1. @ 2012, Cengage Learning Performance Evaluation Using Variances from Standard Costs LO 3 – Computing Direct Materials and Direct Labor Variances

2. Direct Materials Variances  The total cost variance for direct materials and direct labor can be separated into the portion of a cost variance that is caused by price (rate) differences and the portion that is caused by quantity (time) differences. LO 3

3. Direct Materials Variances During June, Western Rider reported an unfavorable total direct materials cost variance of $2,650 for the production of 5,000 XL style jeans, as shown in Exhibit 2 and reproduced below. LO 3

4. Direct Materials Variances  The direct materials price variance is the difference between the actual price per unit and the standard price per unit, multiplied by the actual quantity used. LO 3

5. Actual Direct Materials Cost = Actual Price x Actual Quantity Actual Direct Materials Cost = ($5.50 per sq. yard) x (7,300 sq. yards.) Actual Direct Materials Cost = $40,150 Standard Direct Materials Cost = Standard Price x Standard Quantity Standard Direct Materials Cost = ($5.00 per sq. yard) x (7,500 sq. yards.) Standard Direct Materials Cost = $37,500 Actual costs ($40,150) – Standard costs ($37,500) = $2,650 Total Unfavorable Materials Variance LO 3 Direct Materials Variances

6. LO 3 Direct Materials Price Variance Direct Materials Price Variance = (Actual Price – Standard Price) x Actual Quantity Direct Materials Price Variance = ($5.50 - $5.00) x 7,300 sq. yds. Direct Materials Price Variance = $3,650 Western Rider paid $0.50 more per square yard of material than the standard. Unfavorable direct materials price variance

7. Direct Materials Variances  The direct materials quantity variance is the difference between the actual quantity used and the standard quantity at actual production, multiplied by the standard price per unit. LO 3

8. Direct Materials Quantity Variance Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) x Standard Price Direct Materials Quantity Variance = (7,300 sq. yds. – 7,500 sq. yds.) x $5.00 Direct Materials Quantity Variance = – $1,000 Western Rider used 200 square yards less than the standard. Favorable direct materials quantity variance

9. Direct Materials Variance Relationships LO 3 $3,650 U Direct materials price variance Actual quantity x Standard price 7,300 x $5.00 = $36,500 Actual quantity x Actual price 7,300 x $5.50 = $40,150 Standard quantity x Standard price 7,500 x $5.00 = $37,500 – $1,000 F Direct materials quantity variance Actual cost: Standard cost: $40,150 – $37,500 = $2,650 U Total direct materials cost variance

10. Direct Materials Variance Relationships LO 3 Actual quantity x Standard price 7,300 x $5.00 = $36,500 Actual quantity x Actual price 7,300 x $5.50 = $40,150 Standard quantity x Standard price 7,500 x $5.00 = $37,500 Actual cost: Standard cost: $40,150 – $37,500 = $2,650 U Total direct materials cost variance

11. Direct Labor Variances LO 3 During June, Western Rider reported an unfavorable total direct labor cost variance of $2,500 for the production of 5,000 XL style jeans, as shown in Exhibit 2 and reproduced below.

12. Direct Labor Variances LO 3 Actual Direct Labor Cost = Actual Rate per Hour x Actual Time Actual Direct Labor Cost = $10.00 per hr. x 3,850 hrs. Actual Direct Labor Cost = $38,500 Standard Direct Labor Cost = Standard Rate per Hour x Standard Time Standard Direct Labor Cost = $9.00 per hr. x 4,000 hrs. Standard Direct Labor Cost = $36,000 Actual costs ($38,500) – Standard costs ($36,000) = $2,500 Total unfavorable direct labor cost variance

13. Direct Labor Rate Variance  The direct labor rate variance is the difference between the actual rate per hours and the standard rate per hour, multiplied by actual hours spent to make 5,000 pairs of jeans. LO 3

14. Direct Labor Rate Variance LO 3 Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) x Actual Hours Direct Labor Rate Variance = ($10.00 – $9.00) x 3,850 hours Direct Labor Rate Variance = $3,850 The unfavorable variance could have been caused by improper scheduling and use of employees. Unfavorable direct labor rate variance

15. Direct Labor Time Variance  The direct labor time variance is the difference between the actual direct labor hours and the standard direct labor hours to make 5,000 pairs of jeans, multiplied by the standard direct labor rate per hour. LO 3

16. Direct Labor Time Variance LO 3 Direct Labor Time Variance = (Actual Direct Labor Hours - Standard Direct Labor Hours) x Standard Rate per Hour Direct Labor Time Variance =(3,850 hours – 4,000 direct labor hours) x $9.00 Direct Labor Time Variance = – $1,350 If there had been an unfavorable time variance, it might have been caused by a shortage of skilled workers. Favorable direct labor time variance

17. Direct Labor Variance Relationships LO 3 Actual hours x Standard rate 3,850 x $9 = $34,650 Actual hours x Actual rate 3,850 x $10 = $38,500 $3,850 U Direct labor rate variance Standard hours x Standard rate 4,000 x $9 = $36,000 –$1,350 F Direct labor time variance Actual cost:Standard cost: $38,500 – $36,000 = $2,500 U Total direct labor cost variance

18. Direct Labor Variance Relationships LO 3 Actual hours x Standard rate 3,850 x $9 = $34,650 Actual hours x Actual rate 3,850 x $10 = $38,500 Standard hours x Standard rate 4,000 x $9 = $36,000 Actual cost:Standard cost: $38,500 – $36,000 = $2,500 U Total direct labor cost variance