Calculating Variance DirectLabor Materials Overhead
Calculating Variance DirectLabor Materials Overhead
Calculating Variance DirectLabor Materials Overhead
Most manufacturing companies divide manufac-turing costs into three broad categories: direct materials, direct labor, and manufacturing overhead.
Direct materials The materials that go into the final product are called raw materials. Actually, raw materials refer to any materials that are used in final product; and the finished product of one company can be the raw materials of another company.
Direct materials are those materials that become an integral part of the finished product and that can be physically and conveniently traced to it. Direct Labor
The term direct labor is served for those labor costs that can be easily traced to individual unit of product. Direct labor is sometimes called touch labor, since direct labor workers typically touch the product while it is being made.
Manufacturing Overhead
Manufacturing overhead, the third element of manufacturing cost, included all cost of manufacturing except direct materials and direct labor.
Manufacturing overhead includes items such as: indirect materials indirect labor maintenance and repair production equipment
A favorable material price variance of $1,300 exists because the actual price of materials purchased is less than the standard price of materials purchased.
0.3 hr. 0.2 hr. 30 hr. $10 $300 12 hr. $10 $120 42 hr. $10 $420
Difference 50 hr x $1
$50Favorable
$80 Unfavorable
Inventory-FG Direct Labor Efficiency Variance Direct Labor Rate Variance Wages Payable
420 80 50 450
60 hr.
$10 $600
20 hr.
$10 $200
80 hr.
$10 $800
Difference
75 hr x ($1)
Difference
5 hr x $10
$50 Favorable
$75 Unfavorable
$25 Unfavorable
Inventory-FG Direct Labor Rate Variance Direct Labor Efficiency Variance Wages Payable
800 75 50 825
Tips Divide the direct labor used by the number of units produced to get the direct labor per unit.
Manufacturing Overhead
In the world of manufacturingas competition becomes more intense and customers demand more servicesit is important that management not only control its overhead but also understand how it is assigned to products and ultimately reported on the company's financial statements. We view overhead as two types of costs and define them as follows: 1. Manufacturing overhead (also referred to as
factory overhead, factory burden, and manufacturing support costs) refers to indirect factory-related costs that are incurred when a product is manufactured.
Manufacturing Overhead
Along with costs such as direct material and direct labor, the cost of manufacturing overhead must be assigned to each unit produced so that Inventory and Cost of Goods Sold are valued and reported according to generally accepted accounting principles (GAAP).
Manufacturing overhead includes such things as:the electricity used to operate the factory equipment
depreciation on the factory equipment and building supplies and factory personnel (other factory than direct labor)
Manufacturing Overhead
How these costs are assigned to products has an impact on the measurement of an individual product's profitability.
2. Nonmanufacturing costs (sometimes referred to as administrative overhead) represent a manufacturers expenses that occur apart from the actual manufacturing function. In accounting and financial terminology, the nonmanufacturing costs include Selling, General and Administrative (SG&A) expenses, and Interest Expense.
Manufacturing Overhead
Since accounting principles do not consider these expenses as product costs, they are not assigned to inventory or to the cost of goods sold. Instead, nonmanufacturing costs are simply reported as expenses on the income statement at the time they are incurred. Nonmanufacturing costs include activities associated with the Selling and General Administrative functions. Examples include: the compensation of nonmanufacturing personnel
Manufacturing Overhead
occupancy expenses for nonmanufacturing facilities (rent, light, heat, property taxes, maintenance, etc.) depreciation of nonmanufacturing equipment expenses for automobiles and trucks used to sell and deliver products interest expenses Note: factory administration expenses are considered part of manufacturing overhead.
Manufacturing Overhead
Although nonmanufacturing costs are not assigned to products for purposes of reporting inventory and the cost of goods sold on a companys financial statements, they should always be considered as part of the total cost of providing a specific product to a specific customer. For a product to be profitable, its selling price must be greater than the sum of the product cost (direct material, direct labor, and manufacturing overhead) plus the nonmanufacturing costs and expenses.