Standards for material and labor

A standard is a carefully determined price, cost, or input quantity amount that is used as a benchmark for judging
performance. Standards are usually expressed on a per-unit basis.

A standard input is a carefully determined quantity of input—such as square yards of cloth or direct manufacturing
labor-hours—required for one unit of output, such as a jacket. A standard price is a carefully determined price that a
company expects to pay for a unit of input. In the XYZ example, the standard wage rate that XYZ expects to pay its
operators is an example of a standard price of a direct manufacturing labor-hour. A standard cost is a carefully
determined cost of a unit of output—for example, the standard direct manufacturing labor cost of a jacket at XYZ.

Standard cost per output unit for = Standard input allowed * Standard price
each variable direct-cost input for one output unit per input unit

For example, assume that, XYZ manufacturing Company has developed the standard cost per output unit for each variable
direct-cost input based on the following standard:
 Standard direct material cost per jacket: 2 square yards of cloth input allowed per output unit (jacket)
manufactured, at $30 standard price per square yard

Standard direct material cost per jacket = 2 square yards *$30 per square yard=$60
 Standard direct manufacturing labor cost per jacket: 0.8 manufacturing labor-hour of input allowed per output
unit manufactured, at $20 standard price per hour

Standard direct manufacturing labor cost per jacket=0.8 labor-hour*$20 per labor-hour=$16

Data for Calculating XYZ’s Price Variances and Efficiency Variances

Consider XYZ’s two direct-cost categories. The actual cost for each of these categories for the 10,000 jackets
manufactured and sold in April 2011 is as follows:
 Direct Materials Purchased and Used
1. Square yards of cloth input purchased and used 22,200
2. Actual price incurred per square yard $28
3. Direct material costs (22,200 * $28) $621,600
 Direct Manufacturing Labor
1. Direct manufacturing labor-hours 9,000
2. Actual price incurred per direct manufacturing labor-hour $22
3. Direct manufacturing labor costs (9,000 * $22) $198,000

Required: Calculate the price variance and efficiency variance for both DMS and DLCs.

Sales Volume Variances

1. Example: The Payne Company manufactures two types of vinyl flooring. Budgeted and actual operating data for
2012 are as follows:

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In late 2011, a marketing research firm estimated industry volume for commercial and residential vinyl flooring for 2012
at 800,000 rolls. Actual industry volume for 2012 was 700,000 rolls.

Required:
1. Compute the sales-mix variance and the sales-quantity variance by type of vinyl flooring and in total.
2. Compute the market-share variance and the market-size variance.
3. What insights do the variances calculated in requirements 1 and 2 provide about Payne Company’s performance
in 2012?

Direct Materials Mix and Direct Materials Yield Variances

We illustrate how the efficiency variance discussed in Chapter 3 can be subdivided into variances that highlight the
financial impact of input mix and input yield when inputs are substitutable. Consider ABC Corporation, which makes
tomato ketchup. Our example focuses on direct material inputs and substitution among three of these inputs. The same
approach can also be used to examine substitutable direct manufacturing labor inputs.

To produce ketchup of a specified consistency, color, and taste, ABC mixes three types of tomatoes grown in different
regions: Latin American tomatoes (Latoms), California tomatoes (Caltoms), and Florida tomatoes (Flotoms). ABC’s
production standards require 1.60 tons of tomatoes to produce 1 ton of ketchup; 50% of the tomatoes are budgeted to be
Latoms, 30% Caltoms, and 20% Flotoms. The direct material inputs budgeted to produce 1 ton of ketchup are as follows:

0.80 (50% of 1.6) ton of Latoms at $70 per ton………………………………..$56.00

0.48 (30% of 1.6) ton of Caltoms at $80 per ton………………………………..38.40
0.32 (20% of 1.6) ton of Flotoms at $90 per ton………………………………...28.80
Total budgeted cost of 1.6 tons of tomatoes………………………………….$123.20

Budgeted average cost per ton of tomatoes is $123.20 ÷ 1.60 tons = $77 per ton.

Because ABC uses fresh tomatoes to make ketchup, no inventories of tomatoes are kept. Purchases are made as needed,
so all price variances relate to tomatoes purchased and used. Actual results for June 2012 show that a total of 6,500 tons of
tomatoes were used to produce 4,000 tons of ketchup:

Given the standard ratio of 1.60 tons of tomatoes to 1 ton of ketchup, 6,400 tons of tomatoes should be used to produce
4,000 tons of ketchup. At standard mix, quantities of each type of tomato required are as follows:

Required:

i. Direct Materials Mix Variance?

ii. Direct Materials Yield Variance?

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