Ashley Arbogast
November 8, 2024
Managerial Accounting
Milestone 3
1. Direct Materials, direct labor and manufacturing overhead are the 3
basic product costs related to making donuts. The direct materials
consist of the ingredients such as the flour and sugar that are
necessary to make the donuts. Direct labor costs include wages paid
to bakers and other employees involved in the donut making process.
Indirect expenses such as utilities, equipment, cleaning supplies, and
other employees that are not involved in the donut making process
make up the overhead costs. A company’s overhead varies due to the
type of industry they are in and the products they produce. There are
3 types of overhead for a business to consider: fixed costs, variable
costs and semi-variable costs. Fixed costs remain constant over a
period of time and typically consume a large portion of the overhead.
The fixed costs can include rent, insurance premiums and software
subscriptions. The variable overhead may not occur on a routine basis
and the cost of these items may fluctuate, which can make it difficult
to budget properly. Some examples of variable overhead are
equipment maintenance, shipping costs and office/advertising
supplies. Semi-variable overhead costs do occur on a routine basis;
however, the actual cost varies each time. This type of overhead may
be influenced by the same factors as the variable costs. Semi-variable
overhead includes travel expenses, utilities and employee overtime.
2. Standard costs are those that are expected to be paid for by the
company for materials and labor and are established at the beginning
of the company’s fiscal year. Companies may use past standard costs
to determine current standard costs. Variance occurs when there is a
difference between the standard (or expectation) for production and
the actual performance of a company. To understand why the
variance occurred the company must determine the root cause to
ensure better performance outcomes in the future. A variance analysis
enables a company to see the difference between expected costs and
actual costs. This analysis should examine the root cause as to why
there is a difference and where the difference comes from. Once the
root cause is identified, it must be determined if the additional costs or
