Discussion
To prepare for this Discussion: Review the Learning Resources for this week and reflect on how actual costs, standard costs, and variance analysis will contribute to your current or future role as a manager or in decision making. Consider the role of variances when engaged in decision making and how variance analysis might help contribute to improved organizational efficiency.
Prepare the following:
Describe a scenario in which there are both highly favorable and highly unfavorable variances. Be sure to include the actual and standard costs in your scenario.
Analyze how and why you, as a manager, would prioritize the variances for analysis and how knowing these variances might help you improve efficiency.
Assignment
For this Assignment, review the information in the scenario. You will utilize the information in this weeks Resources and your course text to consider how variance analysis and the results obtained from conducting such an analysis might impact decision making. There is also an Excel template provided that you may find helpful in completing this Assignment.
The Assignment:
Part 1: Calculate all materials and labor variances in a spreadsheet by using a program like Excel. Be sure to include price, quantity, wage rate, and labor efficiency variances.
Part 2: Prepare a memo to your subordinate, using a program like Word.
Summarize and analyze the actual costs in relation to the standard costs incurred for the month.
Ask for clarification of any variances that need to be investigated.
Be sure to include whether alternatives exist for the future of the organization and explain how the results of the variance analysis might influence those alternatives.
Week 5 Assignment
Body Comfort Co. is a manufacturer of high-quality products designed to help support healthy
backs and spines. Their newest product offering is a massage chair. Below is the standard cost
structure for the chair:
Standard Cost Sheet: Massage Chair
Metal tubing
6 meters @ $3.00
Leather
2 square meters @ $7.00 $14.00
Padding
3 kilograms @$3.90
$11.70
Direct labor
4 hours @ $15
$60.00
Total standard cost
$18.00
$103.70
This month, Body Comfort Co. manufactured 500 massage chairs. The following costs were
incurred:
Actual Costs Incurred for the Month: Massage Chair
Metal tubing 3,000 meters
$9,455
Leather
1,050 square meters $7,722
Padding
1,600 kilograms
$6,560
Direct Labor 1,750 hours
$27,270
Total cost
$51,007
Adapted from: Zimmerman, J. L. (2014). Accounting for decision making and control (8th ed.).
New York: NY: McGraw-Hill, Healing Touch, p. 565.
Suppose you are the senior controller for Body Comfort Co. and you plan to perform a variance
analysis of the massage chairs manufactured to determine if the standards are being met. Once
you have completed the analysis, you plan to show it to the production department manager and
ask for an explanation of any variances that you believe should be examined.
WMBA 6050: Accounting for Management Decision Making
Week 5 Weekly Briefing
Welcome to Week 5! In Week 4, you were introduced to responsibility centers and
transfer pricing. You learned about cost centers, profit centers, investment centers,
return on investment (ROI), residual income, EVA, IASB, GAAP, IFRS, and transfer
pricing. These are all now a part of your accounting vocabulary!
In Week 5, you will continue to build your accounting vocabulary as you study standard
costs and variances.
This week:
In terms of the specific learning objectives, you will:
Analyze standard costing in terms of improving efficiency
Analyze material and labor variances
Evaluate alternatives based on information provided by variances
In terms of course-level outcomes, you will:
Evaluate various accounting measures and their relevance to a wide range of
stakeholders
Analyze various types of budgets, strategic planning, and forecasting
Employ managerial accounting approaches and information to make effective
decisions
Demonstrate effective communication skills to present accounting information to
stakeholders
Assess managerial accounting tools and their usefulness to organizational
leaders
Apply accounting principles ethically and appropriately to personal and
professional contexts
Understanding Variances
How can an organization determine if the cost of the products it produces or the
services it renders are reasonable? If a company makes baseballs, how much should it
cost to produce one baseball? How much material should be used? How much time
should it take? If a company services automobiles, how much time should it take to
complete an oil change? How much oil should be used?
As you consider these questions, it becomes evident that standards are needed in order
to provide a comparison to the actual costs. The difference between the standard costs
and the actual costs is a variance. If actual costs are higher than standard costs, the
© 2016 Laureate Education, Inc.
Page 1 of 4
variance is unfavorable. If actual costs are lower than standard costs, the variance is
favorable. These variances are used to judge performance (Zimmerman, 2014).
Two important variances are the direct labor variance and the direct materials variance.
We will look at the direct labor variance first by using an example:
JJ Company’s standard labor cost of producing one unit of its product L is 4 hours at
$12.00 per hour. During last month, 40,800 hours of labor were incurred to produce
10,000 units at a cost of $12.10 per hour. The company’s standard materials cost is
$2.50 per pound and eight pounds are needed for one unit. The actual costs last month
were $180,000 for 90,000 pounds ($2 per pound).
First, it may be helpful for you to examine the acronyms which are considered standard
terminology.
