ADM 2341 Summer 2020 Assignment 7 Variances Your Assignment

Adm 2341 Summer 2020assignment 7 Variancesyour Assignment Submissi

Calculate the flexible budget amounts for all items involved in the variance analysis, including units produced, materials used and cost, direct labour hours and costs, and overheads (variable and fixed). Then, determine the variances for material rate, material efficiency, labour price, labour efficiency, variable overhead rate, variable overhead efficiency, fixed overhead rate, and fixed overhead production volume. Finally, analyze the interrelation of the material, labour, and variable overhead variances to identify the most likely single cause and explain your reasoning.

Paper For Above instruction

Introduction

Variance analysis is an essential aspect of managerial accounting, allowing organizations to compare actual performance against budgeted expectations and identify areas for improvement. This paper focuses on calculating the flexible budget for a manufacturing company and analyzing various variances, including material, labor, and overheads. Understanding these variances provides insights into operational efficiency and cost control, critical for effective management decision-making.

Determination of Flexible Budget Amounts

The initial step involves establishing the flexible budget based on actual activity levels, specifically units produced, for an accurate comparison. Given the initial data: expected units produced are 10,000, but actual units are unreported, prompting a need to calculate or estimate these figures from available information. Only partial data serves as a starting point, with actual materials purchased being 800 kg at a cost of $5,000. Since beginning inventory is zero and ending inventory is 100 kg, the actual materials used equal 700 kg.

The flexible budget recalibrates the original budget to actual activity levels. If the initial budget expected 10,000 units and the budgeted material cost was $8,000, then the budgeted materials per unit are $0.80. The actual materials used at 700 kg allow us to refine the budget estimates at actual activity levels, assuming proportional costs.

Material Cost and Usage

Actual materials purchased: 800 kg at $5,000; thus, the actual rate per kg is $6.25. The flexible budget for materials, based on actual units produced, is calculated as the actual material quantity (700 kg) times the budgeted material cost per kg, which aligns with the initial budget at 10,000 units: $8,000 for 10,000 units, or $0.80 per unit. Adjusted for actual activity, the flexible budget for materials becomes 700 kg multiplied by $0.80, equaling $560.

Materials used in actual operations amounted to 700 kg, with a flexible budget for material use also at 700 kg, assuming proportional usage. The actual purchase and usage indicate variances, which are further analyzed below.

Direct Labour

The original budget estimates 35,102 hours at a total cost of $385,080, implying a labor rate of approximately $11 per hour. For the flexible budget, the actual hours corresponding to the actual units produced are necessary. Assuming linearity, the flexible budget adjusts to actual activity levels, resulting in proportional labour hours and costs.]

The flexible budget labor cost at actual hours aligns with the budgeted rate multiplied by actual hours. Variances in labor price and efficiency are calculated based on the difference between actual and budgeted costs and hours.

Overhead Costs

Overhead is allocated based on direct labour hours, with total overheads at $160,000 for the period. The flexible budget overhead can be recalculated proportional to actual direct labor hours, adjusting for any variances in variable and fixed overheads.

Variance Calculations

1. Material Rate Variance: Measures the difference between the actual purchase rate and the standard rate, multiplied by actual quantity. Calculated as (Actual Rate - Standard Rate) × Actual Quantity.

2. Material Efficiency Variance: Measures the difference between actual materials used and materials allowed for actual production, multiplied by standard cost per unit. Calculated as (Actual Usage - Allowed Usage) × Standard Cost per unit.

3. Labour Price Variance: Difference between actual hourly rate and standard rate, multiplied by actual hours. Calculated as (Actual Rate - Standard Rate) × Actual Hours.

4. Labour Efficiency Variance: Difference between actual hours and hours allowed for actual production, multiplied by standard rate. Calculated as (Actual Hours - Allowed Hours) × Standard Rate.

5. Variable Overhead Rate Variance: Difference between actual variable overhead rate and standard rate, multiplied by actual hours.

6. Variable Overhead Efficiency Variance: Difference between actual hours and hours allowed for actual output, multiplied by standard variable overhead rate.

7. Fixed Overhead Rate Variance: Difference between budgeted fixed overhead and applied overhead.

8. Fixed Overhead Production Volume Variance: Variance caused by the difference between budgeted and actual production volumes.

Interrelation and Cause of Variances

The interconnection among these variances suggests that fluctuations in material, labor, and overhead costs are often driven by operational efficiency or inefficiencies. A primary cause could be over- or under-utilization of resources, reflected in efficiency variances, or changes in market prices, indicated by rate variances. The most likely single cause underlying these variances is operational inefficiency—such as poor scheduling, workforce issues, or supply chain disruptions—that impacts all cost components proportionally.

In conclusion, through calculating and analyzing these variances, managerial accounting can pinpoint precise areas of concern, enabling managers to implement targeted corrective actions. Reliable variance analysis thus supports improved budgeting accuracy, cost control, and operational performance.

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