@ 2012, Cengage Learning

Performance Evaluation Using Variances from Standard Costs

LO 3 – Computing Direct Materials and Direct Labor Variances

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 3LO 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 3LO 3

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 3LO 3

Actual Direct Materials Cost = Actual Price x Actual QuantityActual 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 3LO 3

Direct Materials Variances

LO 3LO 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.

Western Rider paid $0.50 more per square yard of material than the standard.

Unfavorable direct materials price variance

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 3LO 3

LO 3LO 3Direct 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.

Western Rider used 200 square yards less than the standard.

Favorable direct materials quantity variance

Direct Materials Variance Relationships

LO 3LO 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

Direct Materials Variance Relationships

LO 3LO 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

Direct Labor VariancesLO 3LO 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.

Direct Labor VariancesLO 3LO 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 = $38,500Standard 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 = $36,000Actual costs ($38,500) – Standard costs ($36,000) = $2,500

Total unfavorable direct labor cost variance

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 3LO 3

Direct Labor Rate VarianceLO 3LO 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.

The unfavorable variance could have been caused by improper scheduling and use of employees.

Unfavorable direct labor rate variance

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 3LO 3

Direct Labor Time VarianceLO 3LO 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.

If there had been an unfavorable time variance, it might have been caused by a shortage of skilled workers.

Favorable direct labor time variance

Direct Labor Variance Relationships

LO 3LO 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

Direct Labor Variance Relationships

LO 3LO 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