AH = actual hours
AR = actual rate
SH = standard hours
SR = standard rate
TLV = total labor variance
LWV = labor wage variance
LEV = labor efficiency variance
AQ = actual quantity
AP = actual price
SQ = standard quantity
SP = standard price
TMV = total materials variance
MPV = materials price variance
MQV = materials quantity variance
1. The formula to compute the total labor variance is:
TLV = (AH x AR) – (SH x SR)
In this example, the computations are as follows:
TLV = (40,800 x $12.10) – (40,000* x $12.00)
*Since it takes 4 hours to make one unit and 10,000 units were produced, the standard
hours for the units produced totals 40,000.
TLV = $493,680 – $480,000
TLV = $13,680 unfavorable. The result is unfavorable because the actual was greater
than the standard.
Next, you will separate the total labor variance into the wage variance and the efficiency
variance.
2. The formula for the wage variance is:
LWV = AH(AR – SR)
© 2016 Laureate Education, Inc.
Page 2 of 4
LWV = 40,800($12.10 – $12.00)
LWV = 40,800($0.10)
LWV = $4,080 unfavorable. The result is unfavorable because the actual hourly wage
was greater than the standard hourly wage.
3. The formula for the efficiency variance is:
LEV = SR(AH – SH)
LEV = $12.00(40,800 – 40,000)
LEV = $12.00 (800)
LEV = $9,600 unfavorable. The result is unfavorable because the actual hours worked
was greater than the standard hours.
Note: Since TLV = LWV + LEV, you can check your numbers to be sure your
calculations are correct.
$13,680U = $4,080U + $9,600U
There could be many causes for these variances. For example, the standards could be
outdated or unreliable, workers could have recently received a pay raise, there is a
misallocation of workers causing some more skilled workers to be utilized at lower
levels, etc. It is also possible that the efficiency variance could be due to factors beyond
the control of the workers such as inferior quality materials, working too much overtime,
etc. Significant variances should be examined whether they are favorable or
unfavorable. Small variances do not need to be analyzed unless there is a cumulative
month after month affect.
4. The formula for the total materials variance is:
TMV = (AQ x AP) – (SQ x SP)
TMV = ($180,000) – (80,000 x $2.50)
TMV = $180,000 – $200,000
TMV = $20,000 favorable
Next, you will separate the total material variance into a material price variance and a
material quantity variance.
5. The formula for the material price variance is:
© 2016 Laureate Education, Inc.
Page 3 of 4
MPV = AQ(AP – SP)
MPV = 90,000($2.00 – $2.50)
MPV = 90,000(-$0.50)
MPV = -$45,000. This is a favorable variance because the actual price per pound is less
than the standard price per pound.
6. The formula for the material quantity variance is:
MQV = SP(AQ – SQ)
MQV = $2.50(90,000 – 80,000)
MQV = $2.50(10,000)
MQV = $25,000 unfavorable. The variance is unfavorable because the actual quantity
was greater than the standard quantity.
Note: Since TMV = MPV + MQV, you can check the accuracy of the computations
follows:
$20,000F = $45,000F + $25,000U (Subtract the unfavorable variance from the favorable
variance.)
It is interesting to note that in this example the price variance was favorable while the
quantity variance was unfavorable. This could mean that the purchasing department
bought less expensive material, but it was of a poor quality so there was more waste.
In summary, all significant variances should be examined to determine the causes. This
knowledge will help managers make better decisions in the future or show them that
they are doing well and that they should continue using processes that contribute to
effective and efficient operations.
References
Zimmerman, J. L. (2014). Accounting for decision making and control (8th ed.). New
York, NY: McGraw-Hill Irwin.
© 2016 Laureate Education, Inc.
Page 4 of 4
Accounting for Management Decision Making Week 5 Weekly Briefing
Welcome to Week 5! In Week 4, you were introduced to responsibility centers and transfer
pricing. You learned about cost centers, profit centers, investment centers, return on investment
(ROI), residual income, EVA, IASB, GAAP, IFRS, and transfer pricing. These are all now a part
of your accounting vocabulary!
In Week 5, you will continue to build your accounting vocabulary as you study standard costs
and variances.
This week:
In terms of the specific learning objectives, you will:
Analyze standard costing in terms of improving efficiency
Analyze material and labor variances
Evaluate alternatives based on information provided by variances
In terms of course-level outcomes, you will:
Evaluate various accounting measures and their relevance to a wide range of stakeholders
Analyze various types of budgets, strategic planning, and forecasting
Employ managerial accounting approaches and information to make effective decisions
Demonstrate effective communication skills to present accounting information to
stakeholders
Assess managerial accounting tools and their usefulness to organizational leaders
Apply accounting principles ethically and appropriately to personal and professional
contexts
Understanding Variances
How can an organization determine if the cost of the products it produces or the services it
renders are reasonable? If a company makes baseballs, how much should it cost to produce one
baseball? How much material should be used? How much time should it take? If a company
services automobiles, how much time should it take to complete an oil change? How much oil
should be used?
As you consider these questions, it becomes evident that standards are needed in order to
provide a comparison to the actual costs. The difference between the standard costs and the
actual costs is a variance. If actual costs are higher than standard costs, the variance is
unfavorable. If actual costs are lower than standard costs, the variance is favorable. These
variances are used to judge performance (Zimmerman, 2014).
