# Spring 09 Lecture 05

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```					       ACTG 321
Agenda for Lecture 5
• Exam 1
• Cost Variances for Direct Costs
• Break
• In-Class Exercise
ACTG 321
Agenda for Lecture 5
• Exam 1
• Cost Variances for Direct Costs
• Break
• In-Class Exercise
The derivation of the price
and efficiency variances
AP = actual price per unit of input (e.g., price per yard).
Q = quantity of inputs for total output (e.g., yards).

AP

ACTUAL COST

AQ
The flexible budget
SP = budgeted price per unit of input (e.g., price per
yard).
SQ = budgeted quantity of inputs required for total
output achieved (e.g., total yards of fabric that should
have been needed for actual production).

SP
FLEXIBLE
BUDGET

SQ
The variable cost flexible
budget variance (in green)
P = price per unit of input.
Q = quantity of inputs for total output.

Actual
Price

Standard
Price          FLEXIBLE
BUDGET

Standard   Actual
Quantity   Quantity
The price variance
AP = actual price per unit of input.
SP = budgeted price per unit of input.
Q = quantity of inputs for total output.

Actual
Price
PRICE VARIANCE
Standard
Price          FLEXIBLE
BUDGET

S.Q. = standard quantity           Standard   Actual
for actual outputs                 Quantity   Quantity
The efficiency (or quantity) variance
AP = actual price per unit of input.
SP = budgeted price per unit of input.
Q = quantity of inputs for total output.

Actual
Price

Standard
Price          FLEXIBLE
QUANTITY
BUDGET
VARIANCE

S.Q. = standard quantity           Standard   Actual
for actual outputs                 Quantity   Quantity
The variable cost flexible budget
variance decomposes into a “price”
variance and an “efficiency” variance
AP = actual price per unit of input. SP = budgeted price.
Q = quantity of inputs for total output.
Actual
Price
PRICE VARIANCE
Standard
Price          FLEXIBLE
QUANTITY
BUDGET
VARIANCE

S.Q. = standard quantity          Standard   Actual
for actual outputs                Quantity   Quantity
The variable cost flexible budget
variance decomposes into a “price”
variance and an “efficiency” variance
AP = actual price per unit of input. SP = budgeted price.
Q = quantity of inputs for total output (e.g., yards).
Actual
Price                             why
PRICE VARIANCE          price?
Standard
Price          FLEXIBLE
QUANTITY
BUDGET
VARIANCE

S.Q. = standard quantity          Standard   Actual
for actual outputs                Quantity   Quantity
The variable cost flexible budget
variance decomposes into a “price”
variance and an “efficiency” variance
Abbreviations:
Price or Wage Rate or Spending Variance    = PV
Quantity or Usage or Efficiency Variance   = QV

Actual quantity of inputs       = AQ
Standard quantity of inputs     = SQ
Actual price per input unit     = AP
Standard price per input unit   = SP
The variable cost flexible budget
variance decomposes into a “price”
variance and an “efficiency” variance
These variances apply to direct materials,

Formulas:
PV = AQ x (AP - SP)
QV = SP x (AQ - SQ)
For direct materials, AQ sometimes refers to materials
purchased, instead of materials used. In this case, the
price variance and the efficiency variance will not sum to
the flexible budget variance, due to the timing difference.
Cost Variances

The McBean Company
The McBean Company makes stars. The budgeted cost for
each star is as follows:

Materials: 2 pounds of “star stuff” at \$4 per lb. = \$8
per star
Labor: 1.5 hours at \$12 per hour = \$18 per star

In December, 1,200 stars were produced. 2,600 lbs. of
“star stuff” were purchased at \$4.25 per lb. Of this
amount, 2,300 lbs. were used in production. Direct labor
cost was \$20,930 for 1,820 hours.

1. What is the direct material price variance, assuming
that the company recognizes the price variance at the
time the materials are purchased?
2. What is the direct material usage (quantity) variance?
3. What is the direct labor rate (price) variance?
4. What is the direct labor efficiency variance?
Formulas:
PV = AQ x (AP - SP)           QV = SP x (AQ - SQ)
PV = Price Variance           QV = Quantity Variance
AQ (SQ) = Actual (Standard) quantity of inputs
AP (SP) = Actual (Standard) price per input

Standards for Direct materials:
2 lbs of “star stuff” at \$4 per lb. = \$8 per star

In December, 1,200 stars were produced. 2,600 lbs. of
“star stuff” was purchased at \$4.25/lb. Of this, 2,300
lbs. were used in production. What is the direct material
price variance, assuming that the company recognizes
the price variance at the time materials are purchased?
Standards for Direct materials:
2 lbs. of “star stuff” at \$4 per lb. = \$8 per star

In December, 1,200 stars were produced. 2,600 lbs. of
“star stuff” were purchased at \$4.25/lb. Of this, 2,300
lbs. were used in production. What is the direct material
price variance, assuming that the company recognizes
the price variance at the time materials are purchased?

