ACCA F2 Management Accounting - 2010 - Study text - Emile Woolf Publishing
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Chapter 12: Standard costing and variance analysis
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Direct materials: price and usage variances
Direct materials price variance
Direct materials usage variance
Direct materials: possible causes of variances
3 Direct materials: price and usage variances
The direct materials total cost variance can be analysed into a price variance and a
usage variance.
A price variance measures the difference between the actual price paid for
materials and the price that should have been paid (the standard price).
A usage variance measures the difference between the materials that were used
in production and the materials that should have been used (the standard
usage).
3.1 Direct materials price variance
The price variance is calculated by taking the actual quantity of:
materials purchased or
materials used.
For your examination, it is unlikely that you will need to decide whether to use the
quantity purchased or the quantity used. Briefly, however:
the price variance is calculated from the quantities purchased when closing
inventory of direct materials is valued at standard cost
the price variance is calculated from the quantities used when closing inventory
of direct materials is valued at actual cost.
An examination question will often state that quantities of materials purchased and
materials used were the same. However, if a question states that raw materials are
valued at standard cost, the price variance must be calculated using actual
quantities of materials purchased.
The actual cost of the actual quantity of materials is compared with the standard
purchase price of the materials. The difference is the materials price variance.
A direct materials price variance is calculated as follows:
$
Units of materials purchased/used should cost
(× standard price per unit of material)
A
They did cost B
Material price variance A – B (F) or (A)
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If there are two or more direct materials, a price variance is calculated separately for
each material.
Example
A unit of Product P123 has a standard cost of 5 litres of Material A at $3 per litre.
The standard direct material cost per unit of Product 123 is therefore $15. In a
particular month, 2,000 units of Product 123 were manufactured. These used 10,400
litres of Material A, which cost $33,600.
The direct materials price variance is calculated as follows.
The price variance is calculated on the quantity of materials purchased/used.
Materials price variance
$
10,400 litres of materials should cost (× $3)
31,200
They did cost 33,600
Material price variance 2,400
(A)
The price variance is adverse because the materials cost more to purchase than they
should have done (i.e. actual cost was higher than the standard or expected cost).
3.2 Direct materials usage variance
The usage variance is calculated by taking the actual quantity of units produced.
For the actual number of units produced, the actual usage of materials is compared
with the standard usage. The difference is the usage variance, measured as a
quantity of materials. This is converted into a money value at the standard price for
the material.
A direct materials usage variance is calculated as follows:
Units of
material
Units produced should use
(output × standard material usage per unit)
X
They did use Y
Material usage variance in quantities X – Y (F) or (A)
× Standard price per unit of material
x $P
Material price variance in $ (X – Y) x $P (F) or (A)
Example
A unit of Product P123 has a standard cost of 5 litres of Material A at $3 per litre.
The standard direct material cost per unit of Product 123 is therefore $15. In a
Chapter 12: Standard costing and variance analysis
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particular month, 2,000 units of Product 123 were manufactured. These used 10,400
litres of Material A, which cost $33,600.
The direct materials price variance is calculated as follows.
The usage variance is calculated by taking the actual quantity of units produced.
The usage variance in material quantities is then converted into a money value at
the standard price per unit of the raw material.
Materials usage variance
litres
2,000 units of Product P123 should use (× 5 litres)
10,000
They did use 10,400
Material usage variance in litres 400 (A)
Standard price per litre of Material A $3
Material usage variance in $ $1,200 (A)
The usage variance is adverse because more materials were used than expected,
which has added to costs.
Exercise 3
The standard direct materials cost of Product P44 is:
2 kilos of material L at $3 per kilo: $6.
During February, 6,000 units of Product P44 were produced. These used 12,800 kilos
of material L, which cost $35,900.
Required
(a) Calculate the direct materials total cost variance for the month.
(b) Analyse this total variance into a direct material price variance and a direct
material usage variance.
3.3 Direct materials: possible causes of variances
When variances occur and they appear to be significant, management should
investigate the reason for the variance. If the cause of the variance is something
within the control of management, control action should be taken. Some of the
possible causes of materials variances are listed below.
