Page 154 - Finance for Non-Financial Managers

Siciliano08.qxd 2/8/2003 7:18 AM Page 135
Cost Accounting
or differences from estab-
lished standards: price
tion A system of manage-
variances and usage vari- Management by excep- 135
ment in which standards
ances. Price variances are set for operating activities. The
occur when materials or actual results are then compared with
labor used in production those standards, and any differences
that are considered significant are
cost the company more
brought to the attention of the man-
per unit than was projected
agers, along with the reasons for the
when the standards were
differences and recommended correc-
set. Usage variances occur tive action, if appropriate.
when the production run
consumes more of the materials or labor than was planned.
For example, consider the example excerpted from Wonder
Widget’s weekly manufacturing variance report (Figure 8-2).
No. units Standard Actual per
Component Variance
produced per unit unit
Super Widget model 4000 power switch 1,000
Labor hours per unit produced 1.2 hours 1.5 hours .3 hours
Labor cost per hour $25.00 $28.00 $3.00

Labor cost per unit produced $30.00 $42.00 $12.00
Figure 8-2. Report of manufacturing cost variances

In this example, actual labor cost per unit was $42.00 (1.5
hours at $28.00 per hour). The standard per unit for this switch
was $30.00 (1.2 hours at $25.00 per hour). The total unfavor-
able variance for 1,000 units was $12,000 ($42.00-$30.00
times 1,000 units). That information by itself is interesting, but
not particularly useful. It might be difficult to give a plant super-
visor that information and expect an informed plan to eliminate
the variance. But let’s look at what happens when we analyze
the components of the variance (Figure 8-3).
Now we know the cause and we know what each kind of
variance is costing us. We can approach the supervisor about
getting the time back to the standard of 1.2 hours per unit labor