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Calculation Process Of Direct Labor Variances

Labor Variances

A. Formula Approach:
i. Labor cost variance = (Standard time X Standard rate) - (Actual time X Actual rate)
Or, LCV = ST X SR - AT X AR

ii. Labor rate variance = Actual time X (Standard rate - Actual rate)
Or, LRV = AT X (SR- AR)

iii. Labor efficiency variance = Standard rate X (Standard time for actual output - Actual time)
Or, LEV = SR X (RST - AT)

iv. Labor Mix Variance = Standard rate X (Revised standard time - Actual time)
Or, LMV = SR X (RST - AT)

v. Labor Yield Variance = (Actual Yield - Standard Yield) X Standard cost per unit
Or, LYV = (AY - SY) X SC

vi. Labor Idle Time Variance (LITV) = Idle time X Standard rate.

B. Tabular Approach
The steps that should be followed for a tabular approach of calculating labor variances as as follows:

1. Calculate the standard time required for the actual output in case the standard output and the actual output are different.
Standard time required for actual output = (Standard time/Standard output level) X Actual output

2. Calculate the mix rate per unit in case more than one grade of employees are engaged:
* Mix rate per unit of standard time at standard rate
= Total cost of standard time at standard rate/ total standard time

* Mix rate per unit of actual time at actual rate
= Total cost of actual time at actual rate/ Total actual time

* Mix rate per unit for actual time at standard rate
= Total cost of actual time at standard rate/ standard output level

3. Develop the working table as follows:
Working Table:

Code.........Time........Rate.......Result(Time X Rate).........Variances (U for negative and F for positive)
A................S...........S......................................................LEV = result of code (A-B) = $ U/F
B................A...........S......................................................LRV = results of code(B-c) = $ U/F
C................A...........A.....................................................LCV = results of code (A-C) = $ U/F

Where, A,B,C refer to the code. Instead of these letters any other symbol can be used.
S = standard time of labor hours
A = actual rate of wages
U = unfavorable variance
F = favorable variance.


Calculation Of Direct Material Variances

Illustration
Universal Chemical Industry produces a chemical by blending two basic raw materials. It operates a standard costing system and the following standards have been set for raw materials:

Standard Data
Materials .................................Quantity.........................Rate
Material A....................................40%..........................$30
Material B....................................60%..........................$40

The standard loss during its processing is expected to be 15%
During the month of April, 2010 the company produced 1,700 kgs. of chemical
Actual data for the period were:
Actual Data
Materials.................................Quantity............................Rate
Material A ...............................830 kg.................................$ 25
Material B................................1,190 kg................................$ 42.5

Please calculate the following variances:
a) Material cost variance
b) Material price variance
c) Material usage variance
d) Material mix variance
e) Material yield variance
f) Verify your results

Calculation:
Computation of revised standard quantity
Formula for revised standard quantity = SQ/SO xAO
Where, SQ = Standard quantity, SO = Standard output, AO = Actual Output
= 40+60/100-15 x 1,700 = 2,000 kgs.
Revised standard quantity for material A = 40% of 2,000 = 800 Kg.
Revised standard quantity of material B = 60% of 2,000 = 1,200 kg.

a) Material cost variance (MCV) = (SQ x SP) - (AQ x AP)
Material A = (800 x 30) - (830 x 25) = 24,000-20,750 = $ 3,250(F)
Material B = (1,200 x 40) - (1,190 x 42.5) = 48,000-50,575 = $ 2,575(U)
Total Material cost variance = 3,250- 2.575 = $ 675(F)

b) Material price variance(MPV) = AQ x (SP -AP)
Material A = 830(30-25) = 830 x 5 = $ 4,150 (F)
Material B = 1,190(40-42.5) = 1,190 x2.5 = $ 2,975 (U)
Total material price variance = 4,150-2,975 = $ 1,175 (F)

c) Material Usage variance(MUV) = SP x (SQ-AQ)
Material A = 30 x(800-830) = 30 x 30 = $ 900 (U)
Material B = 40 x(1,200- 1190) = 40 x 10 = $ 400 (F)
Total material usage variance For material A and B = 900-400 = 500(U)

d)Material Mix variance(MMV)= SP x(Act. mix/Std. mix ) x SQ - (AQ)
Material A = 30 x(2,020/2,000) x 800 - 830 = 30 x (808-830) = $660(U)
Material B = 40 x (2,020/2,000) x 1,200 - 1,190 = 40 x(1,212-1,190 = $880(F)
Total material mix variance = $220 (F)

e) Material yield variance (MYV) = (AY - SY) x SC
Total material yield variance = (1,700 - 1,717) x 42.35 = $ 720 (U)