Materials price variance: causes
Suppliers increased their prices by more than expected. (Higher prices might be
caused by an unexpected increase in the rate of inflation.)
Different suppliers were used, and these charged a higher price (adverse price
variance) or lower price (favourable price variance) than the usual supplier.
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Materials were purchased in sufficient quantities to obtain a bulk purchase
discount (a quantity discount), resulting in a favourable price variance.
Materials were bought that were of lower quality than standard (and so cheaper
than expected) or better quality than standard (and more expensive than
expected).
There was a severe shortage of the materials, so that prices in the market were
much higher than expected.
Materials usage variance: causes
Poor materials handling resulted in a large amount of breakages (adverse usage
variance). Breakages mean that a quantity of materials input to the production
proves are wasted.
Improvements in production methods resulted in more efficient usage of
materials (favourable usage variance).
Wastage rates were higher or lower than expected.
Materials used were of cheaper quality than standard, with the result that more
materials had to be thrown away as waste.
Chapter 12: Standard costing and variance analysis
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Direct labour: rate and efficiency variances
Direct labour rate variance
Direct labour efficiency variance
Direct labour: possible causes of variances
4 Direct labour: rate and efficiency variances
The direct labour total cost variance can be analysed into a rate variance and an
efficiency variance. These are calculated in a similar way to the direct materials
price and usage variances.
A rate variance measures the difference between the actual wage rate paid to per
labour hour and the rate that should have been paid (the standard rate of pay).
An efficiency variance (or productivity variance) measures the difference
between the time taken to make the production output and the time that should
have been taken (the standard time).
4.1 Direct labour rate variance
The direct labour rate variance is calculated by taking the actual number of hours
worked and paid for.
The actual labour cost of the actual hours worked is compared with the standard
cost for those hours. The difference is the labour rate variance.
A direct labour rate variance is calculated as follows.
$
Hours worked/paid for should cost
(× standard rate per hour)
A
They did cost B
Direct labour rate variance A – B (F) or (A)
If there are two or more different types or grades of labour, each paid a different
standard rate per hour, a rate variance is calculated separately for each labour
grade.
4.2 Direct labour efficiency variance
The direct labour efficiency variance is calculated by taking the actual quantity of
units produced.
For the actual number of standard units produced, the actual hours worked is
compared with the standard number of hours that should have been worked to
produce the actual output. The difference is the efficiency variance, measured in hours.
This is converted into a money value at the standard direct labour rate per hour.
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A direct labour efficiency variance is calculated as follows.
Hours
Units produced should take
(× standard hours per unit)
X
They did take Y
Efficiency variance in hours X – Y (F) or (A)
× Standard direct labour rate per hour
$P
Direct labour efficiency variance in $ (X – Y) x $P (F) or (A)
Example
Product P234 has a standard direct labour cost per unit of:
0.5 hours × $12 per direct labour hour = $6 per unit.
During a particular month, 3,000 units of Product 234 were manufactured. These
took 1,400 hours to make and the direct labour cost was $16,200.
Required
Calculate for the month:
the total direct labour cost variance
the direct labour rate variance
the direct labour efficiency variance.
Answer
Total direct labour cost variance
$
3,000 units of output should cost (× $6)
18,000
They did cost 16,200
Direct labour total cost variance 1,800
(F)
The variance is favourable, because actual costs were less than the standard cost.
The direct labour rate variance is calculated by taking the actual number of hours
worked (and paid for).
Direct labour rate variance
$
1,400 hours should cost (× $12)
16,800
They did cost 16,200
Direct labour rate variance 600
(F)
The rate variance is favourable because the labour hours worked cost less than they
should have done.
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The labour efficiency variance, like a materials usage variance, is calculated for the
actual number of units produced. The variance in hours is converted into a money
value at the standard rate of pay per hour.
Direct labour efficiency variance
hours
3,000 units of Product P234 should take (× 0.5 hours)
1,500
They did take 1,400
Efficiency variance in hours 100 (F)
Standard direct labour rate per hour $12
Direct labour efficiency variance in $ $1,200 (F)
The efficiency variance is favourable because production took less time than
expected, which has reduced costs.
