Performance Evaluation Using
Variances from Standard Costs
LO 3 – Computing
Direct Materials and
Direct Labor Variances
@ 2012, Cengage Learning
LO 3
Direct Materials Variances
The total cost variance for direct materials
and direct labor can be separated into the
portion of a cost variance that is caused by
price (rate) differences and the portion that is
caused by quantity (time) differences.
LO 3
Direct Materials Variances
During June, Western Rider reported an unfavorable
total direct materials cost variance of $2,650 for the
production of 5,000 XL style jeans, as shown in
Exhibit 2 and reproduced below.
LO 3
Direct Materials Variances
The direct materials price variance is the
difference between the actual price per unit
and the standard price per unit, multiplied by
the actual quantity used.
LO 3
Direct Materials Variances
Actual Direct Materials Cost = Actual Price x Actual
Quantity
Actual Direct Materials Cost = ($5.50 per sq. yard) x
(7,300
sq. yards.)
Actual Direct Materials Cost = $40,150
Standard Direct Materials Cost = Standard Price x
Standard Quantity
Standard Direct Materials Cost = ($5.00 per sq. yard) x
(7,500 sq. yards.)
Standard Direct Materials Cost = $37,500
Actual costs ($40,150) – Standard costs ($37,500) =
$2,650
Total Unfavorable
Materials Variance
LO 3
Direct Materials Price Variance
Direct Materials Price Variance = (Actual Price – Standard
Price) x Actual Quantity
Direct Materials Price Variance = ($5.50 - $5.00) x 7,300
sq.
yds.
Direct Materials Price Variance = $3,650
Unfavorable direct
materials price
variance
Western Rider paid $0.50 more per
square yard of material than the standard.
LO 3
Direct Materials Variances
The direct materials quantity variance is the
difference between the actual quantity used
and the standard quantity at actual
production, multiplied by the standard price
per unit.
LO 3
Direct Materials Quantity Variance
Direct Materials Quantity Variance = (Actual Quantity –
Standard Quantity) x
Standard Price
Direct Materials Quantity Variance = (7,300 sq. yds. –
7,500
sq. yds.) x $5.00
Direct Materials Quantity Variance = – $1,000
Western Rider used 200
square yards less than the
standard.
Favorable direct
materials quantity
variance
LO 3
Direct Materials Variance Relationships
Actual cost:
Actual quantity x
Actual price
7,300 x $5.50 =
$40,150
Actual quantity x
Standard price
7,300 x $5.00 =
$36,500
Direct materials
price variance
Standard cost:
Standard quantity
x Standard price
7,500 x $5.00 =
$37,500
Direct materials
quantity variance
$3,650 U
– $1,000 F
Total direct materials cost variance
$40,150 – $37,500 = $2,650 U
LO 3
Direct Materials Variance Relationships
Actual cost:
Actual quantity x
Actual price
7,300 x $5.50 =
$40,150
Actual quantity x
Standard price
7,300 x $5.00 =
$36,500
Standard cost:
Standard quantity
x Standard price
7,500 x $5.00 =
$37,500
Total direct materials cost variance
$40,150 – $37,500 = $2,650 U
LO 3
Direct Labor Variances
During June, Western Rider reported an unfavorable
total direct labor cost variance of $2,500 for the
production of 5,000 XL style jeans, as shown in
Exhibit 2 and reproduced below.
LO 3
Direct Labor Variances
Actual Direct Labor Cost = Actual Rate per Hour x Actual
Time
Actual Direct Labor Cost = $10.00 per hr. x 3,850 hrs.
Actual Direct Labor Cost = $38,500
Standard Direct Labor Cost = Standard Rate per Hour
x
Standard Time
Standard Direct Labor Cost = $9.00 per hr. x 4,000
hrs.
Standard Direct Labor Cost = $36,000
Actual costs ($38,500) – Standard costs ($36,000) =
$2,500
Total unfavorable direct
labor cost variance
LO 3
Direct Labor Rate Variance
The direct labor rate variance is the
difference between the actual rate per hours
and the standard rate per hour, multiplied by
actual hours spent to make 5,000 pairs of
jeans.
LO 3
Direct Labor Rate Variance
Direct Labor Rate Variance = (Actual Rate per Hour –
Standard Rate per Hour) x
Actual Hours
Direct Labor Rate Variance = ($10.00 – $9.00) x 3,850
hours
Direct Labor Rate Variance = $3,850
The unfavorable variance
could have been caused by
improper scheduling and
use of employees.
Unfavorable
direct labor rate
variance
LO 3
Direct Labor Time Variance
The direct labor time variance is the
difference between the actual direct labor
hours and the standard direct labor hours to
make 5,000 pairs of jeans, multiplied by the
standard direct labor rate per hour.
LO 3
Direct Labor Time Variance
Direct Labor Time Variance = (Actual Direct Labor
Hours Standard Direct Labor
Hours)
x Standard Rate per Hour
Direct Labor Time Variance = (3,850 hours – 4,000
direct
labor hours) x $9.00
Direct Labor Time Variance = – $1,350
Favorable
If there had been an
direct labor
time variance
unfavorable time variance, it
might have been caused by a
shortage of skilled workers.
LO 3
Direct Labor Variance Relationships
Actual cost:
Actual hours x
Actual rate
3,850 x $10 =
$38,500
Standard cost:
Actual hours x
Standard rate
3,850 x $9 =
$34,650
Direct labor rate
variance
Standard hours x
Standard rate
4,000 x $9 =
$36,000
Direct labor time
variance
$3,850 U
–$1,350 F
Total direct labor cost variance
$38,500 – $36,000 = $2,500 U
LO 3
Direct Labor Variance Relationships
Actual cost:
Actual hours x
Actual rate
3,850 x $10 =
$38,500
Standard cost:
Actual hours x
Standard rate
3,850 x $9 =
$34,650
Total direct labor cost variance
$38,500 – $36,000 = $2,500 U
Standard hours x
Standard rate
4,000 x $9 =
$36,000