PV = AQ x (AP - SP)

= 2,600 lbs. x (\$4.25 per lb. - \$4.00 per lb.)

= 2,600 lb. x \$0.25 per lb.

= \$650 Unfavorable
Formulas:
PV = AQ x (AP - SP)          QV = SP x (AQ - SQ)
PV = Price Variance          QV = Quantity Variance
AQ (SQ) = Actual (Standard) quantity of inputs
AP (SP) = Actual (Standard) price per input

Standards for Direct materials:
2 lbs. of “star stuff” at \$4 per lb. = \$8 per star

In December, 1,200 stars were produced. 2,600 lbs. of
“star stuff” were purchased at \$4.25/lb. Of this, 2,300
lbs. were used in production.

2. What is the direct material usage (quantity) variance?
Standards for Direct materials:
2 lbs. of “star stuff” at \$4 per lb. = \$8 per star

In December, 1,200 stars were produced. 2,600 lbs. of
“star stuff” were purchased at \$4.25/lb. Of this, 2,300
lbs. were used in production.

2. What is the direct material usage (quantity) variance?

QV = SP x (AQ - SQ)

= \$4 per lb. x (2,300 lbs. - 2,400 lbs.*)

= \$4 per lb. x 100 lbs. = \$400 favorable

* 2 lbs. per star x 1,200 stars
Formulas:
PV = AQ x (AP - SP)           QV = SP x (AQ - SQ)
PV = Price Variance           QV = Quantity Variance
AQ (SQ) = Actual (Standard) quantity of inputs
AP (SP) = Actual (Standard) price per input

Standards for Direct labor:

1.5 hours at \$12 per hour = \$18 per star

In December, 1,200 stars were produced. 2,600 lbs. of
“star stuff” were purchased at \$4.25/lb. Of this, 2,300
lbs. were used in production. Direct labor cost was
\$20,930 for 1,820 hours.

3. What is the direct labor rate (price) variance?
Standards for Direct labor:
1.5 hours at \$12 per hour = \$18 per star

In December, 1,200 stars were produced. 2,600 lbs. of
“star stuff” were purchased at \$4.25/lb. Of this, 2,300
lbs. were used in production. Direct labor cost was
\$20,930 for 1,820 hours.

3. What is the direct labor rate (price) variance?

PV = AQ x (AP - SP)

= 1,820 hr.s x (11.50 per hr* - \$12 per hr)

= 1,820 hr.s x \$0.50 per hr = \$910 favorable

* \$20,930 ÷ 1,820 hours = \$11.50 per hr.
Formulas:
PV = AQ x (SP - AP)           QV = SP x (AQ - SQ)
PV = Price Variance           QV = Quantity Variance
AQ (SQ) = Actual (Standard) quantity of inputs
AP (SP) = Actual (Standard) price per input

Standards for Direct labor:

1.5 hours at \$12 per hour = \$18 per star

In December, 1,200 stars were produced. 2,600 lbs. of
“star stuff” were purchased at \$4.25/lb. Of this, 2,300
lbs. were used in production. Direct labor cost was
\$20,930 for 1,820 hours.

4. What is the direct labor efficiency variance?
Standards for Direct labor:
1.5 hours at \$12 per hour = \$18 per star

In December, 1,200 stars were produced. 2,600 lbs. of
“star stuff” were purchased at \$4.25/lb. Of this, 2,300
lbs. were used in production. Direct labor cost was
\$20,930 for 1,820 hours.

4. What is the direct labor efficiency variance?

QV = SP x (AQ - SQ)
= \$12 per hour x (1,820 hrs - 1,800 hrs*)
= \$12 per hour x 20 hrs. = \$240 Unfav.

* 1,200 stars x 1.5 hours per star = 1,800 hr.s
ACTG 321
Agenda for Lecture 5
• Exam 1
• Cost Variances for Direct Costs
• Break
• In-Class Exercise
ACTG 321
Agenda for Lecture 5
• Exam 1
• Cost Variances for Direct Costs
• Break
• In-Class Exercise

```
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