Variance Analysis: Direct Labor and Direct Materials ACG 4361 5-3 Prepared by Diane Tanner University of North Florida 5-3

Labor Variances Three labor variances Unfavorable Variance Labor price (or rate) variance = LPV or LRV Labor quantity (or efficiency) variance = LQV or LEV Labor flexible budget variance Also called the total labor variance Standard cost system  Inputs are recorded at standard, Resulting in the variances isolated in the accounting records Unfavorable Variance  actual cost > standard Favorable Variance  actual cost < standard

Labor Variance Analysis – Level 3 A S S P Q × × × A A S Actual Price × Actual Quantity Standard Price × Actual Quantity Standard Price × Standard Quantity Allowed Labor Price (Rate) Variance Labor Quantity (Efficiency) Variance Labor Flexible Budget Variance

Labor Variances Example Visor Inc. has the following direct labor standard to manufacture one visor: 1.5 standard hours per visor at $6.00 per direct labor hour Last month 1,550 direct labor hours were worked at a total labor cost of $9,610 to make 1,000 visors. $9,610  1,550 hrs. = $6.20/hr P A $6.20 S $6.00 S $6.00 × × × Q A 1,550 hrs. A 1,550 hrs S 1.5*1,000 hrs = $9,610 = $9,300 = $9,000 LRV = $310 U LEV = $300 U Labor Flexible Budget Variance = $610 U

Interpretation of Labor Variances Type of Variance Variance Occurs When Unfavorable labor rate variance  Actual labor rate per hour exceeds the standard labor rate per hour Favorable labor rate variance Actual labor rate per hour is less than standard labor rate per hour Unfavorable labor efficiency variance Actual labor hours used exceeds the allowed/standard labor hours at the activity level achieved   Favorable labor efficiency variance Actual labor hours used is less than allowed/standard labor hours at the activity level achieved

Responsibility for Labor Variances Managers that are able to control particular costs are held responsible for those costs. I am responsible for the labor rate and labor efficiency variances because I control these costs. Production supervisors make work assignments, monitor the efficiency of employees, authorize pay raises, and terminate employees. Production Supervisor

Material Variances Three material variances Unfavorable Variance Material price variance = MPV Isolated at the point of purchase Material quantity variance = MQV Isolated when used in production Material flexible budget variance Also called the total material variance Standard cost system  Inputs are recorded at standard, Resulting in the variances isolated in the accounting records Unfavorable Variance  actual cost > standard Favorable Variance  actual cost < standard

Material Variance Analysis – Level 4 A S S S P Q × × × × A A A S p p u Actual Price × Actual Quantity Purchased Standard Price × Actual Quantity Purchased Standard Price × Actual Quantity Used Standard Price × Standard Quantity Allowed Materials Price Variance Materials Quantity Variance Materials Flexible Budget Variance

Material Variances Example Turtle Town has the following direct material standard for its turtle floats: 0.2 lb. of resin per float at $5.00 per lb. Resin purchased: 440 pounds at $4.85 per pound Resin used: 390 pounds to make 1,980 floats P A $4.85 . S $5.00 S $5.00 S $5.00 × × × × Q Ap 440 lbs Ap 440 lbs Au 390 lbs S 0.2 x 1980 = $2,134 = $2,200 = $1,950 = $1,980 MPV = $66 F MQV = $30 F Materials Flexible Budget Variance = $96 F

Isolation of Material Variances Price Variance Isolated at the purchase date Computed on the quantity purchased This is the earliest point in time in which the variance can be determined Quantity Variance Isolated at the date used in production Computed on the quantity used We need the variance as early as possible to make product pricing or quantity changes. As a purchasing manager, I need the price variance sooner so that I can better identify purchasing problems.

Interpretation of Material Variances Type of Variance Variance Occurs When Unfavorable material price variance  Actual material price per material denomination quantity exceeds the standard material price Favorable material price variance Actual material price per material denomination quantity is less than standard material quantity Unfavorable material quantity variance Actual material quantity used exceeds the allowed/standard material quantity allowed at the activity level achieved Favorable material quantity variance Actual material quantity used is less than allowed/standard material quantity allowed at the activity level achieved

Material Variance Responsibility Conflicts You used too much material because of poorly trained workers and shoddy equipment maintenance, and you are a lousy scheduler! You make me overnight the material making it cost more, causing unfavorable price variances. I am not responsible for this unfavorable material quantity variance. You purchased cheap material, so my people had to use more of it. Production Manager Purchasing Manager

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