 9.00
= Variance per unit 1.25
× No. of units consumed 10,000
Account = Material price variance 12,500
Number Account Name Actual Budget Variance
4000-020 Direct Materials 102,500 76,500 (26,000)
4000-030 Direct Labor 34,000 29,450 (4,550) Material Yield Variance:
4000-040 Variable Overhead 50,000 36,550 (13,450) Total actual units consumed 10,000
4000-050 Fixed Overhead 78,500 60,775 (17,725) – Total std. units consumed 8,500
265,000 203,275 -61,725 = Unit variance 1,500
× Std. price per unit 9
= Material yield variance 13,500
Fixed Overhead Price Variance: Labor Price Variance:
Total actual price/unit paid 7.85 Total actual price/hour paid 8.00
– Total std. price/unit paid 7.15 – Total std. price/hour paid 7.75
= Variance per unit 0.70 = Variance per hour 0.25
× No. of units consumed 10,000 × No. of units consumed 4,250
= Fixed overhead price variance 7,000 = Labor price variance 1,063
Fixed Overhead Volume Variance: Labor Efficiency Variance:
Std. overhead rate per unit 7.15 Total actual units consumed 4,250
× No. of units consumed 10,000 – Total std. units consumed 3,800
= Total overhead charged to exp. 71,500 = Unit variance 450
– Actual overhead cost pool 60,775 × Std. price per unit 7.75
= Volume variance 10,725 = Labor efficiency variance 3,488
Variable O/H Price Variance:
Total actual rate/unit paid 5.00 – Total std. rate/unit paid 4.30
= Variance per unit 0.70
× No. of units consumed 10,000
= Variable O/H price variance 7,000
Variable O/H Efficiency Variance:
Total actual units consumed 10,000 – Total std. units consumed 8,500
= Unit variance 1,500
× Std. price per unit 4.3
= Variable O/H eff. variance 6,450
Exhibit 5.14 Cost Variance Report
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