Miracle Lights, Inc. 1
Miracle Lights, Inc. – Variable Cost Variance
Kathy Wahl, Jerry Kennedy, and Jerry Craig
Accounting 529
Lewis Worcester
April 10, 2020

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Introduction
Budget, according to Merriam-Webster (2005), the amount of money that is available for, required for, or assigned to a particular purpose. Budgets are a primary means by which performance can be measured against. In business, a budget is projected for some level of activity using a set of standard costs, which come in the form of current commodity pricing, prevailing wage, units of work, and other factors. This concept is a key component in cost accounting, not only are budgets, estimates if you will, set, but post production analyses are generated to determine the actual performance against those budgets, or cost variance.
This paper will analyze the variable cost variances Miracle Lights’ Brightlites product line. In particular, it will focus on the price variance for raw materials purchased, raw materials usage variance, direct labor rate variance, direct labor efficiency variance, variable overhead spending variance, and variable overhead efficiency variance for the week ended May 30, 2004 (see Figure 1). The paper will close focusing on the importance of such measures to managers responsible for a set of activities.
Figure1: Miracle Lights’ Brightlites
Week ended May 30, 2004
Source: Marshall (2003), p. 561

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Raw Materials Price
Standard cost per unit
Actual cost per unit
Actual quantity used
Price variance for raw materials purchased
(6.80/lb
-7.10/lb) x 4.87lbs
= $1.46 U
Companies typically have historical data at their disposal to accurately determine material costs. However, even the best data can be incorrect due to market fluctuations.
Management checklist:

Were the unit costs calculated on specific bulk package rates?

Were the purchases made in such a way that maximizes those rates?

Was there a market factor that shifted the costs?

Were materials purchased on the futures market to lock in costs?

Was there a shift in accounting for inventory usage that affected costs?

Was there a change in the supply chain that impacted prices?

Was there a change in the purchase agreement with the supplier?
Typically there is a lag between the time the estimates were established and when the materials were used. When commodity purchases are involved, time lags allow for market shifts, which invariably provide for price fluctuations. Managers need to monitor situations that will affect prices. It is not enough to simply monitor the prices of a particular product, as Savastano, (2003) indicates in his article on raw material pricing, a result of the increase in the prices of crude oil and other ingredients, numerous raw material suppliers have announced price increases this year.

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Raw Materials Usage
Standard quantity allowed
Actual quantity used
Standard cost per unit
Raw Materials usage variance
(5lbs
– 4.87lbs) x $6.80
= $0.88F
Coupled with raw material pricing is material usage. Companies need to maximize efficient usage of the raw materials used in the production process.
Management checklist:

Was there a change in the supply chain?

Is the quality of the raw materials acceptable?

Have the materials be tested for quality?

Are spoilage levels consistent with expectations?
Material usage shows a favorable variance, so why worry? Logically, the increased margins should be considered a positive. But as is indicated in Marshall (2003), spending less for raw materials because lower-than-specified-quality materials were purchased may give rise to an arithmetically favorable variance (actual cost was less than standard cost) that is not desirable because of the negative impact on product quality.
Variance analysis is not restricted to unfavorable results, the mere fact that there is a variance, may be enough to require an analysis.
Direct Labor Rate
Standard cost per unit
Actual cost per unit
Actual quantity used
Direct labor rate variance
($14/hr
- $14.35/hr) x 2.3hrs
= $0.80U
Labor, typically the most significant cost in any company and the most difficult to control. As a general rule, wages always trend upward. This makes labor rate estimates

Miracle Lights, Inc. 5 that much more difficult. Even with solid average wage rates a manager may find that the labor costs exceeded expectations.
Management checklist:

Was there a need to include higher wage employees?

Was there a union contract change during production?

Were there any legislative actions that affected labor costs?

Were high cost contractors required to supplement the workforce?

Has the labor market changed since the estimates were generated?
There are numerous issues that can affect total labor costs. Unlike raw materials, changes in these costs are more difficult to determine. In this case, the actual labor rate was higher than standard. It could be a conscience decision by a manager to use high skilled labor to generate production efficiencies. As Marshall (2003) indicates in a similar example, even though the workers were paid more than the standard rate, the work was performed efficiently enough to more than make up for the unfavorable rate variance.
Direct Labor Efficiency
Standard quantity allowed
Actual quantity used
Standard cost per unit
Direct labor efficiency variance
(2.4 hrs
- 2.3 hrs) x $14/hr
= $1.4/hr F
Indeed we find a gain of $1.40 per hour in efficiency. While Miracle Lights loses some on the per unit rate, they gain it back by shorter production cycle times.
Management checklist:

Were the assigned employees higher skilled?

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 Were the employee’s average service times higher than standard?
 Were there environmental factors that caused the employee’s to be more efficient?
These are valuable issues for managers to investigate, focusing on successes and perpetuating them is vital to a corporation.
Variable Overhead Spending
Standard cost per unit
Actual cost per unit
Actual quantity used
Variable overhead spending variance
($4.5
-$4.3) x 1.5hr
= $0.3/hr F
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Variable Overhead Efficiency
Standard quantity allowed
Actual quantity used
Standard cost per unit
Variable overhead efficiency variance
(1.5hrs
-1.5hrs) x $4.5
= 0
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Summary
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References
Marshall, D., McManus, W., & Viele, D. (2003). Accounting: what the numbers mean . (6 th ed.).
New York: McGraw Hill Companies.
Savastano, D. (2003). The raw material report. Retrieved, January 12, 2005 from http://www.inkworldmagazine.com/Sept032.htm
Merriam-Webster (2005).***********************************