Question

There are three (3) for price variance and three (3) for quantity variance. Explain how, instead of memorizing three formulas, one can remember one formula for price variance and one formula for quantity variance, and apply them to direct materials, direct labor, and variable manufacturing overhead.

Answer 1

For price variance the formula is (Standard Rate - Actual rate) * Actual Quantity

All three variances i.e. price, labour and variable overhead rate variance can be calculated using this above formula. The standard rate in case of material would mean rate of material, while for labour price and variable overhead rate variance rate would be rate per hour. Actual quantity would mean actual quantity of material or actual hours in case of labour or variable overhead variance. Thus instead of learning three different formulae this one formula would be sufficient.

For Quantity variance the formula is (Standard quanity - actual quantity) * Standard Rate

Here quantity means quantity of material for material quantity variance and hours in case of labour and variable overhead quantity variance. Similarly, standard rate refers to standard rate of material for material variance or rate per hour or labour and overhead variance. This one formula can be use for calculation of all the three quantity variances.