Calculate the two variances for material, two variances for labor, and two variances for factory overhead
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
- Following are the details of Abbass Industries for the period ended June 30, 2020. Company establish standard on its normal capacity of 120,000 units/hours in a year:
Direct Material 600,000 kgs at Rs. 9 per kg
Direct Labor 4 hours per unit at Rs. 6 per hour
Factory overhead:
Fixed cost Rs. 240,000 per year or Rs. 20,000 per month.
Variable Cost Rs. 4.50 per hour.
During the one month of operation, company produced 11,000 units.
Direct material used: 60,500 kgs at Rs. 9.10 per kg
Direct labor used: 41,250 hours at Rs. 268,125
Actual variable Factory overhead Rs. 55,000
Required:
Calculate the two variances for material, two variances for labor, and two variances for factory overhead
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.
Standard costing and the related variances are valuable management tools. If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs.
- If actual costs are greater than standard costs the variance is unfavorable. An unfavorable variance tells management that if everything else stays constant the company's actual profit will be less than planned.
- If actual costs are less than standard costs the variance is favorable. A favorable variance tells management that if everything else stays constant the actual profit will likely exceed the planned profit.
Direct Material Variances:
Material Price Variance = (Standard Price - Actual Price) x Actual Quantity
Material Quantity Variance = (Standard Quantity for Actual Output - Actual Quantity) x Standard Price
Direct Labor Variances:
Labor Rate Variance = (Standard Rate - Actual Rate) x Actual Hours
Labor Efficiency Variance = (Standard Hours for Actual Output - Actual Hours) x Standard Rate
Variable Factory Overhead Variances:
VFOH Spending Variance = (Standard Rate - Actual Rate) x Actual Hours
VFOH Efficiency Variance = (Standard Hours - Actual Hours) x Standard Rate
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