Variance Analysis
The first area you have been asked to address for the management team in this report is to help them understand why the actual costs for the new chair are not aligning with the determined standard costs. The company has set up standard costs for labor and each component of the new chair. It now has the actual costs for the previous month’s production run. You are asked to determine which costs are meeting the standards and which are not, to analyze the probable cause of the variances, and to provide a recommendation for moving forward. To determine this, you will conduct a variance analysis. In Doc Sharing, your Instructor will provide you with standard and actual costs to use for this part of the Assignment.
To complete this part, address the following:
Using the Week 4 Part 2 Assignment Template and the data provided by your Instructor in the Doc Sharing area, calculate the price variances (price variance and wage rate variance) and quantity variances (quantity variance and labor efficiency variance) for each material and direct labor.
Note: In addition to submitting your work in Excel, include your calculations within your report by copying and pasting the information from Excel. For information on inserting data from Excel into Word, refer to the following:
Microsoft. (n.d.). Insert a chart from an Excel spreadsheet into WordLinks to an external site.. https://support.microsoft.com/en-us/office/insert-a-chart-from-an-excel-spreadsheet-into-word-
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- Analyze what the variances to the standards are, including an examination of possible causes.
- Propose at least two recommendations for potential remedies to address the variances.
- Summarize how understanding variance analysis can impact managerial decision-making.
Related: (Solution) WMBA 6050 Week 4 Transfer Pricing Assignment
Solution
Step 1: Variance Calculation
Using the provided data, we can calculate price variances (price variance and wage rate variance) and quantity variances (quantity variance and labor efficiency variance) for each material and direct labor.
Standard Costs:
- Plastic tubing: 7 meters @ $3.50 per meter → $24.50
- Fabric: 6 square meters @ $5.00 per square meter → $30.00
- Padding: 4 kilograms @ $3.50 per kilogram → $14.00
- Direct labor: 3 hours @ $15.00 per hour → $45.00
- Total standard cost per chair: $113.50
Actual Costs for 500 Chairs:
- Plastic tubing: 3,600 meters → $12,780
- Fabric: 3,050 square meters → $15,555
- Padding: 2,050 kilograms → $7,380
- Direct labor: 1,300 hours → $19,500
- Total cost for 500 chairs: $55,215
Price Variance (PV)
Formula:
Price Variance=(Standard Price−Actual Price)×Actual Quantity
Plastic tubing price variance:
Standard Price=$3.50,
Actual Price=$12,780/3,600 = $3.55
PV=($3.50−$3.55)×3,600=−$180
Unfavorable (Actual price higher)
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