McGraw-Hill/Irwin 1-1

Section Objectives
1.
Explain how fixed, variable, and semivariable costs change as the level of manufacturing activity changes.
2.
Use the high-low point method to determine the fixed and variable components of a semivariable cost.
3.
Prepare a fixed budget for manufacturing costs.
4.
Develop a flexible budget for manufacturing costs.
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Chapte
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 Variable costs vary in total in direct proportion to the changes in the level of activity.
 Direct materials and direct labor are examples of variable costs .
Direct Materials
1 unit = $ 5
1,000 units = $ 5,000
4,000 units = $20,000
 The total variable cost change, but the cost per unit does not change.
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 Fixed costs do not change in total as the total level of activity changes.
 Although fixed costs do not change in total as the level of activity changes, the cost per unit does change.
Factory Supervisory Salaries Units Produced Cost Per Unit
$10,000/month 2,000 $5.00
$10,000/month 2,500 $4.00
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 Semivariable costs vary with, but not in direct proportion to, the volume of activity.
 Utilities are an example of a semivariable cost:
 Fixed portion
Needed no matter how many units produced.
 Variable portion
Usage will vary in proportion to level of production.
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Semivariable expense: utilities
Step 1. Determine the production and cost data for the months of highest and lowest production during the past year.
Step 2. Compute the difference in direct labor hours, and the difference in utilities costs, in the months of highest and lowest production.
Step 3. Compute the variable cost per direct labor hour.
Difference in utilities costs ÷ Difference in direct labor hours
Step 4. Compute the fixed cost for a month.
Total cost – (direct labor hours x cost per direct labor hour)
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Objective 3
Prepare a fixed budget for manufacturing costs
Fixed Budget of Manufacturing Costs
Shows one level of activity – 1,000 direct labor hours
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Highlights differences between budgeted and actual amounts
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 Used when the level of activity fluctuates from month to month.
 Shows fixed and variable costs separately.
The different levels of activity are called the relevant range of activity
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Compares overhead expenses at an actual activity level of 960 hours
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Chapter
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Section Objectives
5.
Develop standard costs per unit of product.
6.
Compute the standard costs of products manufactured during the period and determine cost variances between actual costs and standard costs.
7.
Compute the amounts and analyze the nature of variances from standard for raw materials, labor, and manufacturing overhead.
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Objective 5
Develop standard costs per unit of product
 Reflect what costs should be per unit under normal, efficient operating conditions.
 Used to measure the effectiveness of operations.
 Should be set at an achievable level.
 Standards are set for each cost element, including materials, labor, and overhead
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 Standard Quantity: Number of units of each type of raw material required to manufacture one unit of finished product.
 Standard Cost: Cost of each unit of raw material required to make the product.
Raw Materials Standard = Standard Quantity x Standard Cost
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 Standard Quantity: Number of hours of each type of labor needed to manufacture one unit of finished product.
 Standard Cost: Cost of each type of labor used to make the product.
Direct Labor Standard = Standard Quantity x Standard Cost
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 The standard overhead cost per unit of product is usually based on the overhead application rate used to assign overhead costs to products.
 Overhead application rate can be based on:
 Direct labor cost,
 Direct labor hours, or
 Some other measure.
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Compute the variance:
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 Materials Variance
 Labor Variance
 Manufacturing Overhead Variance
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 Materials Quantity Variance:


Results from a difference between the actual quantity of materials consumed and the standard quantity allowed for the job.
Formula:
(Actual Quantity – Standard Quantity) x Standard Cost
 Materials Price Variance:
 Results from a difference between the actual cost and the standard cost allowed.
 Formula:
(Actual Cost – Standard Cost) x Actual Quantity
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 Labor Time Variance:


Results from a difference between the actual hours worked and the standard labor hours allowed for the job.
Formula:
(Actual Hours – Standard Hours) x Standard Rate
 Labor Rate Variance:
 Results from a difference between the actual labor rate per hour and the standard labor rate per hour.
 Formula:
(Actual Rate – Standard Rate) x Actual Hours
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 Applied overhead and standard overhead are analyzed to determine the variance.
 Because it is difficult to determine actual overhead for individual jobs, the overhead variance analysis is usually based on the total actual overhead and total standard overhead for the products manufactured.
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