STANDARD COSTING – VARIANCE ANALYSIS

DIRECT MATERIAL VARIANCE

One Variance Direct Material Cost Variance
Actual DMC – Standard DMC
(AQ x AP) – (SQ x SP)
Two Variances Material Quantity Variance (MQV) Material Price Variance (MPV)
(AQ – SQ) x SP (AP – SP) x AQ
Note:
AQ Actual Quantity SQ Standard Quantity
AP Actual Price SP Standard Price

DIRECT LABOR VARIANCE

One Variance Direct Labor Cost Variance
Actual DLC – Standard DLC
(AH x AR) – (SH x SR)
Two Variances Labor Rate Variance (LRV) Labor Efficiency Variance (LEV)
(AR – SR) x AH (AH – SH) x SR
Note:
AH Actual Hours SH Standard Hours
AR Actual Rate SR Standard Rate

OVERHEAD VARIANCE
1st step – Data Identification
1 Overhead Capacity SC Standard Capacity
NC Normal Capacity
AC Actual Capacity
2 Overhead Rates Fixed OH Rate
Variable OH Rate
Total OH Rate
3 Standard Overhead OH Rate x SC
4 Actual Overhead
5 Flexible Budget Overhead (FOH) FOH at Std. Cap
= Fixed Budget + Variable Budget
= (NC x Fixed Rate OH) + (SC x Variable Rate OH)
FOH at Actual Cap
= Fixed Budget + Variable Budget
= (NC x Fixed Rate OH) + (AC x Variable Rate OH)

2nd step – Variance Analysis

One Variance MOH Cost Variance
Actual MOHC – Standard MOHC
Two Variances Controllable OH Variance Volume OH Variance
Actual OH – FOH at SC FOH at SC – Standard OH
ILLUSTRATION
Armando Corporation manufactures a product with the following standard costs:
Direct Materials-20 yards at $ 1.35 per yard $ 27
Direct Labor-4 hours at $9 per hour 36
Factory Overhead-4 direct labor hours at $7.50 per hour 30
(ratio of variable to fixed overhead is 2:1)
Total Standard cost per unit of output $ 93
Standards are based on normal monthly capacity of 2,400 direct labor hours. The following information
pertains to July:
Unit produced in July 500
Direct Materials purchased-18,000 yards at $1.38 per yard $ 24,840
Direct Materials used-9500 yards
Direct Labor-2,100 hours at $9.15 per hour 19,215
Actual factory Overhead 16,650
Required:
Compute the following variances and indicate whether they are favorable or unfavorable:
1. Material Price Variance
2. Material Quantity Variance
3. Labor Rate Variance
4. Labor Efficiency Variance
5. Factory Overhead Variance