Question

a) How is the deviation for direct materials usage determined

b) How is the deviation for labor costs determined?

c) How is the controlled deviation for manufacturing overhead determined?

d) How is the deviation for manufacturing overhead by volume determined?

Answer 1

Requirement-(a Material Usage Variance (Standard quantity of materials required for actual units produced - Actual materials used) x Standard Price per material Here, Standard quantity of materials required for actual units produced is calculated by standard material required per unit by actual number of units produced. Material usage variance concentrates on identifying variance between budgeted quantity required for actual production as per flexible budget and actual quantity of materials used. If the actual material used is less than standard material required for actual production, it is considered as favorable variance; If the actual material used is more than standard material required for actual production, it is considered as unfavorable variance; If the actual material used is equal to standard material required for actual production, there is no variance. Requirement-(b Labor cost variance Labor rate variance Labor efficiency variance; where, Labor rate variance -Actual direct labor hours worked x (Standard rate per hour - Actual rate per hour) and Labor efficiency variance = (Actual direct labor hours worked-standard labor hours required for actual production) x standard rate per hour Labor rate variance concentrates on identifying difference between standard rate per labor hour budgeted and actual rate paid per labor hour. The per hour rate variance is multiplied by actual labor hours used to calculate total labor rate variance. If the actual rate per hour is less than standard rate per labor hour, it is considered as favorable; If actual rate per hour is more than standard rate per labor hour, it is considered as unfavorable variance; If actual rate per labor hour is equal to standard rate per labor hour, there is no variance.

Labor efficiency variance (Standard labor hours required for actual units produced - Actual labor hours used) x Standard rate per hour Here, Standard labor hours required for actual units produced is calculated by multiplying standard labor hours required per unit by actual number of units produced. Labor efficiency variance concentrates on identifying variance between budgeted labor hours required for actual production as per flexible budget and actual labor hours used. If the actual hours used is less than standard hours required for actual production, it is considered as favorable variance; If the actual hours used is more than standard hours required for actual production, it is considered as unfavorable variance; If the actual labor hours used is equal to standard labor hours required for actual production, there is no variance Requirement- controllable overhead variance = Actual overhead cost-Budgeted overhead cost for actual output; where, Budgeted overhead cost for actual output Actual labor hours used x Overhead rate per hour Here, budgeted overhead cost for actual output is calculated by multiplying actual labor hours required per unit by standard overhead rate per hour. Controllable overhead variance concentrates on identifying variance between budgeted overhead rate per hour and actual overhead rate labor hour. The per hour rate variance is multiplied by actual labor hours used to calculate total controllable overhead variance. If the actual rate per hour is less than standard rate per labor hour, it is considered as favorable; If actual rate per hour is more than standard rate per labor hour, it is considered as unfavorable variance; If actual rate per labor hour is equal to standard rate per labor hour, there is no variance

Requirement-(d Overhead volume variance Budgeted overhead cost as per master budget- Budgeted overhead cost as per flexible budget. Here, budgeted overhead cost as per flexible budget is calculated by multiplying actual labor hours required per unit by standard overhead rate per hour. Overhead volume variance concentrates on identifying variance between budgeted overhead cost per master budget and budgeted overhead per flexible budget. If the overhead cost as per flexible budget is less than overhead cost as per master budget, it is considered as favorable variance; If the overhead cost as per flexible budget is more than overhead cost as per master budget, it is considered as unfavorable variance; If overhead cost as per flexible budget is equal to soverhead cost as per master budget, there is no variance.