Labour cost variances: summary
$
Labour rate variance 600
(F)
Labour efficiency variance 1,200
(F)
Total direct labour cost variance 1,800
(F)
4.3 Direct labour: possible causes of variance
When labour variances appear significant, management should investigate the
reason why they occurred, and take control measures where appropriate to improve
the situation in the future. Possible causes of labour variances include the following.
Labour rate variance
An increase in pay for employees.
Working overtime hours, when overtime is paid at a premium above the basic
rate.
Using direct labour employees who were more skilled and experienced than the
‘normal’ and who are paid more than the standard rate per hour (adverse rate
variance).
Using direct labour employees who were relatively inexperienced and new to
the job (favourable rate variance, because these employees would be paid less
than ‘normal’).
Labour efficiency variance
More efficient methods of working.
Good morale amongst the workforce and good management with the result that
the work force is more productive.
If incentive schemes are introduced to the workforce, this may encourage
employees to work more quickly and therefore give rise to a favourable
efficiency variance.
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Using employees who are more experienced or less experienced than ‘standard’,
resulting in favourable or adverse efficiency variances. Experienced employees
might be able to complete their work more quickly than less-experienced
colleagues.
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Variable production overheads: expenditure and efficiency variances
Variable production overhead expenditure variance
Variable production overhead efficiency variance
Variable production overheads: possible causes of variances
5 Variable production overheads: expenditure and
efficiency variances
The variable production overhead total cost variance can be analysed, if required,
into an expenditure variance (= spending rate per hour variance) and an efficiency
variance.
The expenditure variance is similar to a materials price variance or a labour rate
variance. It is the difference between actual variable overhead spending in the
hours worked and what the spending should have been (the standard rate).
The variable overhead efficiency variance in hours is the same as the labour
efficiency variance in hours (excluding any idle time variance), and is calculated
in a very similar way. It is the variable overhead cost or benefit from adverse or
favourable direct labour efficiency variances.
5.1 Variable production overhead expenditure variance
It is normally assumed that variable production overheads are incurred during
hours actively worked, but not during any hours of idle time.
The variable production overhead expenditure variance is calculated by taking
the actual number of hours worked.
The actual variable production overhead cost of the actual hours worked is
compared with the standard cost for those hours. The difference is the variable
production overhead expenditure variance.
A variable production overhead expenditure variance is calculated as follows. Like
the direct labour rate variance, it is calculated by taking the actual number of labour
hours worked, since it is assumed that variable overhead expenditure varies with
hours worked..
$
Hours worked should cost
(active hours of work × standard rate per hour)
A
They did cost B
Variable production overhead expenditure variance A – B (F) or (A)
5.2 Variable production overhead efficiency variance
The variable production overhead efficiency variance in hours is exactly the same as
the direct labour efficiency variance in hours.
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It is converted into a money value at the standard variable production overhead rate
per hour.
Example
Product P123 has a standard variable production overhead cost per unit of:
1.5 hours × $2 per direct labour hour = $3 per unit.
During a particular month, 2,000 units of Product 123 were manufactured. These
took 2,780 hours to make and the variable production overhead cost was $6,550.
Required
Calculate for the month:
the total variable production overhead cost variance
the variable production overhead expenditure variance
the variable production overhead efficiency variance.
Answer
Total variable production overhead cost variance
$
2,000 units of output should cost (× $3)
6,000
They did cost 6,550
Total variable production overhead cost variance 550 (A)
Variable production overhead expenditure variance
$
2,780 hours should cost (× $2)
5,560
They did cost 6,550
Variable production overhead expenditure variance 990 (A)
The expenditure variance is adverse because the expenditure on variable overhead
in the hours worked was more than it should have been.
Variable production overhead efficiency variance
hours
2,000 units of Product P123 should take (× 1.5 hours)
3,000
They did take 2,780
Efficiency variance in hours 220 (F)
Standard variable production overhead rate per hour $2
Variable production overhead efficiency variance in $440 (F)
The efficiency variance is favourable because production took less time than
expected, which has reduced costs.