Computing Direct Materials Variances

Cambria Company makes leather bags. Each bag should use 4 feet of
leather (standard quantity), and the standard price of leather is $6.00
per foot. During August, the company purchased 760 feet of leather
costing $5.90 per foot and used the leather to produce 180 bags

Standard cost
Standard price  standard quantity 
$6.00 per foot  (180 bags  4 feet per bag) 
$6.00 per foot  720  $4,320
This is an
Less actual cost unfavorable
Actual price  actual quantity  (U) situation
$5.90 per foot  760  4,484
Total direct materials cost varia nce $ 164 (U)
Actual cost > standard cost
22–14
 Direct Materials Variances (cont’d)

Direct Materials Price Variance  (Standard Price  Actual Price)

 Actual Quantity

 ($6.00  $5.90)  760 feet

 $76 (F)

Because the company paid less for direct materials than it expected,
the variance is favorable (F)

22–15
 Direct materials quantity variance
(cont’d)

• Direct materials quantity variance

– Difference between the standard quantity and the
actual quantity used multiplied by the standard
price
– Also called the direct materials efficiency or usage
variance
Direct Materials Quantity Variance  Standard Price  (Standard Quantity
Allowed  Actual Quantity)
 $6.00 per foot  (720 feet  760 feet)
 $240 (U)
Because the company used more for direct materials than it expected, the
variance is unfavorable (U)

22–17
 Computing Direct Materials Variances
(cont’d)

• Test calculations of variances

– If correct, the net of the direct materials
price variance and direct materials quantity
variance will equal the total direct materials
cost variance
Direct materials price variance $ 76 (F)
Direct materials quantity variance 240 (U)
Total direct materials cost variance $164 (U)

. 22–18
 Direct Labor Variances (cont’d)

At Cambria Company, each leather bag requires 2.4 standard direct

labor hours, and the standard direct labor rate is $8.50 per hour.
During August, 450 direct labor hours were used to make 180 bags at
an average pay rate of $9.20 per hour

Standard cost
Standard rate  standard hours allowed 
$8.50 per foot  (180 bags  2.4 hours per bag) 
$8.50 per hour  432 hours  $3,672
Less actual cost
Actual rate  actual hours 
$9.20 per hour  450 hours  4,140
Total direct labor cost varia nce $ 468 (U)

Actual cost > standard cost

22–22
 Direct Labor Variances (cont’d)

• Direct labor rate variance

– Difference between the standard direct labor rate
and the actual direct labor rate multiplied by the
actual direct labor hours worked
– Also called the direct labor spending variance

Direct Labor Rate Variance  (Standard Rate  Actual Rate)

 Actual Hours
 ($8.50  $9.20)  450 hours
 $315 (U)

Because the company paid more per hour for direct

labor than it expected, the variance is unfavorable

22–23
 Computing Direct Labor Variances (cont’d)

• Direct labor efficiency variance

– Difference between the standard direct labor hours
allowed for good units produced and the actual
direct labor hours worked multiplied by the
standard direct labor rate
– Also called the direct labor quantity or usage
variance
Direct Labor Efficiency Variance  Standard Rate  (Standard Hours Allowed
 Actual Hours)
 $8.50 per hour  (432 hours  450 hours)
 $153 (U)
Because the company used more direct labor hours
than it expected, the variance is unfavorable (U)
22–25
Computing Direct Labor Variances (cont’d)

• Test calculations of variances

– If correct, the net of the direct labor rate
variance and direct labor efficiency
variance will equal the total direct labor
cost variance

Direct labor rate variance $ 315 (U)

Direct labor efficiency variance 153 (U)
Total direct labor cost variance $468 (U)

. 22–26
 Computing Manufacturing Overhead
Variances (cont’d)
For Cambria Company, the standard variable overhead rate is $5.75
per direct labor hour (from the flexible budget). Total budgeted fixed
overhead is $1,300 by normal capacity, which is 400 direct labor
hours.

Fixed overhead rate

Budgeted fixed overhead  normal capacity 
$1,300  400 direct labor hours  $3.25

Total standard overhead rate

Standard variable overhead rate  standard fixed overhead rate 
$5.75  $3.25  $9.00

. 22–31
Manufacturing Overhead Variances (cont’d)

For Cambria Company, the standard variable overhead rate is $5.75

per direct labor hour and Total budgeted overhead is $1,300 by normal
capacity, which is 400 direct labor hours.

