Question

Provide enough information for your peers to be able to calculate a company's total, price, and quantity variances. You can focus on labor or materials, whichever you would prefer.

Answer 1

A variance is the difference between the actual output and the standard output. Variance analysis is a technique adopted by companies as means of quality control to ensure that the actual results are not too far from the budgeted results. Variances are computed as Quantiy/efficiency variance and Price variance.

The variances for materials are calculated as follows:-

i.) Total Materials Variance :-

=(Actual Price * Actual quantity) - (Standard price * Standard quantity)

Total Materials variance measures the difference between the standard costs of materials from the production activities and the actual costs of materials from the production activities . The total materials variance is further split into two which is

a.) Direct Materials Price variance:-

This is the difference between the actual price paid for the goods versus the standard price paid for the goods. This is multiplied by the actual quantity used in production. Generally, the purchase manager and the department are ones who are held accountable for the Direct material price variance

Direct Materials price variance = (Actual price - Standard price) * Actual quantity used

Suppose. X bought 10 parts for $20 each. The standard price for 1 part is $19:- Direct material price variance is :-

($20 - $19) * 10 parts = $10 unfavorable

Since the actual price is greater than the standard price, the variance is unfavorable.

b.) Direct Materials Usage/Quantity variance.

This is the difference between the actual quantity used and the standard quantity allowed for the actual output. The formula to calculate the Direct materials quantity variance:-

=(Actual quantity - Standard quantity for actual output) * Standard price pre unit

Suppose Product A requires 2 units of cotton for producing a shirt. The cost of one unit of cotton is $3. The actual results include 175 units of cotton for producing 100 shirts. The Direct materials quantity variance is calculated as:-

=[(175 - 2*100)] * $3

=(175 - 200) * $3

=$25 * 3

=$75

Since the actual quantity used is lesser than the standard quantity allowed, the variance is unfavorable. The Unfavorable variance is $75

Please let me know if you have any further questions via comments and all the best.