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22-- Traditional Variance Calculations for Monitoring Cost and Efficiency, Part 1 - YouTube
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[Music]
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I'm Larry Walter this is principles of
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accounting dot-com chapter 22 and in
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this chapter we're considering tools for
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enterprise performance evaluation now
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turning our attention to the examination
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of variances I'm going to split this
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module into two separate videos the
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first of these will deal with variance
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calculations related to material and
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labor now remember that standard costs
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are compared to actual cost and
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deviations between those are termed
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variances favorable variances result
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when actual cost are less than standard
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cost and vice-versa
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these variance analyses can be conducted
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for material labor and overhead
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components when total costs differ from
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total standard costs management should
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perform more analysis to determine the
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root cause of the variances the overall
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framework for considering variance
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analysis is actually quite simple
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if actual costs are less than standard
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costs we say we have a favorable
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variance and conversely if actual costs
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are greater than standard cost we have
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an unfavorable variance but variance
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analysis digs deeper than this it's not
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sufficient to simply say we spent more
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or less than standard we need to
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determine the causes for that difference
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looking first at direct material
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variances the total variance compares an
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actual direct material costs for the
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standard direct material cost but can be
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further divided into a materials price
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variance which is the difference between
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the standard price for materials
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purchased and the actual amount paid for
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those materials by formula standard
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price minus actual price that's the per
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unit difference that we're paying times
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the actual quantity we purchased and
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used would give us the materials price
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variance whereas the materials quantity
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variance speaks to the usage it compares
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the standard quantity of materials that
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should have been used to produce the
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actual quantity of output and it
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measures the difference at the standard
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price by formula standard quantity that
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should have been used minus the actual
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quantity that was used times the
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standard price per unit gives us the
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material Kwan
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this next illustration will further
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demonstrate this point the actual cost
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is the actual quantity times the actual
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price the standard cost is the standard
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quantity times the standard price the
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difference between those two is the
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total materials variance but we can
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further divide this in terms of looking
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at the price variance and quantity
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variance the difference between the
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actual cost and the actual use times the
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standard price gives us the price
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variance and here at the top of the
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screen I'm repeating that calculation
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standard price - actual price times
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actual quantity the quantity variance
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compares the actual use at standard
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price to the standard cost on other
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words standard quantity - actual
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quantity times the standard price let's
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operationalize these formulas with an
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example this example is exactly like in
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your textbook for blue rail
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manufacturing blue rail manufacturers a
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fence or railing section that requires
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steel tubing or steel pipe to produce
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and for the period in question blue rail
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produced 3400 units of output now each
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unit about that should have required one
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and a quarter pieces of material in
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other words we should have used four
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thousand two hundred and fifty pieces of
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pipe and each piece of pipe had a
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standard price of $80 per unit so the
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standard cost of materials we should
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have used four thousand two hundred and
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fifty pieces of pipe and it should have
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cost eighty dollars per piece that's a
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total of three hundred and forty
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thousand dollars as the standard cost of
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our materials compare that to the actual
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we actually used four thousand one
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hundred pieces of pipe but we paid
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ninety dollars per piece saw our actual
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cost was three hundred sixty nine
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thousand if you compare simply the
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actual expenditure of three sixty nine
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to the standard cost you can see that we
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would have a twenty nine thousand
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unfavorable variance we spent more than
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we anticipated but breaking it down
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further we divided into the materials
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price variance we saw that we paid
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ninety dollars when we anticipated or
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had a standard price of $80 so we paid
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ten dollars per piece of pipe more than
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we should have and we used 4,100 pieces
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of pipe so on the one hand we have a
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forty one
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and dollar unfavorable material price
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variance we're paying more than we
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should have but we use less we used
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forty 100 pieces of pipe when the
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standard was four thousand to fifty
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times the standard price per unit of $80
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gave us a $12,000 favorable material
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quantity variance this reviews the
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illustration in the bubble in the top
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left we actually spent three hundred
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sixty nine thousand compared to the
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three hundred and forty thousand
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standard cost twenty nine thousand total
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material variance unfavorable we've
