Accounting for Management Decision Making
Variance Analysis
| Week 4 Variance Template | ||||||||
| a) Price variance = (actual price – standard price) times quantity bought | ||||||||
| Actual price | Standard price | Quantity bought | Price variance | Favorable or Unfavorable | ||||
| Plastic tubing | 3.65 | 3.6 | 4010 | 200.5 | Unfavorable | |||
| Fabric | 5.26 | 5.25 | 3550 | 35.5 | Unfavorable | |||
| Padding | 3.8 | 3.75 | 1600 | 80 | Unfavorable | |||
| b) Wage rate variance = (Actual wage rate – standard wage rate) times actual hours | ||||||||
| Actual wage rate | Standard wage rate | Actual hours | Wage rate variance | Favorable or Unfavorable | ||||
| Direct labor | 16 | 16 | 900 | 0 | Unfavorable | |||
| c)Total price variance | 28.71 | 28.6 | 10060 | 316 | Unfavorable | |||
| d) Quantity variance = | ||||||||
| (actual quantity used in production – standard quantity used in production) times the standard price | ||||||||
| Actual Quantity | Standard Quantity | Standard Price | Quantity variance | Favorable or Unfavorable | ||||
| Plastic tubing | 4010 | 8 | 3.6 | 14407.2 | Unfavorable | |||
| Fabric | 3550 | 7 | 5.25 | 18600.75 | Unfavorable | |||
| Padding | 1600 | 3 | 3.75 | 5988.75 | Unfavorable | |||
| e) Labor efficiency variance = (actual hours – standard hours) times standard wage | ||||||||
| Actual hours | Standard hours | Standard wage | Efficiency variance | Favorable or Unfavorable | ||||
| Direct labor | 900 | 2 | 16 | 14368 | unfavorable | |||
| f) Total quantity variance | 53364.7 | Unfavorable | ||||||
| TOTAL VARIANCES | ||||||||
| Plastic tubing | 14,608 | Unfavorable | ||||||
| Fabric | 18,636 | Unfavorable | ||||||
| Padding | 6,069 | Unfavorable | ||||||
| Direct labor | 14,368 | Unfavorable | ||||||
| TOTAL | 53,681 | Unfavorable | ||||||
The price variance is one of the terms used in accounting to explain the distinction between the expected cost of a commodity and the actual cost when the purchase is being made. In most instances, the commodity’s price will be affected by the amount of quantity that has been ordered, and the time of the purchase needs to be considered (Davis and Davis, 2017). More so, price variance is obtained by subtracting the standard unit cost from the actual unit cost and multiplying the outcomes by the actual quantity that has been bought. The price variance for plastic tubing, fabric, and padding are 200.5, 35.5, and 80, respectively. Price variance in most instances is caused by a fluctuation in the market-driven forces, such as an adjustment in the price of commodities.
Wage rate variance is the difference between the standards cost that has been used in the actual production and the actual cost that has been incurred. The duration represented by hours is a critical factor in determining the wage rate variance (United States Department of Homeland Security, n.p). While using direct labor as the point of reference, the wage rate variance from the analysis is zero. It indicates a lack of a difference between the hours used, standard costing, and the actual labor that was applied. Therefore, it is unfavorable since there is no variation. Wage rate variance might be due to an incorrect standard. For instance, the standard might not reflect the new changes that have been implemented.
Quantity variance is the difference between what is expected to be used and what has been applied in reality (Zimmerman, 2020). If the actual units are greater than those standards, the variance will be unfavorable. From the computation, the quantity variance of plastic tubing, fabric, and padding are 14407.2, 18600.75, and 5988.75, respectively. All of the variances are favorable based on the rule of thumb. Quantity variance might be due to purchasing the department ordering significantly low-quality materials. In the process, most of the materials are scraped off during production.
Labor efficiency variance is the distinction between the actual number of direct labor hours used and the values that were expected to be used based on the approximation in the budget. The company’s evaluation provides a labor efficiency variance of 14368, which is unfavorable. A key possible cause of the variation in the labor is hiring employees with soft skills than what has been depicted in the standards values.
