Many companies have discovered the importance of cost control as a means of survival in fiercely competitive markets in the early 2000. By implementing an organized, companywide process for controlling costs, a firm can reverse its sinking earnings trend and recover its market position.
Standard costs are established and revised each period during the budgeting process. Standard costs are continually reviewed and periodically revised if significant changes occur in production methods or in the prices paid for material, labor, and overhead. The level of production output plays an important role in determining cost standards. For instance, grossly underutilized production facilities often experience varying degrees of cost inefficiency. Conversely, the stress and demands imposed on production facilities operating at full capacity can cause cost overruns. Thus, standards should correspond to what costs should be under normal operating conditions for a particular company. Establishing realistic cost standards requires input from many different sources- often including people from outside of the business organization.
Materials variances may be caused by the quality and price of materials purchased and by the efficiency with which these materials are used. Labor variances stem from workers' productivity, pay scales of workers placed on the job, and the quality of the materials with which they work. Overhead variances result both from actual spending and from differences between actual and normal levels of production.
Bill Schmidt, Sun Air's accountant, expressed his disappointment about deviations from the production volume and costs from the set of standards in the molding department. He noticed the apparent variances of the actual costs of production of 430 hulls against the standard costs of production for the normal planned volume of 450 hulls while reviewing the most recent month's production results. He predicted that there will be unfavorable variances again so he wanted to discuss the matter with the other members of the management team.
The management of Sun Air Boat Builders, Inc. needs to determine how well the molding department is doing and identify the steps on how to improve its performance in terms of the standards set by the company's accountant and the production department supervisor.
Framework of Analysis
1. Determine the molding department's:
a. materials price and usage variances
b. labor rate and efficiency variances
c. production volume and spending overhead variances
2. Identify probable causes of such variances.
3. Describe the relationships that exist among those variances.
Cost Per Hull Cost of 450 Hulls
120 sqft @ $2.00 $240 $108,000
40 lbs @ $3.75 $150 $67,500
Total Direct Materials Cost $390 $175,500
0.5 hr @ $20.25 $10.12 $4,554
1.0 hr @ $20.25 $20.25 $9,112.50
Total Direct Labor Costs $30.37 $136,663.50
Total Costs to Mold Hulls $444.67 $200,101.50
Cost Per Hull Cost of 450 Hulls
60,000 sq.ft. @ $1.80 $216 $108,000
20,000 lbs @ $4.09 $150 $81,800
Total Costs of Purchased Materials $366 $189,800
54,000 sq.ft. @ $1.80 $216 $97,200
19,000 lbs. @ $4.09 $150 $81,800
Total Costs of Used Materials $366 $179,000
210 hrs @ $21.37 $10.69 $4,487.70
480 hrs @ $20.25 $20.25 $9,720.00
Total Direct Labor Costs $30.94 $14,207.70
Total Costs to Mold Hulls $475.23 $204,347.70
Materials Price Variance
AQP = Actual Quantity Purchased
AP = Actual Price
SP = Standard Price
MPV = Materials Price Variance
AP x AQP = $1.80 x 60,000...
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