Standard OH costs applied to good units produced

Total standard OH rate  ( No. good units produced
 standard hours allowed) 
$9.00 per direct labor hour  (180 bags  2.4 hours per bag)  $3,888
Less actual overhead costs 4,100
Total manufactur ing overhead variance $ 212 (U)
Actual cost > standard cost

This amount can be divided into variable overhead

variances and fixed overhead variances
. 22–32
 Variable Overhead Variances (cont’d)
At Cambria Company, each leather bag requires 2.4 standard labor
hours and the variable overhead rate is $5.75 per direct labor hour.
During August, the company incurred $2,500 of variable overhead
costs

Overhead applied to good units produced

Standard variable rate  standard direct labor hours allowed 
$5.75 per hour  (180 bags  2.4 hours per bag) 
$5.75 per hour  432 hours  $2,484
Less actual cost 2,500
Total variable overhead cost varia nce $ 16 (U)

Actual cost > standard cost

22–33
 Variable Overhead Variances (cont’d)

• Variable overhead spending variance

– Difference between the budgeted variable
overhead costs at actual hours and actual
variable overhead

Variable OH Spending Variance  Budgeted Variable Costs at Actual Hours 

Actual Variable Overhead
 (Standard Variable Rate  Actual
Hours Worked)  Actual Variable OH
 ($5.75  450 hours)  $2,500
 $87.50(F)

22–34
 Variable Overhead Variances (cont’d)

• Variable overhead efficiency variance

– Difference between the standard direct
labor hours allowed for good units
produced and the actual hours worked
multiplied by the standard variable
overhead rate
Variable OH Efficiency Variance  Standard Variable Rate  (Standard
Hours Allowed  Actual Hours)

22–36
 Variable Overhead Variances (cont’d)

• Compute standard hours allowed

Standard Hours Allowed  Good Units Produced  Standard Hours per Bag
 180 bags  2.4 hours per bag
 432 hours

• Compute variable overhead efficiency variance

Variable OH Efficiency Variance  Standard Variable Rate  (Standard

Hours Allowed  Actual Hours)
 $5.75  (432 hours  450 hours)
 $103.50 (U)

22–37
Variable Overhead Variances (cont’d)

• Test calculations of variances

– If correct, the net of the variable overhead
spending variance and variable overhead
efficiency variance will equal the total
variable overhead cost variance
Variable overhead spending variance $ 87.50 (F)
Variable overhead efficiency variance 103.50 (U)
Total variable overhead cost variance $ 16.00 (U)

22–38
 Fixed Overhead Variances (cont’d)

At Cambria Company, each leather bag requires 2.4 standard direct

labor hours and the standard fixed overhead rate is $3.25 per direct
labor hour. During August, the company incurred $1,600 of actual
fixed overhead costs

Overhead applied to good units produced

Standard fixed rate  standard direct labor hours allowed 
$3.25 per hour  (180 bags  2.4 hours per bag) 
$3.25 per hour  432 hours  $1,404
Less actual cost 1,600
Total fixed overhead cost varia nce $ 196 (U)

22–41
 Fixed Overhead Variances (cont’d)

• Fixed overhead budget variance

– Difference between the budgeted and
actual fixed overhead costs
– Also called budgeted fixed overhead
variance

Fixed OH Budget Variance  Budgeted Fixed Overhead 

Actual Fixed Overhead
 $1,300  $1,600
 $300 (U)

22–42
 Fixed Overhead Variances (cont’d)

• Fixed overhead volume variance

– Difference between budgeted fixed
overhead costs and manufacturing
overhead costs applied to production using
the standard fixed overhead rate

Standard fixed OH applied for 432 direct labor hours

$3.25 per direct labor hour  (180 bags  2.4 hours per bag) $1,404
Less total budgeted fixed overhead 1,300
Total variable overhead cost varia nce $ 104 (F)

22–44
 Summary of Manufacturing Overhead
Variances

Variable overhead spending variance $ 87.50 (F)

Variable overhead efficiency variance 103.50 (U)
Fixed overhead budget variance 300.00 (U)
Fixed overhead volume variance 104.00 (F)
Total manufacturing overhead variance $212.00 (U)

22–45
Analyzing and Correcting Manufacturing
Overhead Variances

Variance Amount Cause Corrective Action

Variable overhead
$87.50 (F) Savings on purchases No action
spending variance
Inefficiency of machine Consider feasibility of
Variable overhead
103.50 (U) operator who substituted for ill implementing a program for
efficiency variance
assembly worker cross-training employees
Higher than expected factory
Fixed overhead insurance premiums due to Study insurance claims filed
300.00 (U)
budget variance increased claims filed by over a three-month period
employees
No action necessary because
Fixed overhead Overutilization of capacity
104.00 (F) variance fell within anticipated
volume variance traced to high seasonal demand
range

22–46
 Time for Review

1. Define standard costs and describe

how managers use standard costs in
the management cycle
2. Explain how standard costs are
developed and compute a standard
unit cost
3. Prepare a flexible budget and describe
how variance analysis is used to
control costs

22–48
 And Finally…

4. Compute and analyze direct materials

variances
5. Compute and analyze direct labor
variances
6. Compute and analyze manufacturing
overhead variances
7. Explain how variances are used to
evaluate managers’ performance

22–49
The End !!!!
Thank You for Your
Attention!!!!

22–50