LABOR VARIANCES

The expected output of 24,800 kilos of chocolate should require 5,952 labor hours (240 hours
per thousand kilograms of chocolate produced). Similarly, 6,240 standard labor hours are expected
for the actual output of 26,000 kilos.
The labor variances are: [1] Rate variance [2] Efficiency variance [3] Yield variance.

The determination of the labor variances are as follows:

Actual payroll P464,000
 Standard Labor (6,240 std hrs. x P75) 468,000
TOTAL LABOR VARIANCE (P4,000) F

LABOR RATE VARIANCE

Actual payroll P464,000
Actual hours @ standard rate 435,000 P29,000 UF
LABOR EFFICIENCY VARIANCE
Actual hours @ standard rate P435,000
Std, hours allowed based on expected output (SHEO)
(5,952hrs x P75) 446,400 (11,400) F
LABOR YIELD VARIANCE
SHEO P446,400
Standard labor cost 468,000 (21,600) F
TOTAL LABOR VARIANCE (P4,000) F

FACTORY OVERHEAD VARIANCES

For factory overhead, a yield variance may also be computed. Analysis involving yield
variance may be done by adapting any of the methods earlier discussed for flexible budget.
Presented below is the computation of the factory overhead variance and a sample analysis under
the two way and three way methods.

Actual factory overhead (FOH) P320,000

Standard factory overhead (SORSH) 312,000
Total FOH variance P8,000 UF

A. Two Variance Method

CONTROLLABLE VARIANCE
Actual Factory Overhead P320,000
BASHEO
FxOH P120,000
VOH 178,560 298,560 P21,440 UF
VOLUME VARIANCE
BASHEO P298,560
Std Hrs. based on expected output
@ std OH rate (SHE0SOR) 5,952 x P50 297,600 960 UF
YIELD VARIANCE
SHEOSOR P297,600
SORSH 312,000 (14,400) F
TOTAL OVERHEAD VARIANCE P8,000 UF

B. Three Variance Method

P
SPENDING VARIANCE
Actual FOH P320,000
BAAH
FxOH P120,000
VOH (P30 x 5,800) 174,000 294,000 P26,000 UF
VARIABLE EFFICIENCY
P294,000
VARIANCE
BAAH 298,560 4,560 F
BASHEO
P298,560
VOLUME VARIANCE
BASHEO 297,600 960 UF
Std.hrs @ expected output @ SR 5,952 x P50
(SHEOSOR)
YIELD VARIANCE
 SHEOSOR 297,600
SORSH 312,000 (14,400) F
TOTAL FOH Variance P8,000 UF

Determining and analyzing production costs variances has two major concerns.
First is the proper accounting (disposition) of such variances for external reporting
purposes and the other is the accountability (responsibility) for such variance
for internal uses.

DISPOSITION OF VARIANCES

When the amount of variances is not significant, they are normally closed to cost of goods
sold (COGS). As an alternative, they may be charged immediately against
income summary. In case the amount is significant, they are used as adjustment to COGS and
appropriate inventory account (RM, WIP or FG) on a prorated basis, using the
relative amount of the cost elements at year end.