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Materials Purchase Price Variance

This document discusses materials purchase price variance and direct labor variance. The materials purchase price variance compares the actual cost of materials purchased at the actual price to the standard cost if purchased at the standard price. The variance for the example given is unfavorable because the actual price was higher than the standard price. Direct labor variance compares actual direct labor cost to the standard direct labor cost. The variance for the example is favorable as the actual cost was less than the standard cost. The direct labor variance is then broken down into a direct labor efficiency variance and a direct labor rate variance. The direct labor efficiency variance compares actual labor hours used to standard hours allowed and is favorable as fewer hours were used than standard. The direct labor

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Meghan Kaye Liwen
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136 views3 pages

Materials Purchase Price Variance

This document discusses materials purchase price variance and direct labor variance. The materials purchase price variance compares the actual cost of materials purchased at the actual price to the standard cost if purchased at the standard price. The variance for the example given is unfavorable because the actual price was higher than the standard price. Direct labor variance compares actual direct labor cost to the standard direct labor cost. The variance for the example is favorable as the actual cost was less than the standard cost. The direct labor variance is then broken down into a direct labor efficiency variance and a direct labor rate variance. The direct labor efficiency variance compares actual labor hours used to standard hours allowed and is favorable as fewer hours were used than standard. The direct labor

Uploaded by

Meghan Kaye Liwen
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© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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A.

Materials Purchase Price Variance

This variance compares the actual cost of direct materials purchased with the standard
costs allowed on materials purchased. It is computed as follows:
Actual quantity @ Actual price (11,000 x P21.50) P236,500
Actual quantity @ Standard price (11,000 x P21) 231,000
Materials Purchase Price Variance P 5,500 UF

ALTERNATIVE SOLUTION:
Difference in price (P21.50 –P21) P 0.50 UF
Multiply by: Quantity purchased 11,000
Materials Purchase Price Variance P 5,500 UF

The materials purchase price variance is unfavorable because the company spent
(P21.50) more than the standard price (P21) set.

DIRECT LABOR VARIANCE

Direct labor variance determination and analysis is very similar to that of materials variances.
After gathering the necessary data to determine actual cost and standard cost of labor, a variance
analysis report would be prepared showing the following:

Time Rate Total Cost


Actual direct labor cost 7,000 P34 P238,000
Standard direct labor cost * 7,500 35 262,500
Direct labor variance (F) U (500) (P1) (P24,500)
Standard direct labor hours/unit 1.50
Units produced 5,000
Standard direct labors hours * 7,500

The direct labor variance of P24,500 is favorable since the actual cost incurred is less than the
standard cost allowed in producing the 5,000 units of finished goods.
To analyze the favorable direct labor variance, it must be broken down into its components:
time (efficiency/quantity) variance and rate (price) variance.

A. Direct Labor Efficiency (Time or Quantity) Variance

This variance compares the actual labor hours used and the standard hours allowed on
actual production. Employing highly skilled laborers and production process control measures,
usually lead to favorable variance and vice versa. It is computed as follows:
Actual hours @ Standard rate (7,000 x P35) P245,000
Standard hours @ Standard rate (7,500 x P35) 262,500
Direct Labor Efficiency Variance (P17,500) F

ALTERNATIVE SOLUTION:
Difference in hours (7,000 – 7,500) 500
Multiply by: Standard rate
F P35
Direct Labor Efficiency Variance P17,500 F

The labor efficiency variance is favorable because the firm spent less time than what was
expected or allowed in producing 5,000 units of finished goods.

Possible causes of unfavorable efficiency variance include poorly trained or motivated


workers, poor quality of materials, requiring more labor time, faulty equipment, poor supervision of
workers and inaccurate standards. In most cases, the production manager is responsible in
controlling labor efficiency variances except when it results from the use of substandard materials.
In which case, the purchasing manager is held accountable.

B. Direct Labor Rate Variance

The direct labor rate variance is the difference between the actual direct labor cost and
the actual hours incurred at standard rate per direct labor hour. This variance result from actually
paying more or less than the standard rate of labor. It is computed as follows:

Actual hours @ Actual rate (7,000 x P34) P238,000


Actual hours @ Standard rate (7,000 x P35) 245,000
Direct Labor Rate Variance (P 7,000) F

ALTERNATIVE SOLUTION:
Difference in rate (P34 –P35) P1 F
Multiply by: Actual hours 7,000
Direct Labor Rate Variance P 7,000 F
The rate variance is favorable because the company paid a lower rate of P34 compared
to the standard of P35 per direct labor hour.
Rate variances can arise because of the way labor is used. Using highly skilled
workers who are receiving higher wages for tasks which require little
skill will result in an unfavorable rate variance. On the other hand, a favorable rate
variance may result from paying wages which are lower than the standard rate. Because
labor rate variance generally arise as a result of how labor is used, production supervisors are
usually responsible for seeing that labor rate variances are kept under control.

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