tools-for-enterprise-performance-evaluation

The materials price variances and materials quantity

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Unformatted text preview: ourses). The Materials Price Variances and Materials Quantity Variances are generally reported by Examine the following diagram to debits) or increasing income these entries play out in the ledger -decreasing income (if unfavorable be sure you understand how (if favorable credits), although other the first entry possible (alternative dispositions are discussed in more advanced managerial the outcomes are is in green and the second is in blue. As you examine this diagram, notice that $369,000 of cost is ultimately attributed to work in process inventory ($340,000 debit at standard accounting courses). cost/quantity), materials price variance ($41,000 debit), and materials quantity variance ($12,000 credit): the following diagram to be sure you understand how these entries play out in the ledger -Examine the first entry is in green and the second is in blue. As you examine this diagram, notice that the $369,000 of cost is ultimately attributed to work in process inventory ($340,000 debit at standard cost/quantity), materials price variance ($41,000 debit), and materials quantity variance ($12,000 credit): Download free ebooks at bookboon.com 28 Variance Analysis Tools for Enterprise Performance Evaluation 4.4 When Purchases Differ From Usage The discussion and illustration for direct material variances presumed that all of the raw material purchases were put into production. If this were not a valid assumption, then the preceding illustration would need to be modified to reflect price variances based on the amount purchased and quantity variances based on output. Be aware that the ripple effect of this modification would potentially upset the relationships between the “red, green, and blue balls” used in this chapter to illustrate the basic principles of variance calculations. Further discussion of this topic issue is deferred to more advanced managerial accounting courses. 4.5 Variances Relating to Direct Labor The intrinsic logic for direct labor variances is very similar to that of direct material. The total variance for direct labor is found by comparing actual direct labor cost to standard direct labor cost. The overall labor variance could result from any combination of having paid laborers at rates equal to, above, or below standard rates, and using more or less direct labor hours than anticipated. In this illustration, AH is the actual hours worked, AR is the actual labor rate per hour, SR is the standard labor rate per hour, and SH is the standard hours for the output achieved. The Total Direct Labor Variance can be separated into the: Labor Rate Variance: A variance that reveals the difference between the standard rate and actual rate for the actual labor hours worked [(standard rate - actual rate) X actual hours]. Labor Efficiency Variance: A variance that compares the standard hours of direct labor that should have been used to the actual hours worked. The efficiency variance is measured at the standard rate per hour [(standard hours - actual hours) X standard ra...
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