Question

Compute materials and labour variances, and explain how they are used for control.

Answer 1

Answer : Material & Labour Variances can be computed with the following formula,

A) Material Variance:

Abbreviations used in the formula,

SQ= Standard Quantity i.e Expected consumption for actual output

AQ= Actual Quantity of Material consumed

RAQ= Revised Actual Quantity i.e Actual Quantity rewritten in Standard proportion

SP= Standard Price per unit of material consumed

AP= Actual price per unit of Material consumed

PQ= Purchase Quantity

Sr No	Material Variances	Formula
1	Material Cost Variance	SQ X SP-AQ X AP
2	Material Usage Variance	SQ X SP -AQ X SP
3	Material Price Variance	AQ X SP- AQ X AP
4	Material Mix Variance	RAQ X SP -AQ X SP
5	Material Yield Variance	SQ X SP- RAQ X SP
6	Material Purchase Price Variance	PQ X SP-PQ X AP

b) Labour Variances

Abbreviations used in the formula,

SR= Standard rate per Labour hour

AR= Actual rate per Labour Hour

SH= Standard Hours

AH= Actual Hours

Net AH= Total AH - Idle Time

RAH= Revised Actual hours rewritten in standard proportion

Sr No	Labour Variances	Formula
1	Labour Cost Variance	SH X SR- AH X AR
2	Labour Efficiency Variance	SH X SR-AH X SR
3	Labour Rate Variance	AH X SR -AH X AR
4	Labour Sub efficiency Variance	SH X SR- RAH X SR
5	Labour Mix Variance	RAH X SR- AH X SR
6	Labour Idle Time Variance	Net AH X SR- Total AH X SR
7	Labour Net Efficiency Variance	SH X SR-Net AH XSR

C ) Use of Variances for Control

Use of Material Variance Analysis for Control: Control can be gained over the following ,

1. Purchasing anticipated quantity of Raw material
2. Buying standard quality of Raw material
3. Timely availment of cash discount or incentives
4. Availment of Trade discount on Bulk purchases
5. Gain in Price negotiation or price fixation
6. Timely & Right decision on maintainng stock of raw material or bulk purchases of Raw materials in the event of changes in price,governement policy,strike,lockdown etc
7. Elimination of substandard or defective materials
8. Proper use or proper handling of Raw materials
9. Control over wastages,pilferage,& careless use of materials at the store
10. Product inspection & rectification if required
11. Timely & effective decision making
12. Cost control & cost & waste reduction

Use of labour Variance Analysis for Control: Control can be gained over the following ,

1. Control over excessive overtime by Labourer & extra payment of wages to Laboureres
2. Control over use of Right person for the right job
3. Control over use of wrong type of Labour for the job
4. Control over special allowances/incentives or increments
5. Control over avaoidable Idle time/Reducing Idle Time
6. Control over use of sub standard worker for the work
7. Control over mainatainance / improvements in quality standards or material specifications
8. Control over incomeptent supervision of work & poor working conditions

Please feel free to reach or comment back if you need further clarity or something is missing.