{"id":543,"date":"2018-04-18T15:40:35","date_gmt":"2018-04-18T15:40:35","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/?post_type=chapter&#038;p=543"},"modified":"2024-04-29T17:22:54","modified_gmt":"2024-04-29T17:22:54","slug":"variable-manufacturing-rate-variances","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/chapter\/variable-manufacturing-rate-variances\/","title":{"raw":"Variable Manufacturing Rate Variances","rendered":"Variable Manufacturing Rate Variances"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Analyze the variance between expected variable manufacturing overhead cost and actual variable manufacturing overhead costs<\/li>\r\n<\/ul>\r\n<\/div>\r\nAs a manager in the accounting department, you have been tasked with determining the overhead rate for your manufacturing department. This information is important, as when you price your product or bid jobs, if you don\u2019t include the cost of things like electricity and rent and depreciation on your equipment, you will be underpricing your stuff! Let\u2019s take a look at an explanation of the <strong>why<\/strong> and <strong>how<\/strong> to calculate the variable manufacturing rate and understand why it is so important! Then we will talk about when this number <strong>varies<\/strong> from what we had originally calculated.\r\n\r\nSo we are again looking at two components: The manufacturing overhead <strong>rate<\/strong> variance and the manufacturing overhead <strong>efficiency<\/strong>\u00a0variance. The rate variance happens when there is a change in the components of the variable hourly rate.\r\n\r\n<img class=\"aligncenter wp-image-1600 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2985\/2018\/04\/17173916\/Screen-Shot-2018-07-17-at-10.38.28-AM.png\" alt=\"Spending Variance flows into Labor Rate Variance, Actual Hours of Input at Standard Rate, and Labor Efficiency Variance. Labor Rate Variance flows into Actual Hours of Input at Actual Rate. Labor Efficiency Variance flows into Standard Hours Allowed for Actual Output, at Standard Rate.\" width=\"595\" height=\"321\" \/>\r\n\r\nA rate variance may occur if the cost of one of the components of this rate goes up. An example might be the cost of the needles for the machines that sew together the shoes, or a steep hike in the electricity rate.\r\n\r\nA difference in the efficiency rate occurs when it takes more hours than budgeted to manufacture the budgeted number of pair of shoes.\r\n\r\nWe figured out our expected variable manufacturing overhead for Hupana Running Company back when we were working on our master budget. Here is a reminder for you!\r\n\r\nSince we already figured out our variable rate in a previous unit (remember, it was way back when we were working on our master budget), we can use this number in our calculations.\r\n\r\nSo Mary, our production manager, has noticed an increase in the cost of some of the supplies that go into the manufacturing of our shoes. Apparently, there is a thread shortage, and our supplier has raised the price. That, along with more needles breaking in the machines, has raised our variable overhead cost from $3 per hour to $3.25 per hour. \u00a0Let\u2019s take a look at how that may affect our variable overhead cost for Hupana:\r\n\r\nHere is our budget:\r\n<table style=\"border-collapse: collapse; width: 100%;\" border=\"1\">\r\n<tbody>\r\n<tr>\r\n<td style=\"width: 50%;\"><\/td>\r\n<th style=\"width: 50%;\" scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<tr>\r\n<th style=\"width: 50%;\" scope=\"row\">Budgeted direct labor hours<\/th>\r\n<td style=\"width: 50%;\">1025<\/td>\r\n<\/tr>\r\n<tr>\r\n<th style=\"width: 50%;\" scope=\"row\">Variable manufacturing overhead rate<\/th>\r\n<td style=\"width: 50%;\">$3<\/td>\r\n<\/tr>\r\n<tr>\r\n<th style=\"width: 50%;\" scope=\"row\">Variable manufacturing overhead<\/th>\r\n<td style=\"width: 50%;\">$3,075<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nAnd here is what actually happened:\r\n<table style=\"border-collapse: collapse; width: 100%;\" border=\"1\">\r\n<tbody>\r\n<tr style=\"height: 15px;\">\r\n<td style=\"width: 50%; height: 15px;\"><\/td>\r\n<th style=\"width: 50%; height: 15px;\" scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Budgeted direct labor hours<\/th>\r\n<td style=\"width: 