Cost Analysis and Deviations in Manufacturing: A Comprehensive Guide
1. Standard Unit Cost Calculation
Product X Cost Breakdown
The standard unit cost of Product X is calculated by dividing the cost of sales by the number of units sold. In this case, the standard unit cost is €34.00 (510,000 / 15,000).
Material (MP) Cost
- Technical Standard: 7 kg per unit (105,000 kg / 15,000 units)
- Economic Standard: €2 per kg
- Standard Unit Cost: €14 per unit (7 kg/unit * €2/kg)
- MP Budget: €210,000 (15,000 units * €14/unit)
Direct Labor (MOD) Cost
- Technical Standard: 3 hours per unit
- Total Hours: 45,000 hours for 15,000 units
- Economic Standard: €5 per hour (€225,000 / 45,000 hours)
- Standard Unit Cost: €15 per unit (3 hours/unit * €5/hour)
- MOD Budget: €225,000 (15,000 units * €15/unit)
Indirect Manufacturing Costs (CGF)
- Total Indirect Costs: €75,000 (510,000 – 210,000 – 225,000)
- Fixed Costs: 60% of total indirect costs
- Variable Costs: 40% of total indirect costs
- Technical Standard: 2 machine hours per unit for 15,000 units (30,000 machine hours)
- Economic Standard (Fixed): €1.5 per machine hour (€45,000 / 30,000 hours)
- Economic Standard (Variable): €1 per machine hour (€30,000 / 30,000 hours)
2. Material and Labor Cost Deviations
Material Cost Deviations
Technical Deviation (DT)
- DT = ps * (QS – QR)
- ps: Expected price per kg
- QS: Quantity of MP that should have been consumed
- QR: Actual quantity consumed
- DT = 2 * (93,600 – 105,000) = -€5,200 (unfavorable)
Possible causes: The quality of the MP was worse than expected, leading to higher consumption.
Economic Deviation (DE)
- DE = QR * (ps – pr)
- QR: Actual quantity purchased
- pr: Actual purchase price
- ps: Planned purchase price
- DE = 93,600 * (2 – 2.1) = -€9,360 (unfavorable)
Possible causes: Increase in supplier prices or higher transportation costs.
Overall Deviation (DG)
- DG = DT + DE = -€14,560 (unfavorable)
Direct Labor Cost Deviations
Technical Deviation (DT)
- DT = ts * (hs – hr)
- ts: Expected price per man-hour
- hr: Total actual hours worked
- hs: Man-hours that should have been worked
- DT = 5 * (39,000 – 41,600) = -€13,000 (unfavorable)
Possible causes: Lower quality MP requiring more time, or less skilled workers hired.
Economic Deviation (DE)
- DE = hr * (ps – pr)
- hr: Hours worked
- pr: Actual price
- ps: Expected price for time
- DE = 41,600 * (5 – 4.9) = €4,160 (favorable)
Possible cause: Less qualified workers hired at a lower wage rate.
Overall Deviation (DG)
- DG = (hs * ts) – (hr * pr) = 39,000 * 5 – 203,840 = -€8,840 (unfavorable)
3. Indirect Manufacturing Cost Deviations
Budget Deviation (DB)
- DB = (TSV – TRV) * HR + (FP – FR)
- TSV: Standard economic coefficient for variable CGF
- TRV: Real economic coefficient for variable CGF
- HR: Units of work (actual machine hours)
- FP: Budgeted fixed costs
- FR: Actual fixed costs
- DB = (1 – 0.9) * 28,600 + (45,000 – 48,620) = -€760 (unfavorable)
The budget deviation indicates that the actual indirect manufacturing costs were higher than expected due to the difference in fixed costs.
Activity Deviation (DA)
- DA = (FP / HP) * (HR – HP)
- FP: Budgeted fixed costs
- HP: Total budgeted units of work (machine hours)
- HR: Actual total units of work (machine hours)
- DA = (45,000 / 30,000) * (28,600 – 30,000) = -€2,100 (unfavorable)
The activity deviation suggests that the company is underutilizing its resources (subactivity) as it has only used 28,600 machine hours out of the normal capacity of 30,000 machine hours.
Performance or Efficiency Deviation (DR)
- DR = TS * (PR * HS – HR)
- TS: Total standard cost per hour (TSV + TSF)
- PR: Real production (actual machine hours)
- HS: Standard quantity of hours required per unit
- HR: Actual machine hours
- DR = 2.5 * (13,000 * 2 – 28,600) = -€6,500 (unfavorable)
The performance deviation indicates that more units of work (labor hours) were used than planned.
Overall Deviation (DG)
- DG = DB + DA + DR = -€9,360 (unfavorable)
5. Actual Analytical Result and Income Statement
To analyze the actual outcome using a standard cost system, we need to adjust the income statement for activity deviations and compare it to the actual results.
Flexible Budget Income Statement (13,000 units)
- Sales: €546,000 (13,000 units * €34/unit)
- Cost of Sales: €442,000
- Gross Margin: €104,000
- Administrative Costs: €9,450
- Operating Income (before deviations): €94,550
- Material Deviation: -€14,560
- Labor Deviation: -€8,840
- CGF Deviation: -€9,360
- Actual Operating Income: €61,790
The analysis shows that if the standard unit cost had been maintained, the operating income for 13,000 units would have been €94,550. However, due to unfavorable deviations, the actual operating income was €61,790.