One of the remedies that can be used to address the variances is to ensure that the employees hired to assist with the production have the needed skills and knowledge (Smith, 2010). There will be a reduction in the labor hours and minor variation between the standards and actual. The second solution that will be effective and efficient is to vary out forecasting in the budget. The main aim will be to analyze the expected changes in price and quantity in the marketplace. Therefore, the values placed in the standard will not have a considerable gap with reducing the existing variance.
Understanding variance positively impacts managerial decisions since it is possible to make choices that will be more effective. For instance, the management team can picture the distinction between what has been approximated and the reality. In the process, it will be easy to create a contingency play to act as a mitigation strategy towards the variance.
Transfer Pricing
| Week 4 Assignment | |||
| Full Cost | Variable Cost | ||
| Alpha Division Taxes: | |||
| Transfer Price | 53789 | 53681 | |
| Less (subtract) Cost | 300 | 300 | |
| Taxable Income | 53489 | 53381 | |
| Taxes (or refund) | 35% | 35% | |
| Beta Division Taxes: | |||
| Sales Price | 1050 | 1050 | |
| Less (subtract) Transfer Price | 53789 | 53681 | |
| Taxable Income | -52739 | -52631 | |
| Income Taxes | 40% | 40% | |
| Import Duty | 10% | 10% | |
| Taxes (or refund) | 0.5 | 0.5 | |
| Total Taxes | 85% | 85% |
Complete cost transfer pricing methods or the entire cost approach takes advantage of the total cost of production per unit. They include direct labor, materials, and factory overhead. While using the design, the selling division can’t realize the profits of gains on the goods that have been transferred. Therefore, the primary and underlying agenda behind using the approach is to cover the cost and obtain the pre-determined percentage of profit. The percentages added to the costs will represent the margins or the markups. From the calculation using the complete cost transfer pricing method, the transfer price is much higher, leading to a negative taxable income. It is clear that the division is not gaining, and there is a high chance of reducing revenue. Also, the taxes are relatively moderate but still not favorable for the operation and management of the division effectively and efficiently.
Variable cost transfer pricing methods are the opposite of the comprehensive cost framework. The design takes advantage of the variable costs in determining the pricing of the commodities. The reliability and application of the variable cost transfer pricing methods are vital when the selling division operates below capacity. The manager in charge of the selling division will, in most instances, not appreciate the methods since there will be no gains or profits to the division. Therefore, only the variable production costs are the ones that will be transferred. From the evaluation, the variable transfer cost is much lower than anticipated. It is a good sign, but the income tax is still negative, with relative taxes making it equally less favorable.
The total cost transfer pricing methods are the more suitable of the two approaches. That is because the alternative does not result in any profits for the division (Kierulff, 2010). Therefore, when applied and used in the decision-making process by the manager, it might not be very accurate, leading to outcomes that are not anticipated. The transfer will not be effective as expected. So, the former will lead to much better outcomes than the latter.
A better understanding of transfer pricing is crucial in impacting managerial decision-making since it will be possible to account for the various transactions of similar entities. In the process, it will be easy to realize the profits and losses of each element (Bhandari, 2012). More so, there will be accurate and fair reporting on the transaction that has taken place in the various entities, and even a recording in the books of accounts will be more accurate. Such an understanding is essential for a company since it prevents the issue of double taxation.
References
Bhandari, S. (2012). Discounted Payback Period – A Viable Complement to Net Present Value for Projects with Conventional Cash Flows. The Journal of Cost Analysis, 7(1).
Kierulff, H. (2010). MIRR: A Better Measure. Business Horizons, 51(4), 321-329.
Smith, P. (2010) Performance Indicators and Outcomes in the Public Sector. Journal of Public Money and Management, 15(4), 13–16.
United States Department of Homeland Security. (n.d.). Budget – in – Brief: Fiscal Year 2017. DHS. Retrieved from https://www.dhs.gov/sites/default/files/publications/FY2017BIB.pdf. Accessed 21 July 2021.
Davis, C. E., & Davis, E. (2017). Managerial accounting (3rd ed.). Wiley.
Zimmerman, J. L. (2020). Accounting for decision making and control (10th ed.). McGraw-Hill/Irwin.
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