Question

Explain direct material variance and labor variance. Please give a good explanation and     example to support your answer.

Answer 1

solution:

direct material variance:

The actual cost less the actual quantity at standard price equals the direct materials price variance. The difference between the actual quantity at standard price and the standard cost is the direct materialsquantity variance. The total of both variances equals the total direct materials variance.

The immediate material change is the contrast between the standard expense of materials coming about because of creation exercises and the genuine expenses brought about. The immediate material difference is included two different fluctuations, which are:

Purchase price variance:
This is the distinction between the standard and genuine expense per unit of the immediate materials acquired, increased by the standard number of units anticipated that would be utilized in the generation procedure. This fluctuation is the obligation of the buying division.

Material yield variance:
This is the contrast between the standard and real number of units utilized in the generation procedure, duplicated by the standard expense per unit. This difference is the obligation of the generation office.

It is standard to compute and report these two fluctuations independently, with the goal that administration can decide whether changes are caused by buying issues or assembling issues.

The immediate material difference is generally charged to the expense of products sold in the period caused.

Example of the Direct Material Variance

ABC International produces 1,000 green widgets and records an unfavorable direct material variance of $700. Further investigation reveals that the cost to purchase the various components was $3.50 per unit, versus a budgeted amount of $4.00 per unit. This represents a favorable purchase price variance of $500, which is calculated as:

($3.50 actual cost - $4.00 standard cost) x 1,000 standard units

In addition, ABC finds that the purchase price was so low because the raw materials were of unusually low quality, resulting in a great deal of scrap during the manufacturing process. As a result, the company used 1,300 units of raw material to produce 1,000 finished units. This represents an unfavorable material yield variance of $1,200, which is calculated as:

(1,300 actual units - 1,000 standard units) x $4.00 standard cost

Thus, by delving into the two types of variances, it is apparent that the purchasing manager of ABC is at fault; he saved money by purchasing raw materials of excessively low quality, and it resulted in a large unfavorable variance when units were scrapped during production.

labor variance definition:

Labor variance refers to a situation in which actual costs of labor differ from projected or budgeted laborcosts. This concept is most commonly applied in manufacturing environments.

A work fluctuation emerges when the genuine cost related with a work action shifts (either better or more regrettable) from the normal sum. The normal sum is commonly a planned or standard sum. The work fluctuation idea is most usually utilized in the generation region, where it is known as an immediate work difference. This change can be subdivided into two extra differences, which are:

Labor efficiency variance:

Measures the contrast among genuine and expected hours worked, duplicated by the standard hourly rate.

Labor rate variance:

Measures the contrast between the genuine and expected expense every hour, duplicated by the real hours acquired.

The work fluctuation can be utilized in any piece of a business, insofar as there is some remuneration cost to be contrasted with a standard sum. It can likewise incorporate a scope of costs, starting with simply the base remuneration paid, and conceivably additionally including finance charges, rewards, the expense of stock concedes, and even advantages paid.

The utilization of the work change is faulty in a generation domain, for two reasons:

Different expenses more often than not involve by a long shot the biggest piece of assembling costs, rendering work unimportant.

Coordinate work costs have turned out to be significantly not exactly factor, and in this manner less subject to change than may be normal, which abandons one to ask why the difference is being determined for what is basically a settled expense.

The work difference is especially presume when the financial plan or standard whereupon it is based has no likeness to real expenses being caused. For instance, the building office may set work models at the hypothetically feasible dimension, which implies that genuine outcomes will never be as great, bringing about a progressing arrangement of vast horrible changes. On the other hand, a supervisor may utilize political strain to falsely build work guidelines; this makes it simple to enhance the benchmarks, bringing about unendingly ideal fluctuations that misleadingly improve the execution of the director.