What is a variance?
The discrepancy between a predicted and actual sum is known as a variance.
A variance is a difference between an expected sum and the actual sum. Budgeting frequently involves adjustments, but every forecast will see some variability. When making a prediction, one may consistently have a favorable or unfavorable variance.
A variance's magnitude can be changed by changing the baseline on which it is based. For instance, the purchasing manager can advocate for a high baseline cost to produce favorable materials buy price differential. Due to the high standard, purchasing anything at a lower price is simple, producing beneficial results for the variance calculation. The creation of variations should therefore be strictly regulated.
Numerous potential deviations might be reported to management; therefore, the person providing this information should be informed only to send those variances that management can act to fix. There is less need to disclose the information if a deviation is trivial or cannot be fixed in the future.
Understanding variance relationships
Complete the table below for the missing variances.
Total Flexible Budget Product Cost Variance
Total direct material variance
Total direct labor variance
Total Manufacturing Overhead Variance
Direct material cost variance
Direct material efficiency variance
Direct Labor Cost Variance
Direct Labor Efficiency Variance
Total Variable Overhead Variance
Total fixed overhead variance
Variable Overhead Cost Variance
Variable Overhead Efficiency Variance
Fixed Overhead Cost Variance
Question: Top managers of Marshall Industries predicted 2018 sales of 14,800 units of its product at a unit price of $9.50. Actual sales for the year were 14,600 units at $12.00 each. Variable costs were budgeted at $2.00 per unit, and actual variable costs were $2.10 per unit. Actual fixed costs of $48,000 exceeded budgeted fixed costs by $4,000.
Prepare Marshall’s flexible budget performance report. What variance contributed most to the year’s favorable results? What caused this variance?
Preparing a flexible budget and computing standard cost variances
McKnight Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. McKnight allocates overhead based on yards of direct materials. The company’s performance report includes the following selected data:
Static Budget (1,025 recliners)
Actual Results (1,005 recliners)
(1,025 recliners * $500 each)
(1,005 recliners * $495 each)
Variable Manufacturing Costs:
(6,150 yds. @ $8.50/yard)
(6,300 yds. @ $8.30/yard)
(10,250 DLHr @ $9.20/DLHr)
(9,850 DLHr @ $9.40/DLHr)
(6,150 yds. @ $5.10/yard)
(6,300 yds. @ $6.50/yard)
Fixed Manufacturing Costs:
Total Cost of Goods Sold
1. Prepare a flexible budget based on the actual number of recliners sold.
2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing overhead, compute the variable overhead cost, variable overhead efficiency, fixed overhead cost, and fixed overhead volume variances. Round to the nearest dollar.
3. Have McKnight’s managers done a good job or a poor job controlling materials, labor, and overhead costs? Why?
4. Describe how McKnight’s managers can benefit from the standard cost system.
Question: Mills, Inc. is a competitor of Murry, Inc. from Exercise E2318. Mills also uses a standard cost system and provides the following information:
Static budget variable overhead $ 1,200
Static budget fixed overhead $ 1,600
Static budget direct labor hours 800 hours
Static budget number of units 400 units
Standard direct labor hours 2 hours per unit
Mills allocates manufacturing overhead to production based on standard direct labor hours. Mills reported the following actual results for 2018: actual number of units produced, 1,000; actual variable overhead, $4,000; actual fixed overhead, $3,100; actual direct labor hours, 1,600.
1. Compute the variable overhead cost and efficiency variances and fixed overhead cost and volume variances.
2. Explain why the variances are favorable or unfavorable
Computing standard overhead allocation rates
The following information relates to Morgan, Inc.’s overhead costs for the month:
Static budget variable overhead
Static budget fixed overhead
Static budget direct labor hours
Static budget number of units
Morgan allocates manufacturing overhead to production based on standard direct labor hours. Compute the standard variable overhead allocation rate and the standard fixed overhead allocation rate.
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