cost variences — OpenTuition Forums

MMammuna9y ago

hi when calculating total material cost variance do you just consider the total budgeted material cost as compared to total actual cost incurred and ignore the number of units produced? say the budgeted number of units were to be 700 costing $2625 but actual number of units produced were 720 costing $2628 whats the total budgeted cost variance ? is it (2625-2628) =$3 (Adverse) or is it (2625/700)-(2628/720) x 720= 0.1 x 720 = 72(favourable) also is the method same if the actual production was lower than that budgeted? would we still consider number of units produced or just the cost incurred? any help would be appreciated thanks so much

kengarrettTutor9y ago#1

For variable costs (material, labour and variable overheads) you must always flex the budget. So, given that 720 units were produced, we want to see how well they did achieving that output. The original 700 is irrelevant. Flexed budget cost = 2625 x 720/700 = 2,700 Total cost variance is therefore 2,700 (flexed budget) - 2628 (actual cost) = 72 Favourable. A similar process if production is lower than expected.

MMammuna9y ago#2

thanks very much for your help. i am still a little bit confused . because i thought that flexed budget -actual cost= variance due to price/usage or efficiency? and total material/labour/cost variance = budget-actual just confused as thats what is mentioned in the book yet some example flex the budget while some do not.

kengarrettTutor9y ago#3

Actual cost for materials - Flexed budget cost for materials = Total material cost variance. The total material cost variance is then broken down to material price variance and material usage variance. This should always be the case.

MMammuna9y ago#4

thank you

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