Question

1) Will waste on the production line result in a materials price variance?

2) Are labor rate variances out of management's control?

3) If your employees take longer to complete a job than expected will you have an unfavorable labor rate variance?

4) Should management investigate ALL variances?

Answer 1

1. Material Cost Variance arises mainly because of either difference in material price from the standard price or difference in material consumption from standard consumption. Material cost variance mainly classified into two.

a. Materal Price Variance and,

b. Material Usage Variance

Material Price Variance is the difference between standard cost of materials used and the actual cost of materials. Mathematically it is written as:

Standard Quantity x Standard Price - Actual Quantity x Actual Price.

Hence we can say that waste on the line of production will not result a Price variance, However the same will result a Material Usage Variance, it is the variance in material cost due to usage or consumption of materials. When the wastage increase consumption also will increase, and it will result a unfavourable variance result.

2. Labour rate variance arises due to difference in actual rate paid from standard rate. Generally labour rates are influenced by the external factors which are beyond the control of the organization. However personel manager is responsible for labour rate negotiation.

3. As per point No. 3 above rate variance arises due to difference in actual rate paid from standard rate. Mathematically it can written as:

Standard rate x Actual Hour - Actual rate x Actual Hours

Hence, if the emplyee take too long to complete a job it will not effect the labour rate variance.

4. Standard costs are the target cost which should not be crossed by the responsibility centres. Performance of responsibilty centre is continously monitored and measured against the set standards. any variance from the standard is noted and reported for appropriate action. So the management should investigate all variances.