Working Notes:
Standard output for actual input = Actual input-Standard loss =2,020-15% of 2,020=1,717
Standard cost per unit of Actual output = Total standard cost/Actual output
= (800 x30 + 1200 x 40)/1700 = (24000 + 48000)/1700 = $42.35 per kg.

f) Verification:
Material cost variance = Material price variance + Material usage variance
= $1,175(F)+$500(U) = $675(F)
Material usage variance = Material mix variance+Material yield variance
= $220(F)+$720(U) = $ 500 (U)
Material cost variance = Material price variance + Material mix variance + Material yield variance = 1,175(F)+220(F)+720(U) = $675(F)




Concept Of Material Yield Variance(MYV) And Its Formula For Calculation

Material Yield Variance (MYV)
Material yield variance is defined as the portion of material usage variance that results from the difference between the standard yield (output) specified and the actual yield or output obtained. The material yield variance is different from other material variances in the sense that all other variances are based on input but it is based on output. The material yield variance can be calculated by using following formula:
Material yield variance (MYV) = (AY - SY) x SC
Where,
AY = Actual yield or output
SY = Standard yield or output
SC = Standard cost per unit
If the resulting figure is positive, it is considered as favorable and if the resulting figure is negative, it is considered unfavorable.

Note: Please see the post " Calculation Of Direct Material Variances" for the calculation process of Material Yield Variance (MYV)

Related Topics
Material Cost Variance And Its Calculation
Material Price Variance And Its Calculation
Material Usage Variance And Its Calculation
Material Mix Variance And Its Formula

Concept Of Material Mix Variance(MMV) And Its Formula For Calculation

Material Mix Variance (MMV)
The material mix variance is the result of a deviation of the actual composition of a mixture of material from the standard one. Normally, a material mix variance arises when there is a change in the composition of the material mixture, if more than one type of materials are used in a definite proportion. In such a situation, the material variance is calculated separately for each type of material. The material mix variance is calculated by using the following formula:
Material Mix Variance(MMV) = SP x (RSQ-AQ)
Where,
SP = Standard Price
RSQ = Revised standard quantity
AQ = Actual Quantity

Note: Please see the post "Calculation Of Direct Material Variances" for the calculation process of Material Mix Variance.

Related Topics
Material Cost Variance And Its Calculation
Material Price Variance And Its Calculation
Material Usage Variance And Its Calculation
Material Yield Variance And Its Formula

Concept Of Material Usage Or Quantity Variance (MUV) And Its Calculation

Material usage or quantity variance (MUV)
Material usage variance or quantity variance indicates the difference between the standard quantities of material specified from the actual quantity of output and actual quantities of material used. The material usage variance can be calculated by multiplying the difference between the actual quantity and the standard quantity by the standard price. As such the formula for the calculation of material usage variance is as follows:
Material Usage Variance (MUV) = SP x (RSQ - AQ)
Or, MUV = MMV + MYV
Where,
SP = Standard price
RSQ = Revised standard quantity
AQ = Actual Quantity
MMV = Material mix variance
MYV = Material yield variance

If the actual quantity is less than the standard quantity, there will be a favorable variance and if the actual quantity is more than the standard quantity, there will be an unfavorable variance.
Calculation Of Material Usage Variance
Illustration
- Standard quantity of material Q for 500 units of output is fixed as 800 kg.
- Standard price per kg. of material Q is estimated to be $ 5
- Actual quantity of material Q was 800 kg.
- Actual price of material was $ 4.5 per kg.
- Actual output was 400 units.

