CONCEPTUAL CONNECTION: Assume that you know only the total direct materials used for both products and the total direct labor hours used for both products. Can you compute the total materials usage and labor efficiency variances

Yes

Explanation:

Direct Material Usage Variance is the measure of difference between the actual quantity of material utilized during a period and the standard consumption of material for the level of output achieved.

Formula

Direct Material Price Variance:  

Actual Quantity x Standard Price - Standard Quantity x Standard Price  = Standard Cost of Actual Quantity - Standard Cost of Standard Quantity

=(Actual Quantity - Standard Quantity) x Standard Price

Since the effect of any variation in material price from the standard is calculated in the material price variance, material usage variance is calculated using the standard price.

Example : Cement PLC manufactured 10,000 bags of cement during the month of January. Consumption of raw materials during the period was as follows:

MaterialQuantity UsedStandard Usage Per BagActual Price                 Standard Price

Limestone100 tons11 KG$75/ton$70/ton

Clay150 tons14 KG$21/ton$20/ton

Sand250 tons26 KG$11/ton$10/ton

Material Usage Variance will be calculated as follows:

Step 1: Calculate Standard Quantity

Limestone:10,000 unitsx11 / 1000= 110 tons

Clay: 10,000 units x 14 / 1000= 140 tons

Sand: 10,000 unitsx 26 / 1000 = 260 tons

Step 2: Calculate the Variance

Material Usage Variance = [Actual Quantity - Standard Quantity (Step 2)] x Standard Price

Limestone:(100 - 110)x$70=($700)Favorable

Clay:(150 - 140)x$20=$200Adverse

Sand:(250 - 260)x$10=($100)Favorable

Total Usage Variance($600)Favorable

Direct Labor Efficiency Variance is the measure of difference between the standard cost of actual number of direct labor hours utilized during a period and the standard hours of direct labor for the level of output achieved.

Formula

Direct Labor Efficiency Variance:

=Actual Hours x Standard Rate-Standard Hours x Standard Rate

  =Standard Cost of Actual Hours-Standard Cost

Note: As the effect of difference between standard rate and actual rate of direct labor is accounted for separately in the direct labor rate variance, the efficiency variance is calculated using the standard rate.

Example

DM is a denim brand specializing in the manufacture and sale of hand-stitched jeans trousers.

DM manufactured and sold 10,000 pairs of jeans during a period.

Information relating to the direct labor cost and production time per unit is as follows:

Actual Hours

Per UnitStandard Hours

Per UnitActual Rate

Per HourStandard Rate

Per Hour

Direct Labor0.500.60$12$10

Labor rate variance shall be calculated as follows:

Step 1: Calculate Actual hours

Actual Hours=10,000 units x 0.5 hours per unit

=5,000 hours.

Step 2: Calculate the standard cost of actual number of hours

Standard Cost of Actual Hours=Actual Hours x Standard Rate

=5,000 hours (Step 1) x $10 per hour

=$50,000.

Step 3: Calculate the standard hours

Standard hours=10,000 units x 0.60 hours per unit

=6,000 hours.

Step 4:  Calculate the standard cost

Standard Cost=Standard Hours x Standard Rate

=6,000 hours (Step 3) x $10 per hour

=$60,000.

Step 5: Calculate the variance

Labor Efficiency Variance=Standard Cost of Actual Hours - Standard Cost

=$50,000 (Step 2) - $60,000 (Step 4)

=$10,000 Favorable.

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