Question

You have been told that some of the variances that are generally calculated are not very useful. Explain the meaning and value of each of these variances. With meaning, this includes what it measures. Min 3 sentences per variance.

Direct materials price variance

Direct labor price variance

Variable manufacturing overhead efficiency variance

Fixed manufacturing overhead volume variance

Answer 1

VARIANCES

DIRECT MATERIAL PRICE VARIANCE

Direct material price variance is the difference between the actual cost of direct material and the standard cost of quantity purchased/ consumed. Such variance calculation and analysis is needed to monitor the costs incurred to produce goods. It is one among the two components of direct total variances. Material price variance is the result of change in actual price of material from what has been set as standard.

value / formula for direct material price variance = [actual quantity purchased * actual rate] - [actual quantity purchased * standard rate ]

DIRECT LABOUR PRICE VARIANCE   

Direct labour hours refered to, the cost of how many hours it takes to produce a product with a set amount of worked hours. Direct labour price/cost/rate variance is the result of difference between actual hourly rate and standard hourly rate, multiplied by actual hours worked. It is also known as spending variance / wage rate variance. Such variance calculations are used to measures the difference between the budgeted hourly rate and the actual rate you pay to the workers , who engage in the direct manufacturing of products.

value/ fomula for calculation = [standard rate - actual rate ] * actual hours

VARIABLE MANUFACTURING OVERHEAD EFFICIENCY VARIANCE

A variance arising in a standard costing system, which indicates the difference between standard amount of manufacturing variable overhead for the goods produced and the variable manufacturing overhead on actual activity, is termed as variable manufacturing overhead efficiency variance. It is the measure of impact on the standard variable overheads due to the changes in standard number of manufacturing hours and the actual hours worked.

value/formula for calculation = [ actual hours worked * standard rate ] - [ standard hours allowed * standard rate ]

FIXED MANUFACTURING OVERHEAD VOLUME VARIANCE

It is the difference between fixed overhead applied to produced units of goods during a given accounting period and the total fixed overheads budgeted for the period. Fixed overhead volume variance will arise, when there is an change in the actual production volume from budgeted volume. It measures whether or not fixed production resources have been efficiently utilized.

value/formula for calculation = budgeted fixed overhead - fixed overhead applied.

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