Chapter 10

Materials Price Variance

the difference between a direct material's actual price unit and its standard price per unit, multiplied by the quantity purchased

standard rate per hour

the labor rate that should be incurred per hour of labor time, including employment taxes and fringe benefits

standard cost card

A detailed listing of the standard amounts of inputs and their costs that are required to produce one unit of a specific product.

what is quantity standard? what is a price standard

A quantity standard indicates how much of an input should be used to make a unit of output. A price standard indicates how much the input should cost.

Quantity Variance

A variance that is computed by taking the difference between the actual quantity of the input used and the amount of the input that should have been used for the actual level of output and multiplying the result by the standard price of the input.

why can undue emphasis on labor efficiency variances lead to excess work in process inventories

If labor is a fixed cost in the short run and demand is insufficient to keep everyone busy (and workers are not laid off), it will result in an unfavorable labor efficiency variance. To avoid this unfavorable variance, managers may choose to produce at capacity (rather than reducing output to match customer demand) which leads to a build up of work in process and finished goods inventories.

If variable manufacturing overhead is applied based on direct labor hours and the direct labor efficiency variance is unfavorable, will the variable overhead efficiency variance be favorable or unfavorable

If overhead is applied using direct labor-hours, then the variable overhead efficiency variance and the direct labor efficiency variance will always be favorable or unfavorable together. Both variances are computed by comparing the number of direct labor-hours actually worked to the standard hours allowed. That is, in each case the formula is: Efficiency variance = SR(AH - SH) Only the "SR" part of the formula, the standard rate, differs between the two variances.

why are separate price and quantity variances computed

Separating an overall variance into a price variance and a quantity variance provides more information. Moreover, price and quantity variances are usually the responsibilities of different managers.

"our workers are all under labor contracts; therefore, our labor rate variance is bound to be zero"

Several factors other than the contractual rate paid to workers can cause a labor rate variance. For example, skilled workers with high hourly rates of pay can be given duties that require little skill and that call for low hourly rates of pay, resulting in an unfavorable rate variance. Or unskilled or untrained workers can be assigned to tasks that should be filled by more skilled workers with higher rates of pay, resulting in a favorable rate variance. Unfavorable rate variances can also arise from overtime work at premium rates.

standard cost per unit

The standard quantity allowed of an input per unit of a specific product, multiplied by the standard price of the input.

standard hours allowed

The time that should have been taken to complete the period's output. It is computed by multiplying the actual number of units produced by the standard hours per unit.

if the materials price variance is favorable but the materials quantity variance is unfavorable, what might this indicate?

This combination of variances may indicate that inferior quality materials were purchased at a discounted price, but the low-quality materials created production problems.

Price Variance

a variance that is computed by taking the difference between the actual price and the standard price and multiplying the result by the actual quantity of the input

what effect, if any, would you expect poor-quanity materials to have direct labor variances

If poor quality materials create production problems, a result could be excessive labor time and therefore an unfavorable labor efficiency variance. Poor quality materials would not ordinarily affect the labor rate variance.

should standards be used to identify who to blame for problems

If standards are used to find who to blame for problems, they can breed resentment and undermine morale. Standards should not be used to find someone to blame for problems.

standard quantity allowed

The amount of an input that should have been used to complete the period's actual output. It is computed by multiplying the actual number of units produced by the standard quantity per unit.

standard hours per unit

The amount of direct labor time that should be required to complete a single unit of product, including allowances for breaks, machine downtime, cleanup, rejects, and other normal inefficiencies.

standard quantity per unit

The amount of direct materials that should be used for each unit of finished product, including an allowance for normal inefficiencies, such as scrap and spoilage.

labor rate variance

The difference between the actual hourly labor rate and the standard rate, multiplied by the number of hours worked during the period.

labor efficiency variance

The difference between the actual hours taken to complete a task and the standard hours allowed for the actual output, multiplied by the standard hourly labor rate.

Variable Overhead Efficiency Variance

The difference between the actual level of activity (direct labor-hours, machine-hours, or some other base) and the standard activity allowed, multiplied by the variable part of the predetermined overhead rate.

materials quantity variance

The difference between the actual quantity of materials used in production and the standard quantity allowed for the actual output, multiplied by the standard price per unit of materials.

Variable Overhead Rate Variance

The difference between the actual variable overhead cost incurred during a period and the standard cost that should have been incurred based on the actual activity of the period.

the materials price variance can be computed at what two different points in time? which point is better? why?

The materials price variance can be computed when materials are purchased or when they are placed into production. It is usually better to compute the variance when materials are purchased because that is when the purchasing manager, who has responsibility for this variance, has completed his work. In addition, recording the price variance when materials are purchased allows the company to carry its raw materials inventory at standard cost, which simplifies bookkeeping.

who is generally responsible for the materials price variance? the materials quantity variance? the labor efficiency variance

The materials price variance is usually the responsibility of the purchasing manager. The materials quantity and labor efficiency variances are usually the responsibility of production managers and supervisors.

standard price per unit

The price that should be paid for each unit of direct materials. It should reflect the final, delivered cost of those materials.