Question

For this assignment you are to assume that you are the production supervisor for a plant that manufactures picture frames. The July variance report shows a large unfavorable material quantity variance. The new plant manager has asked you for an explanation of this variance by answering the following questions.

1. Explain the components of the total material variance.

2. Is it possible that price had an impact on the unfavorable quantity variance? Explain.

3. Is it possible that labor had an impact on the unfavorable quantity variance? Explain.

Answer 1

(1). In variance analysis (accounting) direct material total variance is the difference between the actual cost of actual number of units produced and its budgeted cost in terms of material. Direct material total variance can be divided into two components: ... the direct material usage variance.

(2). While material consumption was greater than expected the material unit price was less than expected or the unit standard cost is incorrect

(3). If workers manufacture a certain number of units in an amount of time that is less than the amount of time allowed by standards for that number of units, the variance is known as favorable direct labor efficiency variance. On the other hand, if workers take an amount of time that is more than the amount of time allowed by standards, the variance is known as unfavorable direct labor efficiency variance.

The direct labor efficiency variance may be computed either in hours or in dollars. Suppose, for example, the standard time to manufacture a product is one hour but the product is completed in 1.15 hours, the variance is 0.15 hours – unfavorable. If the labor cost is $6.00 per hour the variance in dollars would be $0.90 (0.15 hours × $6.00). For proper financial measurement the variance is normally expressed in dollars.

Formula

The following formula is used to calculate this variance:

Direct labor efficiency variance = (Actual hours worked × Standard rate) – (Standard hours allowed × Standard rate)