50%; height: 15px;\">1025<\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Variable manufacturing overhead rate<\/th>\r\n<td style=\"width: 50%; height: 15px;\">$3.25<\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Variable manufacturing overhead<\/th>\r\n<td style=\"width: 50%; height: 15px;\">$3,331.25<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nSo you can see, this change has caused an increase in our variable manufacturing overhead. This is a <strong>rate<\/strong> change, so let\u2019s analyze it using what we know. (You can refer back to the diagram on 10.4 if needed)\r\n<ul>\r\n \t<li>Actual Quantity of Input at Actual Cost = 1025 \u00d7 $3.25 = $3331.25<\/li>\r\n \t<li>Actual Quantity of Input at Standard Cost= 1025 \u00d7 $3.00 = $3075.00<\/li>\r\n \t<li>Price Variance = $3331.25 \u2212 $3075.= $256.25 <strong>unfavorable<\/strong> variance. We spent <strong>more<\/strong> than anticipated.<\/li>\r\n<\/ul>\r\nSo, if the direct labor hours remain the same, our <strong>spending<\/strong>\u00a0variance will be $256.25\u2014<strong>unfavorable<\/strong>. So, a reduction in the variable manufacturing overhead rate would create a <strong>favorable<\/strong> price variance.\r\n\r\nSo, a <strong>rise<\/strong> in the variable manufacturing overhead rate will cause an\u00a0<strong>unfavorable<\/strong> variance in the price variance. But might that be a good thing? It could, if the increase in price causes a corresponding increase in efficiency!\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/f8460e66-c8b3-4e09-a075-1498e740b078\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Analyze the variance between expected variable manufacturing overhead cost and actual variable manufacturing overhead costs<\/li>\n<\/ul>\n<\/div>\n<p>As a manager in the accounting department, you have been tasked with determining the overhead rate for your manufacturing department. This information is important, as when you price your product or bid jobs, if you don\u2019t include the cost of things like electricity and rent and depreciation on your equipment, you will be underpricing your stuff! Let\u2019s take a look at an explanation of the <strong>why<\/strong> and <strong>how<\/strong> to calculate the variable manufacturing rate and understand why it is so important! Then we will talk about when this number <strong>varies<\/strong> from what we had originally calculated.<\/p>\n<p>So we are again looking at two components: The manufacturing overhead <strong>rate<\/strong> variance and the manufacturing overhead <strong>efficiency<\/strong>\u00a0variance. The rate variance happens when there is a change in the components of the variable hourly rate.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-1600 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2985\/2018\/04\/17173916\/Screen-Shot-2018-07-17-at-10.38.28-AM.png\" alt=\"Spending Variance flows into Labor Rate Variance, Actual Hours of Input at Standard Rate, and Labor Efficiency Variance. Labor Rate Variance flows into Actual Hours of Input at Actual Rate. Labor Efficiency Variance flows into Standard Hours Allowed for Actual Output, at Standard Rate.\" width=\"595\" height=\"321\" \/><\/p>\n<p>A rate variance may occur if the cost of one of the components of this rate goes up. An example might be the cost of the needles for the machines that sew together the shoes, or a steep hike in the electricity rate.<\/p>\n<p>A difference in the efficiency rate occurs when it takes more hours than budgeted to manufacture the budgeted number of pair of shoes.<\/p>\n<p>We figured out our expected variable manufacturing overhead for Hupana Running Company back when we were working on our master budget. Here is a reminder for you!<\/p>\n<p>Since we already figured out our variable rate in a previous unit (remember, it was way back when we were working on our master budget), we can use this number in our calculations.