Solution,
Since the standard outputs and actual outputs differ, the standard quantity should be revised.
Revised standard quantity (RSQ) = (SQ/SO) x AO =800/500 x 400 = 640 units.
Now, Material usage variance (MUV) = SO x (RSQ - AQ) = 5 x (640-800) = $ 800(U)
Since the actual quantity is more than standard quantity, the resulting variance is unfavorable variance.

Related Topics
Material Cost Variance And Its Calculation
Material Price Variance And Its Calculation
Material Mix Variance And Its Formula
Material Yield Variance And Its Formula
Calculation Of Direct Material Variances

Concept Of Material Price Variance (MPV) And Its Calculation

Material Price Variance (MPV)
Material price variance is the deviation of the actual price paid from the standard price specified. The material price variance can be calculated at the time of purchase or at the time of usage. It is generally preferred to calculate at the time of purchase.
Material price variance is calculated by using the following formula:
Material price variance (MPV) = AQx(SP-AP)
Where,
AQ = Actual Quantity
SP = Standard Price
AP = Actual Price
If the actual price is more than standard price, there will be an adverse or unfavorable variance and when the actual price is less than the standard price, the variance will be favorable.
Calculation Of Material Price Variance
Illustration
- Standard quantity of material Q for 500 units of output is fixed as 800 kg.
- Standard price per kg. of material Q is estimated to be $ 5
- Actual quantity of material Q was 800 kg.
- Actual price of material was $ 4.5 per kg.
- Actual output was 400 units.
Solution,
Material Price Variance(MPV) = Actual quantity x(Standard price-Actual price)
Or, MPV = AQ x (SP-AP) = 800 x(5-4.5) = $400 (F)
Since the resulting figure is positive the material price variance is favorable.

Related Topics
Material Cost Variance And Its Calculation
Material Usage Variance And Its Calculation
Material Mix Variance And Its Formula
Material Yield Variance And Its Formula
Calculation Of Direct Material Variances

Concept Of Material Cost Variance(MCV) And Its Calculation

Material Cost Variance(MCV)
Material cost variance is the deviation from the standard direct material cost, of the actual production volume and the actual cost of direct material. Material cost variance is also concerned as a sum of the direct material usage and price variances. The variances can be favorable or unfavorable. If the actual cost is lower than the standard cost, it is considered as favorable variance and if the actual cost exceeds the standard cost, the difference is unfavorable. There is not any rule of thumb for the calculation of direct material cost variances.
The following formula is used to calculate direct material cost variance:
MCV = (SQ x SP) - (AQ x AP)

Standard quantity (SQ) should be revised if standard outputs and actual outputs differ.
Revised standard quantity (RSQ) = (SQ/SO x AO)
Where,
SQ = Standard Quantity
SP = Standard Price
AQ = Actual Quantity
AP = Actual Price
SO = Standard Output
AO = Actual Output

Material cost variance represents the total of material price variance and material usage variances.
As such, MCV = Material price variance (MPV) + Material usage variance(MUV)
If the resulting figure is positive, the difference is denoted by favorable variance i.e.(F) and if the resulting figure is negative, the difference is denoted by unfavorable variance i.e.(U).

Calculation Of Material Cost Variance:
Illustration
- Standard quantity of material Q for 500 units of output is fixed as 800 kg.
- Standard price per kg. of material Q is estimated to be $ 5
- Actual quantity of material Q was 800 kg.
- Actual price of material was $ 4.5 per kg.
- Actual output was 400 units.

Solution,
Since the standard outputs and actual outputs differ, the standard quantity should be revised.
Revised standard quantity (RSQ) = (SQ/SO) x AO =800/500 x 400 = 640 units.
Now,
Material Cost Variance(MCV) = (SQ x SP)-(AQ x AP) = (640x5)-(800x4.5) = $ 400 (U)

Since, the resulting figure is negative the variance is denoted as unfavorable i.e. (U).

Related Topics
Material Price Variance And Its Calculation
Material Usage Variance And Its Calculation
Material Mix Variance And Its Formula For Calculation
Material Yield Variance And Its Formula
Calculation Of Direct Material Variances