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The difference between actual costing and standard cost for material,
Labor and factory over head
Rather than assigning the actual costs of direct material, direct labor, and
manufacturing overhead to a product, many manufacturers assign the
expected or standard cost. This means that a manufacturer's inventories
and cost of goods sold will begin with amounts reflecting the standard
costs, not the actual costs, of a product. Manufacturers, of course, still
have to pay the actual costs. As a result there are almost always
differences between the actual costs and the standard costs, and those
differences are known as variances.
The sooner that the accounting system reports a variance, the sooner that
management can direct its attention to the difference from the planned
amounts.
1. Direct material
2. Direct labor
3. Manufacturing overhead
a. Variable manufacturing overhead
b. Fixed manufacturing overhead
Efficiency (or
Direct labor Rate (or cost)
quantity)
Manufacturing overhead-
Spending Efficiency
variable
These standard costs will be used for valuing the manufacturer’s cost of
goods sold and inventories. If the actual costs vary only slightly from
the standard costs, the resulting variances will be assigned to the cost of
goods sold. If the variances are significant, they should be prorated to the
cost of goods sold and to the inventories.
Actual Costing
When you use actual costing, all goods movements within a period are valuated
preliminarily at the standard price. At the same time, all price and exchange rate
differences for the material are collected in the material ledger.
At the end of the period, an actual price is calculated for each material based on
the actual costs of the particular period. The actual price that is calculated is
called the periodic unit price and can be used to revaluate the inventory for the
period to be closed. In addition, you can use this actual price as the standard
price for the next period.
Difference between the actual quantity of materials used in production and the
standard quantity of materials allowed for actual production, multiplied by the
standard price per unit.
The variance is unfavorable if the actual quantity exceeds the standard quantity;
it is favorable if the actual quantity is less than the standard.
Any deviation from standard in the average hourly rate paid to workers:
Labor Rate = (Actual Rate - Standard Rate) x Actual Hours of Labor Used
Variance.
For example, assume that the standard cost of direct labor per unit of product A
is 2.5 hours x $14 = $35. Assume further that during the month of March the
company recorded 4500 hours of direct labor time. The actual cost of this labor
time was $64,800, or an average of $14.40 per hour. The company produced
2000 units of product A during the month. The labor rate variance is ($14.40 -
$14.00) x 4500 hours = $1800, which is unfavorable since the actual hourly rate
exceeded the standard rate. This may be the result of unavoidable increases in
labor rates, or it may reflect excessive labor costs due to use of higher skilled
labor commanding higher wages.
Factory overhead Variance
Volume Variance
Controllable Variance
part of the total factory overhead variance not attributable to the volume variance
in two-way analysis.
2. Calculate variances for direct labor, direct Materials and variable overhead
Material
Labor
Expenses
Each of these elements is again subdivided into direct and indirect material.
Direct material, direct labor and direct expenses are those which can be traced in
relationship with a particular process, job, operation or product. Indirect material,
indirect labor and indirect expenses are those which are of general nature and
cannot be traced in relationship with a particular process, operation, job or
product.
fixed costs are business expenses that are not dependent on the activities of
the business [1] They tend to be time-related, such as salaries or rents being paid
per month. This is in contrast to variable costs, which are volume-related (and
are paid per quantity).
ABSORPTION COSTING
Method of costing a product in which all fixed and variable costs (however
remote) are apportioned to cost centers where they are accounted for (absorbed)
using absorption rates. This method ensures that all incurred costs are recovered
from the selling price of a good or service, (assuming the final price is acceptable
to the customers). Also called full absorption costing. See also direct costing, and
marginal costing.
MARGINAL COSTING
Definition
Increase or decrease in the total cost of a production-run, from making one
additional unit of an item. It is computed in situations where breakeven point has
been reached: the fixed costs have already been absorbed by the already
produced items and only the direct (variable) costs have to be accounted for.
Marginal costs are variable costs comprising of labor and material costs, plus an
estimated portion of fixed costs (such as administration overheads and selling
expenses). In firms where average costs are fairly constant, marginal cost is
usually equal to average cost. However, in industries that require heavy capital
investment (automobile plants, airlines, mines) and have high average costs, it is
comparatively very low. The concept of marginal cost is of critical importance in
resource allocation because, for optimum results, the management must
concentrate its resources where the excess of marginal revenue over the
marginal cost is maximum. Also called choice cost, differential cost, or
incremental cost.