Variance Analysis: Practical Questions and Answers

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on August 26, 2021

Practical Question 1

The standard product cost card of a product is shown below.

Materials 2 feet length, 1/4 inch thick @ $16 $32
Factory overhead labor 4 hours @ $6 $24
Variable 4 hours @ $2 $8
Fixed 4 hours @ $4 $16 $24
Total standard production cost $80

Fixed overhead was based on 36,000 hours a year.
Total fixed overhead estimated at $144,000 per annum.

Actual data for a month has been ascertained as follows:

  • Actual hours worked = 3,800
  • Units of product produced = 900
  • Material used = 1,900 feet in length
  • Price per foot = $15
  • Actual labor wage rate = $5.80
  • Actual factory overhead: variable = $6,200, fixed = $12,000

Required: Calculate two variances for each of the three elements of the production cost.

Solution

1) Material Cost Variance

Standard quantity of output @ standard price:
900 units x 2 x $16 = $28,800
Actual quantity used @ standard price:
1,900 x $16 = $30,400
Actual quantity used @ actual price:
1,900 x $15 = $28,500
Total material cost variance:
$28,800 – $28,500 = $300 (favorable)

Analysis

Materials usage variance:
28,800 – 30,400 = $1,600 (unfavorable)
Materials price variance:
30,400 – 28,500 = $1,900 (favorable)

2) Labor Cost Variance

Standard hours of output at standard wage rate:
900 units x 4 hours x $6 = $21,600
Actual hours for the output at standard wage rate:
3,800 hours x $6 = $22,800
Actual hours at actaul wage rate:
3,800 hours x $5,80 = $22,040
Total labor cost variance:
$21,600 – $22,040 = $440 (unfavorable)

Analysis

Labor efficiency variance:
$21,600 – $22,800 = $1,200 (unfavorable)
Labor wage rate variance:
$22,800 – $22,040 = $760 (favorable)

3) Factory Overhead Variance

Standard hours of output @ standard overhead rate:
900 units x 4 hours x $6 = $21,600
Budget for standard hours produced = 900 units x 4 hours = 3,600 hours
Variable overhead:
3,600 hours x $2 = $7,200
($144,000 / 12 months = $12,000)
Total = $19,200
Actual overhead = $18,200
Total factory overhead variance:
$21,600 – $18,200 = $3,400
Factory overhead volume variance:
$21,600 – $19,500 = $2,400 (favorable)
Factory overhead controllable variance:
$19,200 – $18,200 = $1,000 (favorable)

Practical Question 2

The data shown below relate to an industrial organization that manufactures household appliances.

Standard quantity required of materials item 0020 1 kg.
Standard price per kg. $10
Product in a month appliances 100 kgs.
Actual quantity of materials used 98 kgs.
Actual price paid $11/kg

The following calculations for variances have been made:

Material usage variance = 2 kgs. @ $11 = $22
Material price variance = 100 kgs. x $1 = $100

Required: Do you agree with these calculations? If not, provide a correct calculation for the variances.

Solution

The above analysis of variances is not correct. The correct calculations are given below:

Material Usage Variance

= Difference between standard quantity for the output x Standard price
= 100 units x 1 kg. x $10 = $1,000
(-) 98 kgs. x $10 = $980 or 2 kgs. x $10 = 20 (favorable variance)

Material Price Variance

= Actual quantity used x Difference between standard price and actual price
= 98 kgs. x $1 = $98 (unfavorable)
Total Variance = $78 (unfavorable)

Practical Question 3

The following data pertains to a company’s first week of operations in June 2011:

Materials:

Actual purchased  = 1,500 units @ $3.80 per unit
Actual usage  = 1,350 units
Standard usage  = 1,020 units @ $4.00 per unit

Direct Labor:

Actual hours  = 310 hours @ $12.10 per hour
Standard hours  = 340 hours @ $12.00 per hour

Required: Compare the following variances to determine whether they are favorable or unfavorable:

  • (A) Material purchase price variance and quantity variance
  • (B) Labor rate efficiency variance.

Answer

Requirement (A)

1) Material Purchase Price Variance

Actual quantity purchased x Actual rate (1,500 units x $3.80)  = $5,700
Actual quantity purchased x Standard rate ( 1,500 units x $4)  = $6,000
Favorable  = $300

2) Material Usage Price Variance

Actual quantity used x Actual rate ( 1,350 units x $3.80)  = $5,130
Actual quantity used x Standard rate (1,350 units x $4)  = $5,400
Favorable  = $270

3) Material Quantity Variance

Actual quantity used x Standard rate (1,350 units x $4)  = $5,400
Standard quantity allowed x Standard rate (1,020 units x $4)  = $4,080
Unfavorable  = $1,320

Requirement (B)

1. Labor Rate Variance

Actual labor hours worked x Actual rate (310 hours x $12.10)  = $3,751
Actual labor hours worked x Standard rate (310 labor hours x $12)  = $3,720
Unfavorable  = $31

 

2. Labor Efficiency Variance

Actual labor hours worked x Standard rate (310 hours x $12)  = $3,720
Standard hours allowed x Standard rate (340 hours x $12)  = $4,080
Favorable  = $360

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