Question

Organizations determine standard costs for labor, materials, and overhead. Discuss variances for labor, materials, and overhead. How do these variances differ from the standard costs? How is each computed? Why is calculating variances useful to an organization?

Please help answer: How do these variances differ from the standard costs?

Answer 1

Standard costs are the costs which the organization is expected to incur. Standards have two parts: Standard Price at which materials should be procured and Standard Quantity that is expected to be used. Standard Cost=Standard Price* Standard Quantity. For Labor , the standard price is the standard labor rate and standard quantity is the standard labor hour.For variable overhead standard price is the standard recovery rate and standard quantity is the standard hour. For fixed overhead , the standard cost is the budgeted fixed overhead cost.

Variances are the difference between the standard costs and the actual costs. Actual costs also have two components: Actual price and actual quantity.

Difference in price gives the Price variance for materials and Rate variance for Labor and overhead

Difference in quantity used gives rise to the Materials Quantity Variance and Labor Efficiency Variance.

Direct Material Price Variance =Actual Quantity Used*(Actual Price-Standard Price)

Direct Material Quantity Variance =Standard Price *(Actual Quantity-Standard Quantity)

Direct Labor Rate  Variance =Actual Labor Hours  Used*(Actual Rate-Standard Rate)

Direct Labor  Efficiency  Variance =Standard Rate *(Actual Labor hour-Standard Labor Hour)

Variable Overhead Spending (Rate ) Variance =Actual Labor Hours  Used*(Actual Recovery Rate-Standard Recovery Rate)

Variable Overhead Efficiency  Variance =Standard Recovery Rate *(Actual Labor hour-Standard Labor Hour)

Fixed Overhead Spending Variance =Budgeted Overhead-Actual Overhead

AN example of Calculation of Variances is given below:

		DIRECT MATERIALS VARIANCES
	SQ	Standard Quantity for actual output	9000	(3*3000)
	SP	Standard Price per unit	$12.00
	AQ	Actual Quantity of materials used	8900
	AP	Actual Price per unit paid	$12.10	(121000/10000)
1	AQ*(AP-SP)	Direct Materials Price Variance	$890.00	Unfavorable	(Actual price is higher than Standard Price)
2	SP*(AQ-SQ)	Direct Materials Quantity Variance	$1,200	Favorable	(Actual quantity is less than Standard quantity)
		DIRECT LABOR VARIANCES
	SH	Standard Labor hour for actual output	3000	(1*3000)
	SR	Standard Labor rate per hour	$10.00
	AH	Actual labor hour used	2800
	AR	Actual Labor rate per hour	$10.50
3	AH*(AR-SR)	Direct labor Rate Variance	$1,400	Unfavorable	(Actual Rate is higher than Standard Rate)
4	SR*(AH-SH)	Direct Labor Efficiency   Variance	$2,000	Favorable	(Actual hour is less than Standard hour)
		VARIABLE OVERHEAD VARIANCES
	SH	Standard Labor hour for actual output	3000	(1*3000)
	SR	Standard Overhead rate per hour	$6.00
	AH	Actual labor hour used	2800
	AR	Actual Overhead rate per hour	$6.07	(17000/2800)
5	AH*(AR-SR)	Variable Manufacturing Spending (Price) Variance	$200	Unfavorable	(Actual Rate is higher than Standard Rate)
6	SR*(AH-SH)	Varable Manufacturing Efficiency   Variance	$1,200	Favorable	(Actual hour is less than Standard hour)
		FIXED OVERHEAD VARIANCES
	A	Budgeted Fixed Overhead	$63,000	(3500*18)
	B	Budgeted labor hour	3500
	C=A/B	Budgeted fixed overhead rate	$18
	D	Standard Labor hour for actual output	3000	(1*3000)
	E=C*D	Fixed overhead applied	$54,000	(3000*18)
	A-E	Fixed Manufacturing Volume Variance	$9,000	Unfavorable
	F	Budgeted Fixed Overhead	$63,000
	G	Actual Fixed Overhead	$53,200
	H=F-G	Fixed Manufacturing Spending Variance	$9,800	Favorable