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)