Ajack Partnership Manufactures Jackhammers
Ajack Partnership Manufactures Jackhammers Ajack Partnership Is Looki
Ajack Partnership is evaluating its standard cost system variances for the production of jackhammers. The company seeks to understand the material price variance for steel purchased during the year, the labor rate and efficiency variances, and the overhead variances related to variable overhead. The standard cost card indicates the expected costs per unit, and actual data from the recent fiscal year is provided. This paper calculates the relevant variances, explains their significance, and presents the appropriate accounting entries for each variance component.
Paper For Above instruction
Introduction
Standard costing is a widely utilized management accounting tool that facilitates cost control and performance evaluation by comparing actual costs to standard or budgeted costs. Variance analysis, a critical component of standard costing, helps organizations identify areas where operational performance deviates from expectations, enabling targeted managerial actions. In the context of Ajack Partnership, analyzing material, labor, and overhead variances provides insights into production efficiency, cost control, and operational effectiveness.
Material Variance Analysis
The material price variance assesses the impact of differences between actual purchase costs and standard costs of materials, reflecting purchasing efficiency and supplier performance. It is calculated as:
Material Price Variance = (Actual Price - Standard Price) × Actual Quantity Purchased
Given the data:
- Actual price per pound = $8.75
- Standard price per pound = $9.00
- Total steel purchased = 45,000 pounds
Calculation:
Material Price Variance = ($8.75 - $9.00) × 45,000 = (-$0.25) × 45,000 = -$11,250
A negative variance indicates a favorable outcome, meaning Ajack Partnership paid less for steel than planned, saving $11,250. This saving enhances profitability and demonstrates successful bargaining or sourcing strategies.
The journal entry for the material price variance is:
```plaintext
Debit: Materials Inventory (or Cost of Goods Sold) $11,250
Credit: Material Price Variance $11,250
```
This entry recognizes the savings achieved in material procurement.
Labor Variance Analysis
Labor cost control is essential for maintaining operational efficiency. Two variances are analyzed:
1. Labor Rate Variance (LRV): Reflects differences between actual hourly wages and standard wages.
2. Labor Efficiency Variance (LEV): Indicates whether actual labor hours utilized are more or less than standard hours for actual production.
Given:
- Actual hours = 21,000
- Actual rate = $19.50/hour
- Standard rate = $20.00/hour
- Production units = 10,000 jackhammers
Labor Rate Variance Calculation:
LRV = (Actual rate - Standard rate) × Actual hours
LRV = ($19.50 - $20.00) × 21,000 = (-$0.50) × 21,000 = -$10,500
This favorable variance signifies cost savings from paying lower wages than planned.
Labor Efficiency Variance Calculation:
Standard labor hours for actual production:
Standard hours = 10,000 units × 2 hours/unit = 20,000 hours
Actual hours used = 21,000 hours
Efficiency variance:
LEV = (Standard hours - Actual hours) × Standard rate
LEV = (20,000 - 21,000) × $20.00 = (-1,000) × $20.00 = -$20,000
This unfavorable variance indicates that more hours were used than expected, possibly due to inefficiencies or machine downtime.
Accounting entries:
- For labor rate variance:
```plaintext
Debit: Wages Expense $10,500
Credit: Labor Rate Variance $10,500
```
- For labor efficiency variance:
```plaintext
Debit: Wages Expense $20,000
Credit: Labor Efficiency Variance $20,000
```
These entries segregate the variances from the standard wages expense, enabling clear performance analysis.
Overhead Variance Analysis
Overhead variances include rate and efficiency components for variable overheads.
Variable Overhead Rate Variance:
Actual variable overhead = $210,000
Actual hours = 21,000 hours
Actual rate per labor hour = $210,000 / 21,000 = $10.00/hour (matches standard rate)
Standard variable overhead rate = $10.00/hour
Calculation:
Variable Overhead Rate Variance = (Actual rate - Standard rate) × Actual hours
= ($10.00 - $10.00) × 21,000 = $0
Since the actual rate equals the standard rate, no variance exists.
Variable Overhead Efficiency Variance:
Standard variable overhead per unit = $20.00 (for 2 hours at $10/hour)
Standard hours for actual units: 10,000 × 2 = 20,000 hours
Actual hours used = 21,000 hours
Efficiency variance:
= (Standard hours - Actual hours) × Standard rate
= (20,000 - 21,000) × $10 = (-1,000) × $10 = -$10,000
This unfavorable variance indicates that extra hours increased variable overhead costs.
Accounting entries:
- For variable overhead rate variance:
```plaintext
Debit: Variable Overhead Control $0
Credit: Variable Overhead Rate Variance $0
```
- For variable overhead efficiency variance:
```plaintext
Debit: Variable Overhead Control $10,000
Credit: Variable Overhead Efficiency Variance $10,000
```
The overall impact reflects the inefficiency represented by the increased hours.
Conclusion
Effective variance analysis provides valuable insights into operational performance. Ajack Partnership benefited from favorable material price variances due to lower purchase costs but faced inefficiencies in labor and overhead utilization, as indicated by unfavorable efficiency variances. Recognizing and analyzing these variances allows management to implement corrective measures, optimize procurement strategies, and improve operational efficiency. Accurate accounting entries ensure transparent financial reporting and facilitate comprehensive performance evaluation, integral to effective managerial decision-making.
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