Cost Accounting, Material and Labor Variances - YouTube

Welcome welcome. Cost accounting and performance measurement. We're just continuing on with

fun and exciting stuff. Quick review. Don�t forget to do your homework. Do one question

at a time, check the answer, one question, and check the answer. Make sure you understand

the key concepts. If you need homework help go to the homework help line, right online.

We can help you there. Otherwise, just keep powering through the material. We�re looking

at cost accounting and performance measurement, actually a pretty exciting and interesting

section. You may recall from the previous section we talked about manufacturing costs.

And we said with manufacturing costs, we�ve got direct materials, direct labor and factory

overhead, manufacturing overhead. Materials, labor and overhead. Now, we said material

and labor together are called what? Prime costs. And labor and overhead were called

what? Conversion costs. Good. Now, with materials, those are the materials that become an integral

part of the product. What can go wrong with materials? You either paid too much per pound

or you use too many pounds. Now let�s think about it logically. You paid too much...who

messed up? Purchasing or production? That would be purchasing. If you use too many pounds,

who messed up? Purchasing or production? That would be production. Alright. Direct labor.

With labor, that was the labor directly to convert a raw material to a finished good.

That was the labor that became an integral part of the product. Now what can go wrong

with labor? You pay too much, or you use too many hours, which is efficiency. Now as far

as paying too much, let's see. Is that personnel or production? That would be personnel. What

about efficiency? You use too many hours in the factory. That would be production. Now,

in looking at this, remember, we�ve also got our overhead. What is overhead? All other

factory costs except direct materials, direct labor, indirect materials, indirect labor,

factory insurance, rent, utilities, electricity, air conditioning, depreciation, property tax...everything

else in the factory except materials and labor. With materials and labor, with overhead rather,

what can go wrong? Here�s my little trick. What is four plus three? Even my videographer

goes, �Seven!� Right? S-E-V....spending, efficiency, volume. Spending, efficiency,

volume. And this is four plus three, S-E-V, spending, efficiency. With spending what does

it mean? Well, spending has both fixed and variable. In other words, you spent too much

on fixed overhead, like the rent, you spent too much on variable, like electricity. Efficiency...that

is all variable because it�s like electricity. Volume deals with production volume, production

capacity. This is fixed. So you can see that we�re going to have some fixed and variable

variances here in overhead. These are not too bad. These are ugly. Alright, you might

remember from school, or, �I don't even get this stuff.� Well, hopefully at the

end of lecture it makes a little more sense. So we got materials, labor and overhead. The

whole purpose of this first part of the section is, �Dude,� �What?�, �Dude! Who�s

got my car?� �Dude! What could go wrong?� The purpose of this is to aid in budget process,

pinpoint trouble areas and evaluate performance. It says in your notes in setting goals for

the efficient production of inventory, companies established standards for the components for

the components that determine materials labor and overhead. At the end of the period, these

standards are compared actual with variances in order to figure. So we�re going to compare

actual and standard, standard allowed for actual in some case and we�re going to look

at the differences or variance to see what went wrong. The main thing is you want to

not give the finger, but point the finger good job, bad job, good job, bad job, so we

got to go out here and say if this is good, �Hey purchasing! Good job!� But here�s

the problem: maybe they did a good job in purchasing when they bought cheaper materials,

but maybe they were so cheap that it took us more materials to get the quantity we needed.

So we�ve got to look not only at these but at the total variance as well. Same thing

here. We hired cheaper people, but they're lazy, they don't work as much, so it took

them longer to do it. We have to look at the total variances as well. So as we go through

this variance analysis, we�re trying to evaluate and see what can go wrong and who's

responsible. Who�s responsible? Purchasing production purchasing production. What could

go wrong? You pay too much, you use too many hours. What could go wrong? We spent too much,

we�re less efficient, and our production capacity is down. This one really means that

the factory stood idle for a while, like our...let�s say we can produce 100,000 units and we only

produce 90,000 units. What does that say? It says that we wasted production ability

of 100,000. Our production volume variance our production volume was down. That�s a

problem. Alright. Look at your notes on the first page there.