Material Variances

Materials Price Variance = (Standard price per unit - Actual price per unit) x Actual Quantity Purchased
= (SP - AP) x AQ

Materials Usage Variance = (Standard Quantity required - Actual Quantity Used) x Standard price
= (SQ - AQ) x SP

© 2009 Prentice-Hall, Inc. 6–1

Calculate materials variances from following data
(i ) Material E: Standard price per kilo £4
Standard usage per unit 280 kg
Actual price per kilo £5
Actual usage per unit 310 kg

(ii ) Material F: Standard price per litre £75

Standard usage per unit 5,000 litres
Actual price per litre £66
Actual usage per unit 4,950 litres

© 2009 Prentice-Hall, Inc. 6–2

Disposition of Variances

How variances are to be brought into financial statements of business.

(i) They can be treated entirely as period costs, therefore, are not included in valuation of
closing inventory.

(ii) They may be brought in as product costs & therefore used in valuation of closing
inventory.

(iii) Another variation is to treat those variances which are controllable as period costs, but to
treat uncontrollable variances as product costs.
© 2009 Prentice-Hall, Inc. 6–3
Labour Variances

Labour variances are similar to that of material variances. Labour variances analysis can
be broken down into:

(a) wage rate variances (price)

(b) labour efficiency variances (quantity)

© 2009 Prentice-Hall, Inc. 6–4

Labour efficiency variances can be caused by:

- Using unsuitable labour

- Unsuitable machinery

- workers trying to slow work up so that more overtime rates of pay are earned,

- morale of workers & physical state of workers

- using poor materials which slows up production

- hold-ups because of bottlenecks in production

© 2009 Prentice-Hall, Inc. 6–5
Formulas for Labour Variances:

Wage Rate Variance = (Standard wage rate - Actual wage rate) x Actual hours worked
= (SR - AR) x AH

Labour Efficiency Variance = (Standard hours for actual production – Actual Hours) x Standard Rate

= (SH - AH) x SR

If you compare these formulae to materials variance formulae, they are actually same, only
terminology is different, i.e. ‘wage rate’ instead of ‘price’; ‘efficiency’ instead of ‘usage’.

© 2009 Prentice-Hall, Inc. 6–6

Calculate labour variances from the following data:
Standard hours Actual hours Standard rate (£) Actual rate (£)
(i) Job a 450 426 5.20 5.60
(ii) Job f 810 780 4.60 5.00

© 2009 Prentice-Hall, Inc. 6–7

© 2009 Prentice-Hall, Inc. 6–8