5.2 Variance analysis - Material Variances & Labour variances

Question 1

Direct materials total variance is the difference between

Answer 1

• The actual direct material cost and
• The std direct material cost of the actual production

Question 2

The total material variance can be analysed into two sub variances:

Answer 2

• Direct material price variance, ie. paying more or less than expected for materials
• Direct material usage variance, ie. using more or less material than expected for the actual output

Question 3

Direct material price variance is calculated as the difference between

Answer 3

Actual purchase price
Less: Std purchase price X Actual qty of materials purchased / used

• If raw material inventory is valued at std cost then the price variance is calculated based on materials purchased in period (whether used or not)
• If raw material inventory is valued at actual cost the the price variance is based on materials used in the period

Question 4

Direct material usage variance is calculated as the difference between

Answer 4

Actual qty used
Less: Std qty
= Direct materials usage variance (in qty)
x Std price (per unit of material)
= Direct materials usage variance

Question 5

Potential causes of material price variances

Answer 5

• Using a different supplier who is either cheaper (F) or more expensive (A)
• Buying larger sized orders and getting larger bulk purchase discounts (F) or buying in smaller sized orders and losing planned bulk purchase discounts (A)
• An unexpected increase in prices charged by supplier (A)
• Unexpected buying costs such as high delivery charges (A)
• Efficient (F) or inefficient (A) buying procedures
• A change in material quality (increased quality = more expensive = A; reduced quality = cheaper = F)

Question 6

Potential causes of material usage variances

Answer 6

• A higher (A) than expected or lower (F) than expected rate of scrap or wastage
• Using a different quality of material could affect wastage rate (higher quality = less wastage = F; lower quality = more wastage = A)
• Defective materials (A)
• Better quality control (F)
• More efficient work procedures resulting in better material usage rates (F)
• Changing the labour mix which impacts on wastage if different types of labour make more / less errors (higher grade labour = less errors = F; lower grade labour = more errors = A)
• Changing the materials mix to obtain a more expensive (better quality = F) or less expensive (reduced quality = A) mix than the std

Question 7

Labour variances

Answer 7

Total labour variance
- Labour rate variance (paying more or less than expected per hour for labour)
- Labour efficiency variance (using more or less labour hours per unit than expected)
- Idle time variance

Question 8

Direct labour total variance

Answer 8

Actual cost of direct labour for actual units
Less: Std direct labour cost of actual production

Question 9

Direct labour rate variance

Answer 9

Actual cost for Actual hours worked
Less: Actual hours worked X Std rate per hour

Question 10

Direct labour efficiency variance

Answer 10

Actual hours worked for actual units
Less: Actual units X Std hours
X std hourly rate

Question 11

When idle time occurs the efficiency variance should be separated into

Answer 11

• An idle time variance (hours paid exceed the hours worked)
  If no std this variance is always adverse (represents money wasted)
• An efficiency variance during active working hours

Question 12

Possible causes of labour rate variances

Answer 12

• An unexpected increase in basic rates of pay (A)
• Payments of bonuses where recorded as direct labour costs (A)
• Using labour that is more experienced (more expensive = A) or less experienced (less expensive = F) than the std
• A change in composition of work force and therefore change in average rates of pay (increase = A; reduction = F)

Question 13

Possible causes of labour efficiency variances

Answer 13

• Taking more or less time than expected to complete work due to inefficient or efficient working (more time = A; less time = F)
• Using labour that is more experienced (more efficient = F) or less experienced (less efficient = A) than the std
• A change in the composition or mix of workforce and therefore change in level of efficiency (more efficient = F; less efficient = A)
• Improved working methods (F)
• Industrial action by work force (A)
• Poor supervision (A)
• Improvements in efficiency due to an unexpected learning effect amongst work force (F)
• Unexpected lost time due to production bottlenecks and resource shortages (A)