Variable Analysis

Variable Analysis

Introduction

The variance analysis for the Brightlite line of products will be used to promote management action at the earliest possible stages. This analysis will process the examining in detail each variance between actual and standard costs. The results will determine the reasons why budgeted results were not met. The types or variances computed depend on the responsibility centers and the level of management for which the review is performed. Since the objective is to determine the degree of corrective action needed, the variances computed must relate to key performance indicators considered critical to the success of the responsibility center. The primary objective of cost variance analysis is to permit organizational managers to detect and correct inefficiencies wherever they exist in operations involving expenditures. Decisions are generally necessary as to what kinds of variances to compute whether or not to investigate and whether or not to investigate a particular variance once computed.

Variances

The variances for the Brightlite line of lighting products are as follows:

a) Price variance for raw materials purchased

= (standard price - actual price) * actual qty purchased

= (6.8-7.1)*11,400

= (3,420) U

b) Raw materials usage variance

= (standard usage - actual usage) * standard price

= ((1,900*5)-9,260)*6.8

= 1,632 F

c) Direct labor rate variance

= (standard rate - actual rate) * actual hours

= ((14-14.35)*4,420

= (1,547) U

d) Direct labor efficiency variance

= (standard hours - actual hours) * standard rate

= ((1,900*2.4)-4,420)*14

= 1,960 F

e) Variable overhead spending variance

= (standard rate - actual rate) * actual hours

= ((12,513/2,910)-4.5)*2,910

= (582) U

f) Variable overhead efficiency variance

= (standard hours - actual hours) * standard rate

= ((1,900*2.4)-4,420)*4.5

= 630 F

Explanations

The unfavorable purchase price variance may be indicative that higher than standard quality raw material inputs were purchasedЎXand the favorable raw materials usage variance suggests that this was probably the case. Consideration should be made when purchasing higher than standard quality inputs unless it is indicated by favorable usage variance month over month as compared to the unfavorable price variance. The raw materials budget variance was unfavorable. In this case, using higher than standard quality was not a good deal. Working higher paid and experienced workers may have caused the unfavorable direct labor variance of $0.35 per hour. The cost indicated for labor was equalized by the labor efficiency achieved. The continued labor efficiency can be maintained by focusing on the more productive and efficiency of it workers. The last two variances overhead spending and overhead efficiency are not material as at this point they tend to cancel each other out of the equation mathematically.

Minimizing