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broken that down between the material
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price variance and a material quantity
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variance these variances require journal
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entries variance amounts are debited for
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unfavorable outcomes and credited for
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favorable outcomes so debits are a bad
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thing in this case credits are a good
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thing raw material inventory should only
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carry the standard of price of material
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and work in process should reflect the
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standard cost of the standard quantity
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that should be used let's see how this
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works for blue rail the material
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purchased we're going to record into the
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inventory account at the standard cost
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of $80 a unit or three hundred and
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twenty eight thousand total whereas the
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working process we're going to debit for
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three hundred forty thousand for the
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standard cost that went into production
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this next illustration will probably
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clarify the effects of these entries the
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green box material we're going to credit
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the accounts payable for the actual
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amount we spent we're going to debit
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direct materials for the standard cost
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and the forty one thousand unfavorable
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variance is debited to a material price
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variance account then when we charge the
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material to work in process we debit
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work in process for the standard cost of
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three forty even though there was only
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three hundred and twenty eight thousand
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and the raw material account the other
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twelve thousand is our favorable
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quantity variance we're maintaining our
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accounting for our inventory and our
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working process at standard costs the
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differences are being thrown off into
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favorable or unfavorable variance
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accounts as shown direct labor has a
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very similar model the total variance is
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found by comparing actual labor cost to
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standard direct labor cost we break this
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down to a labor right variance which
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compares the standard right for labor
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times the actual right for the labor and
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we multiply that times the actual hours
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worked and then our labor efficiency
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variance looks to the number of hours
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were used the standard hours that should
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have been used compared to the actual
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hours times the standard right so this
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is really very much almost identical to
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the material price variance in terms of
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the setup once you've conquered the
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materials variance formulas and
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calculations you've fairly well
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conquered the labor calculations as well
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here's the framework the actual cost for
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labor the actual hours work times the
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actual rate compared to the standard
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cost the standard hours that should have
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been used times the standard right the
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difference is the total variance which
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we can break down between the right
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variance and the efficiency variance if
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we look at actual hours times standard
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right and compare that to the actual
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cost we'll get our right variance it's
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simply the difference in the hourly rate
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times the actual hours work the
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efficiency variance compares the
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standard hours versus the actual hours
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times the standard right again the sum
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of those two variances equals the total
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variance so let's see how this is going
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to work for blue rail here blue rail
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produced 3400 sections of output they
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should have used three hours per section
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of welding time so our standard hour
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should have been ten thousand two
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hundred hours and our standard rate was
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$18 an hour our standard cost of labor
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in other words should have been one
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eighty three six but down below you can
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see we actually spent less than that
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only a hundred and seventy five thousand
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dollars so if we break this out between
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the two variances the labor rate
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variance is a very favorable 50 thousand
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dollars that's the $4 an hour difference
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between standard and actual labor rate
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times the 12,500 hours actually worked
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the efficiency was terrible however but
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we use 12,500 hours instead of the
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standard ten thousand two hundred times
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the standard rate gave us an unfavorable
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labor efficiency variance of forty one
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thousand four hundred as it turns out if
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you review the facts in your book blue
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rail hired inexperienced laborer and was
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able to pay them less however they
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appeared to be somewhat inefficient they
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took more hours to do what was necessary
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so this reviews that then we've got the
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actual cost was 175 the standard cost
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was 183 six our total variance eighty
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six hundred favorable divided between
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the right variance and the efficiency
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variance and so here's the journal entry
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for the labor rate variances on debiting
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working process for the standard cost of
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183 six and
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wages payable for the actual expenditure
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of 175 you see I've spent less than I
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anticipated or less than was standard
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those differences are charge of the
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respective unfavorable debit and
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favorable credit variance accounts
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related to efficiency and rate variances
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and so this is a very comprehensive
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accounting model it fleshes out it
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actually pushes into the general ledger
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those components that management would
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want to monitor to determine variances
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from standard and the cause of those and
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in some cases take necessary corrective
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actions
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