Part C Variance Analysis For Decision Making Bronfenbrenner

Part C Variance Analysis For Decision Making Bronfenbrenner Co Uses

Part C: Variance Analysis for Decision Making Bronfenbrenner Co. uses a standard cost system for its single product in which variable overhead is applied on the basis of direct labor hours. The following information is given: Standard costs per unit: Raw materials (1.5 grams at $16 per gram) ............................ $24.00 Direct labor (0.75 hours at $8 per hour).................................. $6.00 Variable overhead (0.75 hours at $3 per hour)........................ $2.25 Actual experience for current year: Units produced ........................................................................ 22,400 units Purchases of raw materials (21,000 grams at $17 per gram) .. $357,000 Raw materials used.................................................................. 33,400 grams Direct labor (16,750 hours at $8 per hour).............................. $134,000 Variable overhead cost incurred.............................................. $48,575 Required: Compute the following variances for raw materials, direct labor, and variable overhead, assuming that the price variance for materials is recognized at point of purchase: a. Direct materials price variance. b. Direct materials quantity variance. c. Direct labor rate variance. d. Direct labor efficiency variance. e. Variable overhead spending variance. f. Variable overhead efficiency variance. g. As a manager, why is variance analysis important?

Paper For Above instruction

Variance analysis is a crucial managerial accounting tool that enables organizations to monitor their financial performance, identify areas of inefficiency, and inform strategic decision-making. At Bronfenbrenner Co., understanding variances in raw materials, labor, and overhead costs helps management control expenses, optimize resource allocation, and improve overall profitability. This paper presents a detailed calculation of the variances for the current year, grounded in the provided data, and discusses the significance of variance analysis in managerial decision-making.

Introduction to Variance Analysis

Variance analysis involves comparing actual financial outcomes with standard or budgeted figures to identify deviations. These deviations, or variances, can be favorable or unfavorable, providing insight into operational efficiency and cost control. By analyzing variances, managers can pinpoint specific areas requiring corrective actions, thus enhancing organizational performance.

Calculation of Raw Materials Variances

The standard cost of raw materials per unit is based on 1.5 grams at $16 per gram, totaling $24.00. Actual data shows purchases of 21,000 grams at $17 per gram, and total raw materials used amount to 33,400 grams.

1. Raw Materials Price Variance (RM PV)

This variance measures the difference between actual purchase price and standard price, multiplied by the actual quantity purchased. The formula is:

RM PV = (Actual Price – Standard Price) × Actual Quantity Purchased

Using the data:

RM PV = ($17 – $16) × 21,000 grams = $1 × 21,000 = $21,000 Unfavorable

This variance indicates that Bronfenbrenner paid more for raw materials than the standard cost, leading to an unfavorable variance of $21,000.

2. Raw Materials Quantity Variance (RM QV)

This measures the difference between actual quantity used and the standard quantity allowed for the actual output, valued at the standard price. The formula is:

RM QV = (Actual Quantity Used – Standard Quantity Allowed) × Standard Price

Standard quantity for actual production = 22,400 units × 1.5 grams/unit = 33,600 grams

Actual quantity used = 33,400 grams

RM QV = (33,400 – 33,600) × $16 = (–200) × $16 = –$3,200

The negative sign indicates a favorable variance, meaning less raw materials were used than expected, saving $3,200.

Calculation of Direct Labor Variances

The standard direct labor cost per unit is 0.75 hours at $8 per hour, totaling $6.00 per unit. Actual data shows 16,750 hours at $8 per hour for the year.

3. Direct Labor Rate Variance (DL RV)

This measures the difference between actual hourly wage rate and standard wage rate, multiplied by actual hours worked. The formula is:

DL RV = (Actual Rate – Standard Rate) × Actual Hours

Actual Rate = $134,000 ÷ 16,750 hours = $8 per hour

DL RV = ($8 – $8) × 16,750 = $0

Thus, there is no rate variance, indicating actual wages matched the standard rate.

4. Direct Labor Efficiency Variance (DL EV)

This measures the difference between actual hours worked and standard hours allowed for actual production, valued at the standard wage rate. The formula is:

DL EV = (Actual Hours – Standard Hours Allowed) × Standard Rate

Standard hours for actual production = 22,400 units × 0.75 hours/unit = 16,800 hours

Actual hours worked = 16,750 hours

DL EV = (16,750 – 16,800) × $8 = (–50) × $8 = –$400

The negative sign indicates a favorable efficiency variance, as fewer hours were used than standard, saving $400.

Calculation of Variable Overhead Variances

The standard variable overhead rate is $3 per hour, with standard hours per unit at 0.75 hours. Actual variable overhead incurred was $48,575 based on 16,750 hours.

5. Variable Overhead Spending Variance (VOH SP)

This variance compares actual variable overhead cost to the budgeted cost based on actual hours. The formula is:

VOH SP = Actual Overhead – (Actual Hours × Standard Rate)

Applied overhead at standard rate = 16,750 hours × $3 = $50,250

VOH SP = $48,575 – $50,250 = –$1,675

This variance is favorable, indicating the actual overhead costs were less than expected based on actual hours worked.

6. Variable Overhead Efficiency Variance (VOH EV)

This variance reflects the difference between standard hours allowed for actual production and actual hours worked, multiplied by the standard rate:

VOH EV = (Actual Hours – Standard Hours Allowed) × Standard Rate

Standard hours for actual production = 16,800 hours as calculated earlier.

VOH EV = (16,750 – 16,800) × $3 = (–50) × $3 = –$150

This favorable efficiency variance indicates less overhead cost was incurred due to efficiency gains in hours worked.

Significance of Variance Analysis

Variance analysis is vital for managers because it provides insight into operational performance and cost control. By dissecting variances into price, quantity, rate, and efficiency components, managers can identify specific issues such as supplier price increases, wastage, labor inefficiencies, or cost-saving opportunities. This detailed understanding allows targeted corrective action, leading to improved profitability and competitive advantage. Furthermore, consistent variance analysis facilitates better budgeting and forecasting, aligning organizational goals with operational realities.

Conclusion

In conclusion, the variance analysis performed for Bronfenbrenner Co. reveals areas where costs deviated from standards, highlighting both favorable and unfavorable variances. The most significant variance was the raw materials price variance, indicating a higher purchase cost per gram than planned. Meanwhile, efficiencies in raw materials and labor usage resulted in favorable variances, underscoring the importance of operational efficiency. Overall, variance analysis serves as an essential management tool that helps optimize resource utilization, control costs, and support strategic decision-making, ultimately enhancing organizational performance in a competitive environment.

References

  • Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
  • Hilton, R. W., & Platt, D. E. (2019). Managerial Accounting: Creating Value in a Dynamic Business Environment (12th ed.). McGraw-Hill Education.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (16th ed.). McGraw-Hill Education.
  • Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2020). Introduction to Financial Accounting (11th ed.). Pearson.
  • Blocher, E., Stout, D., & Cokins, G. (2019). Cost Management: A Strategic Emphasis (8th ed.). McGraw-Hill Education.
  • Kaplan, R. S., & Atkinson, A. A. (2019). Advanced Management Accounting (3rd ed.). Pearson.
  • Anthony, R. N., & Govindarajan, V. (2018). Management Control Systems (13th ed.). McGraw-Hill Education.
  • Anthony, R. N., & Govindarajan, V. (2018). Management Control Systems (13th ed.). McGraw-Hill Education.
  • Sepe, R. L., & Williams, M. (2018). Cost Accounting: Foundations and Evolution. Routledge.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial & Managerial Accounting (11th ed.). Wiley.

Related Assignments