<\/p>\n<p>So Mary, our production manager, has noticed an increase in the cost of some of the supplies that go into the manufacturing of our shoes. Apparently, there is a thread shortage, and our supplier has raised the price. That, along with more needles breaking in the machines, has raised our variable overhead cost from $3 per hour to $3.25 per hour. \u00a0Let\u2019s take a look at how that may affect our variable overhead cost for Hupana:<\/p>\n<p>Here is our budget:<\/p>\n<table style=\"border-collapse: collapse; width: 100%;\">\n<tbody>\n<tr>\n<td style=\"width: 50%;\"><\/td>\n<th style=\"width: 50%;\" scope=\"col\">Total<\/th>\n<\/tr>\n<tr>\n<th style=\"width: 50%;\" scope=\"row\">Budgeted direct labor hours<\/th>\n<td style=\"width: 50%;\">1025<\/td>\n<\/tr>\n<tr>\n<th style=\"width: 50%;\" scope=\"row\">Variable manufacturing overhead rate<\/th>\n<td style=\"width: 50%;\">$3<\/td>\n<\/tr>\n<tr>\n<th style=\"width: 50%;\" scope=\"row\">Variable manufacturing overhead<\/th>\n<td style=\"width: 50%;\">$3,075<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>And here is what actually happened:<\/p>\n<table style=\"border-collapse: collapse; width: 100%;\">\n<tbody>\n<tr style=\"height: 15px;\">\n<td style=\"width: 50%; height: 15px;\"><\/td>\n<th style=\"width: 50%; height: 15px;\" scope=\"col\">Total<\/th>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Budgeted direct labor hours<\/th>\n<td style=\"width: 50%; height: 15px;\">1025<\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Variable manufacturing overhead rate<\/th>\n<td style=\"width: 50%; height: 15px;\">$3.25<\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 50%; height: 15px;\" scope=\"row\">Variable manufacturing overhead<\/th>\n<td style=\"width: 50%; height: 15px;\">$3,331.25<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>So you can see, this change has caused an increase in our variable manufacturing overhead. This is a <strong>rate<\/strong> change, so let\u2019s analyze it using what we know. (You can refer back to the diagram on 10.4 if needed)<\/p>\n<ul>\n<li>Actual Quantity of Input at Actual Cost = 1025 \u00d7 $3.25 = $3331.25<\/li>\n<li>Actual Quantity of Input at Standard Cost= 1025 \u00d7 $3.00 = $3075.00<\/li>\n<li>Price Variance = $3331.25 \u2212 $3075.= $256.25 <strong>unfavorable<\/strong> variance. We spent <strong>more<\/strong> than anticipated.<\/li>\n<\/ul>\n<p>So, if the direct labor hours remain the same, our <strong>spending<\/strong>\u00a0variance will be $256.25\u2014<strong>unfavorable<\/strong>. So, a reduction in the variable manufacturing overhead rate would create a <strong>favorable<\/strong> price variance.<\/p>\n<p>So, a <strong>rise<\/strong> in the variable manufacturing overhead rate will cause an\u00a0<strong>unfavorable<\/strong> variance in the price variance. But might that be a good thing? It could, if the increase in price causes a corresponding increase in efficiency!<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_f8460e66-c8b3-4e09-a075-1498e740b078\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/f8460e66-c8b3-4e09-a075-1498e740b078?iframe_resize_id=assessment_practice_id_f8460e66-c8b3-4e09-a075-1498e740b078\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-543\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Variable Manufacturing Rate Variances. <strong>Authored by<\/strong>: Freedom Learning Group. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":62559,"menu_order":16,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Variable Manufacturing Rate Variances\",\"author\":\"Freedom Learning Group\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"868450ab-4cd0-4473-a6af-6594e730389b, 2947feaa-0d2a-43a8-aedb-baeccf6fd248","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-543","chapter","type-chapter","status-publish","hentry"],"part":109,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/543","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/users\/62559"}],"version-history":[{"count":13,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/543\/revisions"}],"predecessor-version":[{"id":4132,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/543\/revisions\/4132"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/parts\/109"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/543\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/media?parent=543"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapter-type?post=543"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/contributor?post=543"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/license?post=543"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}