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materials price variance, and materials quantity
variance, respectively.
1. The standard price is used to compute the
quantity variance so that the production
manager is not held responsible for the
performance of the purchasing manager.
ii. The materials variances are not always entirely
controllable by one person or department. For
example:
1. The production manager may schedule
production in such a way that it requires
express delivery of raw materials resulting
in an unfavorable materials price variance.
2. The purchasing manager may purchase
lower quality raw materials resulting in an
unfavorable materials quantity variance for
the production manager.
Quick Check – direct materials variance calculations
VI. Using standard costs—direct labor variances
Learning Objective 2: Compute the direct labor rate
and efficiency variances and explain their significance.
A. Glacier Peak Outfitters – continued (assume the
information as shown)
i. The labor rate variance, defined as the difference
between the actual average hourly wage paid and
the standard hourly wage, is $1,250 unfavorable.
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1. The rate variance is labeled unfavorable
because the actual average wage rate was
more than the standard wage rate by $0.50
per hour.
ii. The labor efficiency variance, defined as the
difference between the actual quantity of labor
hours and the quantity allowed according to the
standard, is $1,000 unfavorable.
1. The efficiency variance is labeled
unfavorable because the actual quantity of
hours exceeds the standard quantity allowed
by 100 hours.
iii. Supporting/additional computations
1. The standard quantity of 2,400 hours was
computed as shown.
2. The actual price (or rate) of $10.50 per
hour was computed as shown.
3. Factored equations can also be used to
compute the efficiency and rate variances.
B. Direct labor variances—points of clarification:
i. Labor variances are partially controllable by
employees within the Production Department. For
example, production managers/supervisors can
influence:
1. The deployment of highly skilled workers
and less skilled workers on tasks consistent
with their skill levels.
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2. The level of employee motivation within the
department.
3. The quality of production supervision.
4. The quality of the training provided to the
employees.
ii. However, labor variances are not entirely
controllable by one person or department. For
example:
1. The Maintenance Department may do a
poor job of maintaining production
equipment. This may increase the
processing time required per unit, thereby
causing an unfavorable labor efficiency
variance.
2. The purchasing manager may purchase
lower quality raw materials resulting in an
unfavorable labor efficiency variance for the
production manager.
Quick Check – direct labor variance calculations
VII. Using standard costs—variable manufacturing
overhead variances
Learning Objective 3: Compute the variable
manufacturing overhead rate and efficiency variances
and explain their significance.
A. Glacier Peak Outfitters – continued
i. The variable overhead rate variance, defined as
the difference between the actual variable overhead
costs incurred during the period and the standard
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cost that should have been incurred based on the
actual activity of the period, is $500 unfavorable.
1. The rate variance is labeled unfavorable
because the actual variable overhead rate
was more than the standard variable
overhead rate by $0.20 per hour.
ii. The variable overhead efficiency variance,
defined as the difference between the actual activity
of a period and the standard activity allowed,
multiplied by the variable part of the predetermined
overhead rate, is $400 unfavorable.
1. The efficiency variance is labeled
unfavorable because the actual quantity of
the activity (hours) exceeds the standard
quantity of the activity allowed by 100
hours.
iii. Supporting/additional computations
1. The standard quantity of 2,400 hours was
computed as shown.
2. The actual price of $4.20 per hour was
computed as shown.
3. Factored equations can be used to compute
the efficiency and rate variances.
Quick Check – variable overhead variance calculations
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VIII. Materials variances—an important subtlety
A. When the quantity of materials purchased differs
from the quantity used in production, the price
variance is based on the quantity purchased and the
quantity variance is based on the quantity used in
production.
B. Glacier Peak Outfitters—revisited
i. The materials price variance is computed using
the actual quantity purchased (210 kgs.); therefore,
the materials price variance is $21 favorable.
ii. The materials quantity variance is computed
using the actual quantity used in production (200
kgs.); therefore, the materials quantity variance is
$0.
IX. Standard costs—managerial implications
A. Advantages of standard costs:
i. Standard costs are a key element of the
management by exception approach.
ii. Standards can provide benchmarks that promote
economy and efficiency.
iii. Standards can greatly simplify bookkeeping.
iv. Standards can support responsibility accounting
systems.
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B. Potential problems with standard costs:
i. Standard cost variance reports are usually prepared
on a monthly basis; hence, they may contain
information that is outdated.
ii. If variances are misused as a club to negatively
reinforce employees, morale may suffer and
employees may make dysfunctional decisions.
iii. Labor variances make two important
assumptions. First, they assume that production is
labor-paced; if labor works faster, output will go
up. Second, they assume that labor is a variable
cost. These assumptions are often invalid in today’s
automated manufacturing environment where
employees are essentially a fixed cost.
iv. In some cases, a “favorable” variance can be as
bad as or worse than an “unfavorable” variance.
v. Excessive emphasis on meeting the standards
may overshadow other important objectives such as
maintaining and improving quality, on-time
delivery, and customer satisfaction.
vi. Just meeting standards may not be sufficient;
continuous process improvement may be
necessary to survive in a competitive environment.
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