In our previous discussion, we talked about how even if the price of a component of our variable manufacturing overhead is higher, it might actually cause our spending variance to be favorable. Sometimes, higher quality of input creates such a time savings that it is a good thing. Of course the opposite could be true. Remember back when we talked about direct labor and direct materials, cheaper is not always better. If a savings on one component of our costs causes additional costs in another area, we need to examine what the best course of action would be. So let’s go back to Mary at Hupana and her new needles and thread!
So now, what happens if Mary notices that the needles and thread we are buying, even though they cost more, are actually creating better efficiency, thus lowering the time it takes to make our amazing shoes? She has been doing a time tracking system, and noticed that rather than 1025 hours that were budgeted, it is now only taking 928 hours to make the same number of shoes! This is awesome news, so let’s see what the numbers look like.
|Budgeted direct labor hours||928|
|Variable manufacturing overhead rate||$3.25|
|Variable manufacturing overhead||$3,016.00|
So remember our budgeted amount of variable manufacturing overhead was 1025 hours at $3 per hour for a total cost of $3075. Let’s analyze the change.
- Actual Hours of Input at Actual Rate = 928 × $3.25= $3016
- Actual Hours of Input at Standard Rate = 928 × $3= $2784
- Standard Hours of Input allowed for Actual Output at Standard Rate= 1025 × $3= $3075
So with that information the price variance can be calculated as follows:
- Actual Hours of Input at Actual Rate= $3016
- Actual Hours of Input at Standard Rate= $2784
- So we have a PRICE variance of $3016 − $2784= $232 unfavorable (we spent more per hour than budgeted)
But look at the efficiency variance:
- Actual Hours of Input at Standard Rate = $2784
- Standard Hours of Input Allowed for Actual Output at Standard Rate= $3075
So we have an efficiency variance of $3075 − $2784= $291 favorable (We spent less total that we budgeted)
Our overall spending variance can then be calculated at $3075 − $3016= $59 favorable.
So the takeaway here is, the product may cost more, but if it increases efficiency the extra cost may be worth it! The cheapest product does not always bring us the best outcome!