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Introduction to Variance in Decision making

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Cost acc 2
Standard Costing and Variance Analysis Formulas:
This is a collection of variance formulas / equations which can help you calculate
variances for direct materials, direct labor, and factory overhead.
Direct materials variances formulas
Direct labor variances formulas
Factory overhead variances formulas
Direct Materials Variances:
Materials purchase price variance Formula:
Materials purchase price variance = (Actual quantity purchased × Actual price)
(Actual quantity purchased × Standard price)
Materials price usage variance formula
Materials price usage variance = (Actual quantity used × Actual price) (Actual
quantity used × Standard price)
materials quantity / usage variance formula
Materials price usage variance = (Actual quantity used × Standard price) (Standard
quantity allowed × Standard price)
Materials mix variance formula
(Actual quantities at individual standard materials costs) (Actual quantities at
weighted average of standard materials costs)
Materials yield variance formula
(Actual quantities at weighted average of standard materials costs) (Actual output
quantity at standard materials cost)
Direct Labor Variances:
Direct labor rate / price variance formula:
(Actual hours worked × Actual rate) (Actual hours worked × Standard rate)
Direct labor efficiency / usage / quantity formula:
(Actual hours worked × Standard rate) (Standard hours allowed × Standard rate)
Direct labor yield variance formula:
(Standard hours allowed for expected output × Standard labor rate) (Standard hours
allowed for actual output × Standard labor rate)
Factory Overhead Variances:
Factory overhead controllable variance formula:

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(Actual factory overhead) (Budgeted allowance based on standard hours allowed*)
Factory overhead volume variance:
(Budgeted allowance based on standard hours allowed*) (Factory overhead applied
or charged to production**)
Factory overhead spending variance:
(Actual factory overhead) (Budgeted allowance based on actual hours worked***)
Factory overhead idle capacity variance formula:
(Budgeted allowance based on actual hours worked***) (Actual hours worked ×
Standard overhead rate)
Factory overhead efficiency variance formula:
(Actual hours worked × Standard overhead rate) (Standard hours allowed for
expected output × Standard overhead rate)
Variable overhead efficiency variance formula:
(Actual hours worked × Standard variable overhead rate) (Standard hours allowed ×
Standard variable overhead rate)
Variable overhead efficiency variance formula:
(Actual hours worked × Fixed overhead rate) (Standard hours allowed × Fixed
overhead rate)
Factory overhead yield variance formula:
(Standard hours allowed for expected output × Standard overhead rate) (Standard
hours allowed for actual output × Standard overhead rate)
Problem 1:
Materials Variance Analysis:
The Schlosser Lawn Furniture Company uses 12 meters of aluminum pipe at $0.80
per meter as standard for the production of its Type A lawn chair. During one month's
operations, 100,000 meters of the pipe were purchased at $0.78 a meter, and 7,200
chairs were produced using 87,300 meters of pipe. The materials price variance is
recognized when materials are purchased.
Required: Materials price and quantity variances.
Solution:
Meters of pipe
Unit Cost
Amount
Actual quantity
purchased
100,000
$0.78 actual
$78,000
actual quantity
purchased
100,000
$0.80 standard
$80,000
-----------
-----------
-----------
Materials purchase
price variance
100,000
$(0.02)
$(2,000) fav.
=======
=======
=======
Actual quantity used
87,300
0.80 standard
$69,840

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Cost acc 2 Standard Costing and Variance Analysis Formulas: This is a collection of variance formulas / equations which can help you calculate variances for direct materials, direct labor, and factory overhead. Direct materials variances formulas Direct labor variances formulas Factory overhead variances formulas Direct Materials Variances: Materials purchase price variance Formula: Materials purchase price variance = (Actual quantity purchased × Actual price) – (Actual quantity purchased × Standard price) Materials price usage variance formula Materials price usage variance = (Actual quantity used × Actual price) – (Actual quantity used × Standard price) materials quantity / usage variance formula Materials price usage variance = (Actual quantity used × Standard price) – (Standard quantity allowed × Standard price) Materials mix variance formula (Actual quantities at individual standard materials costs) – (Actual quantities at weighted average of standard materials costs) Materials yield variance formula (Actual quantities at weighted average of standard materials costs) – (Actual output quantity at standard materials cost) Direct Labor Variances: Direct labor rate / price variance formula: (Actual hours worked × Actual rate) – (Actual hours worked × Standard rate) Direct labor efficiency / usage / quantity formula: (Actual hours worked × Standard rate) – (Standard hours allowed × Standard rate) Direct labor yield variance formula: ...
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