Direct Price Variance

NASA had a favorable spending variance of $498,000 this year which means they spent 498,000 less than budgeted. The actual fixed cost per ton was around $519/ton.

Use of the flexible budget shows the budgeted operating income given the actual sales. When you compare the flexible budget to the actual budget you are able to compare the total sales and cost incurred given the same units sold. The sales price variance, which is the actual sales less the flexible budgeted sales, was $14,700 favorable. This means that actual sales were higher than budgeted sales at that usage. This is attributable to the increase in service price from $25 to $26.40. Price variance for material usage was $2,100 over the flexible budget projection. This could be attributed to overuse or waste of materials. As expected, the direct labor price variance was $3,375 lower than the flexible budget amount. This is attributed to the manager’s effective use of labor. Operating expenses were also higher than the flexible budget

Planning is a function that is employed by every organization in projecting the future outcome of the firm. Successful firms achieve their goals through the use of different types of budgets. These budgets include, production budget, sales budget, labor budget and expenses budget. These budgets also show the targets that should be achieved by the firm within the budgeted time plan.

Another concern identified, is the utilities expense budget for utilities in Year 9 which is $150,000. This amount is identified as a fixed amount and is unrelated to actually production activities and manufacturing efficiency. Considering that production levels and activity fluctuates throughout the year, the budget for utilities should be a variable item. An example; from Year 7 to Year 8, the utilities expenses increase by $15,000 and with this detection, ways to reduce this expense should be investigate. Another concern is a duplicated line item under the Selling, General, and Administrative Budget for Utilities and Utilities and Services. Another issue for concern, Total Variable Cost was reported to be lower; however was not enough for the lack of sales combined with an increase in advertising and transportation which resulted in an overall negative result. The low Net Sales directly impacted the Contribution Margin which decreased by $49,397. Overall, these concerns indicate the need for a flexible budget with variance analysis.

Brunton, N. M. (1988). Evaluation of overhead allocations. Management Accounting, 70(1), 22. Retrieved from http://search.proquest.com/docview/229737200?accountid=32521

The company had a budget of $5,247,250, with the flexible budget being $5,117,385, however the final numbers were $5,096,847, which gives the company an unfavorable variance of -$130,065. Total Variable Cost however was a favorable expense. With a planned budget of $3,967,962 and a flexible budget of $3,869,612 the actual output was $3,805,400 the favorable variance came out to $98,349. Contribution margin was also an unfavorable variance (-$31,716).

The variance overhead variance is unfavourable for leather jackets indicating NLJ spent more on variable overhead to produce leather jackets than budgeted. This was because new specialized sewing machines had to be purchased to meet the increased production demand of leather jackets.

It is mainly because of the booming economy which caused raise in direct labor cost

In the case of Mendel Paper Company which produces four basic paper products lines at one of its plants: computer paper, napkins, place mats, and poster board. Although the plant superintendent, Marlene Herbert is pleases with increased sales he is also concerned about the costs. The superintendent is concerned with the high fixed cost of production, the increases in fixed overhead and even variable overhead. He feels that the production of place mat should be discontinued. His reason for the discontinuation is that the special printing is driving up the variable overhead to the point where the company may not find it profitable to continue with the line. After reviewing the future predictions of the

Therefore, we can guess why direct labor costs and material costs went down faster than overhead.

Categories reporting variances include the managerial/ professional section of the Yoder-Wise (2015), report (p.288). According to Yoder-Wise (2015) variances can be either positive or negative however; variances cannot be interpreted without proper analysis. Education, meetings, and orientation of new employees could be responsible for this necessary variance. The benefits portion of the personnel section was also a variance; this could be a positive or

Companies will have set guidelines to trigger the need for a variance report such as variances over a specific percentage or dollar amount. (Cleverly, Song, & Cleverly, 2011, Pg. 381) In an analysis of revenues, a negative variation is unfavorable; in an analysis of costs, a negative variation is favorable. (Dove & Forthman, 1995) Variation is calculated by subtracting the expected or budgeted figure from the actual figure for each variable. The variable figure is then divided by the expected figure in order to establish a percentage of the variance. Wages that are over the budgeted amount would be an unfavorable variance and would be an indication that there is a need for a variance report. (Dove & Forthman, 1995) Supply costs being less than the budgeted amount would be a favorable variance, however it could result in the supplies budget being reduced if there is not a reasonable explanation as to the cause for the variance. Therefore, a variable department manager would ask for a variance report detailing the reason for the variance to be completed, otherwise it appears as if the budget is overstated and needs to be reduced.

Standard costing and variance analysis may still be useful even where the final product or service is not standardised. In addition, the use of demanding performance levels in standard cost may help to encourage continuous improvement.

There are some major weaknesses in standard costing procedure and cost variance analysis. In standard costing procedure, the standard

Based on the numbers from the budget variance, the only unfavorable aspect is that of the labor efficiency. It is clear that the labor force needs to be investigated to right this deficiency. Whether it is more proper training, which would inevitably come at a cost, or if the amount of people in a certain department is not sufficient, it is necessary to look at why there is the discrepancy. Whenever the budgeted amount is greater than the actual sale it is indicative of pricing, not enough inventory or other underlying factors such as theft etc.