Two important variances are the direct labor variance and the direct materials variance. We will
look at the direct labor variance first by using an example:
JJ Company’s standard labor cost of producing one unit of its product L is 4 hours at $12.00 per
hour. During last month, 40,800 hours of labor were incurred to produce 10,000 units at a cost
of $12.10 per hour. The company’s standard materials cost is $2.50 per pound and eight pounds
are needed for one unit. The actual costs last month were $180,000 for 90,000 pounds ($2 per
pound).
First, it may be helpful for you to examine the acronyms which are considered standard
terminology.
AH = actual hours
AR = actual rate
SH = standard hours
SR = standard rate
TLV = total labor variance
LWV = labor wage variance
LEV = labor efficiency variance
AQ = actual quantity
AP = actual price
SQ = standard quantity
SP = standard price
TMV = total materials variance
MPV = materials price variance
MQV = materials quantity variance
1. The formula to compute the total labor variance is:
TLV = (AH x AR) – (SH x SR)
In this example, the computations are as follows:
TLV = (40,800 x $12.10) – (40,000* x $12.00)
*Since it takes 4 hours to make one unit and 10,000 units were produced, the standard hours for
the units produced totals 40,000.
TLV = $493,680 – $480,000
TLV = $13,680 unfavorable. The result is unfavorable because the actual was greater than the
standard.
Next, you will separate the total labor variance into the wage variance and the efficiency
variance.
2. The formula for the wage variance is:
LWV = AH(AR – SR)
© 2016 Laureate Education, Inc. Page 3 of 4
LWV = 40,800($12.10 – $12.00)
LWV = 40,800($0.10)
LWV = $4,080 unfavorable. The result is unfavorable because the actual hourly wage was
greater than the standard hourly wage.
3. The formula for the efficiency variance is:
LEV = SR(AH – SH)
LEV = $12.00(40,800 – 40,000)
LEV = $12.00 (800)
LEV = $9,600 unfavorable. The result is unfavorable because the actual hours worked was
greater than the standard hours.
Note: Since TLV = LWV + LEV, you can check your numbers to be sure your calculations are
correct.
$13,680U = $4,080U + $9,600U
There could be many causes for these variances. For example, the standards could be outdated or
unreliable, workers could have recently received a pay raise, there is a misallocation of workers
causing some more skilled workers to be utilized at lower levels, etc. It is also possible that the
efficiency variance could be due to factors beyond the control of the workers such as inferior
quality materials, working too much overtime, etc. Significant variances should be examined
whether they are favorable or unfavorable. Small variances do not need to be analyzed unless
there is a cumulative month after month affect.
4. The formula for the total materials variance is:
TMV = (AQ x AP) – (SQ x SP)
TMV = ($180,000) – (80,000 x $2.50)
TMV = $180,000 – $200,000
TMV = $20,000 favorable
Next, you will separate the total material variance into a material price variance and a material
quantity variance.
5. The formula for the material price variance is:
MPV = AQ(AP – SP)
MPV = 90,000($2.00 – $2.50)
MPV = 90,000(-$0.50)
MPV = -$45,000. This is a favorable variance because the actual price per pound is less than the
standard price per pound.
6. The formula for the material quantity variance is:
MQV = SP(AQ – SQ)
MQV = $2.50(90,000 – 80,000)
MQV = $2.50(10,000)
MQV = $25,000 unfavorable. The variance is unfavorable because the actual quantity was
greater than the standard quantity.
Note: Since TMV = MPV + MQV, you can check the accuracy of the computations follows:
$20,000F = $45,000F + $25,000U (Subtract the unfavorable variance from the favorable
variance.)
It is interesting to note that in this example the price variance was favorable while the quantity
variance was unfavorable. This could mean that the purchasing department bought less
expensive material, but it was of a poor quality so there was more waste.
In summary, all significant variances should be examined to determine the causes. This
knowledge will help managers make better decisions in the future or show them that they are
doing well and that they should continue using processes that contribute to effective and efficient
operations.
References
Zimmerman, J. L. (2014). Accounting for decision making and control (8th ed.). New York, NY:
McGraw-Hill Irwin.
Week 5 Template
a) Price variance = (actual price – standard price) times quantity bought
Actual
price
Standard Quantity
price
bought
Price
variance
Favorable or
Unfavorable
Metal tubing
Leather
Padding
b) Wage rate variance = (Actual wage rate – standard wage rate) times actual hours
Actual Standard
wage rate wage rate
Wage
rate
variance
Actual
hours
Favorable or
Unfavorable
Direct labor
c)Total price variance
0
0
0
0
d) Quantity variance =
(actual quantity used in production – standard quantity used in production) times the standard price
Actual Standard Standard Quantity
Quantity Quantity
Price
variance
Favorable or
Unfavorable
Metal tubing
Leather
Padding
e) Labor efficiency variance = (actual hours – standard hours) times standard wage
Actual
hours
Standard Standard Efficiency Favorable or
hours
wage
variance Unfavorable
Direct labor
f) Total quantity variance
TOTAL VARIANCES
Metal tubing
Leather
Padding
Direct labor
TOTAL
0
–
Purchase answer to see full
attachment
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