I. STATEMENT OF THE PROBLEM

Beta Company produces two products, A and B, Each of which uses materials X and Y.

The Following unit Standard cost apply:

Material X Material Y Direct Labor
Product A 4 lbs @ $15 1 lb @ $9.50 1/5 hr @ $18
Product B 6 lbs @ $15 2 lbs @ $9.50 1/3 hr @ $18

During November 4,200 units of A and 3,600 units of B were produced. Also, 39,000 pounds of X were purchased at $14.40, and 11,000 pounds of Y were purchased at $9.70; all of these materials (but no other materials) were used for the month’s production. This production required 2,025 direct labor-hours at $17.50.

Questions:

1. Calculate the material price and usage variance for the month.

2. Calculate the labor rate and efficiency variances for the month.

3. How would your answer to Questions 1 and 2 change if you have been told that November’s planned production activity was 4,000 units of A and 4,000 units of B?

4. How would your answers to Questions 1 and 2 change if you had been told that November’s sales were 4,000 units of A and 3,500 units of B?

II. DECISION CRITERIA

The following criteria are considered in answering the problem and the questions that are required to be answered:

• Standard Costs of Materials X and Y
• Standard Labor Rate
• Standard Requirements of Products A and B
• Actual Materials Usage of X and Y
• Actual Cost of Materials
• Actual Labor Rate
• Actual Working Hours

III. ANSWERS/SOLUTIONS

A. Question # 1
• Materials Price Variance

Formula:
MPV = (Actual Price – Standard Price) x Actual Materials Used
MPV for X = ($14.40 - $15.00) x 39,000 = $ 0.60 x 39,000
MPV for X = $23,400 favorable
A favourable materials price variance is not always a positive thing. A lower actual cost from the standard set by the company may be caused by a high volume of supply of the said material, a lower quality of material, bulk discounts, or even a mistake in the standard price calculation, etc (Garrison, 2012).
The management should see to it that the procurement system of the company and its procurement personnel are efficient in their jobs and that the company has sufficient materials in storage to reduce the impact of the instability of prices in the market. MPV for Y = ($9.70 - $9.50) x 11,000 = $ 0.20 x 11,000
MPV for Y = $2,200 unfavorable

An unfavourable MPV may also be attributed to the scarce supply of the materials in the market, the timing of the purchase of the materials, high quality of materials, etc. Total MPV = $21,200 favorable

• Materials Usage Variance

Formula:
MUV = (Actual Usage – Standard Usage for Output) x Std. Price
MUV for X = {39,000 - [(4x 4,200) + (6x 3,600)} x $15.00 = [39,000 - (16,800 + 21,600)] x $15.00 = (39,000 – 38,400) x $15.00
MUV for X = $9,000 unfavorable

An unfavourable MUV shows that the production team has encountered problems which resulted to the use of more materials. This may be caused by machine malfunctions, poor material quality, untrained workers, poor production supervision, etc (Garrison, 2012).
The manufacturing team cannot be solely blamed for this variance as some factors are only carried over from other departments (ex. Procurement, Warehouse, etc.)

MUV for Y = {11,000 – [(1x 4,200) + (2x 3,600)} x $9.50 = [11,000 – (4,200 + 7,200)] x $15.00 = (11,000 – 11,400) x $15.00
MUV for Y = $3,800 favorable

A favourable usage variance indicates that all materials that are put into production are being used efficiently and/or the machines used in production are in good condition. This may also be attributed to high quality of raw materials purchased and the excellent storage condition of the company facility.

Total MUV = $5,200 unfavorable

B. Question # 2
• Labor Rate Variance

Formula:
LRV = (Actual Rate – Standard Rate) x Actual Direct Labor Hours = ($17.5- $18.00) x 2,025
LRV = $1,012.50 favorable

A favourable LRV may be caused by low-skilled workers doing tasks requiring specialized skills but this may be sacrificing the quality of the job. In contrast an unfavourable LRV may be caused by overtime work done or highly-skilled workers doing ordinary tasks.
Production supervisors are tasked to ensure that the compensation of the workers is justified to the work that they are assigned to.

• Labor Efficiency Variance

Formula:
LEV = (Actual DL Hours – Standard DL on Output) x Std. DL Rate = {2,025 – [(1/5x 4,200) + (1/3 x 3,600)]} x $18.00 = [2,025 – (840+1,200)] x $18.00 = 15 x $18.00 LEV = $270.00 favorable

A favourable LEV may be attributable to well-trained/highly motivated workers, high quality materials requiring less time, conditioned equipment, adequate supervision, etc. The exact opposite is the possible causes of an unfavourable LEV.

C. Question # 3
The answers for questions 1 and 2 will not change even when planned production activity for the said month will be given. This is because the analysis for materials variance and labor variance only considers three factors: o Actual inputs at actual price/rate o Actual inputs at standard price/rate, and o Standard inputs for the given output at standard price/rate
Planned production activity, when given, will affect the result of variance analysis for overhead expenses.

D. Question # 4
The answer for questions 1 and 2 will not change even when sales volume for the month will be given. The reason is the same as the one stated on item C. However the actual sales volume for the month will affect the sales variance of the company when compared with the targeted sales volume.

IV. CONCLUSION

Variance analysis is one way to aid the management in its decision-making functions. Though all types of variance analysis provide useful information, it doesn’t mean that they should all be utilized.
Management should be wary which among this information they should use in making crucial decisions as one false interpretation of an analysis may result in unwanted outcomes.

REFERENCES

Garrison, R., Noreen, E., & Brewer, P. (2012). Standard Costs and Variances: Managing Materials and Labor. Managerial Accounting (pp. 418-432). New York: McGraw-Hill/Irwin.

Coombs, H., Hobbs, D., & Jenkins, E. (2005). Management Accounting and the Control Process – 1. Management Accounting: Principles and Applications (pp. 147-167). London: Sage Publications Ltd.