9.2 Material and Labor Variances

Material and labor variances are key tools for cost control in manufacturing. They help managers spot differences between expected and actual costs for materials and labor, pinpointing areas that need attention.

These variances break down into price and quantity components for materials, and rate and efficiency for labor. By analyzing these, companies can improve their production processes and make smarter decisions about resource use.

Material Variances

Price and Quantity Variances

• Direct material price variance measures difference between actual and standard price paid for materials
• Calculated by multiplying difference in price by actual quantity purchased
• Formula: $(AP - SP) × AQ$
  • AP: Actual Price
  • SP: Standard Price
  • AQ: Actual Quantity
• Direct material quantity variance assesses difference between actual and standard quantity of materials used
• Computed by multiplying difference in quantity by standard price
• Formula: $(AQ - SQ) × SP$
  • AQ: Actual Quantity
  • SQ: Standard Quantity
  • SP: Standard Price

Interpreting Variances

• Favorable variance occurs when actual costs are lower than standard costs
• Indicates better-than-expected performance (lower prices or less material used)
• Unfavorable variance arises when actual costs exceed standard costs
• Suggests worse-than-expected performance (higher prices or more material used)
• Managers use these variances to identify areas for improvement or cost control

Labor Variances

Rate and Efficiency Variances

• Direct labor rate variance evaluates difference between actual and standard hourly rate paid to workers
• Calculated by multiplying difference in rate by actual hours worked
• Formula: $(AR - SR) × AH$
  • AR: Actual Rate
  • SR: Standard Rate
  • AH: Actual Hours
• Direct labor efficiency variance measures difference between actual and standard hours worked
• Computed by multiplying difference in hours by standard rate
• Formula: $(AH - SH) × SR$
  • AH: Actual Hours
  • SH: Standard Hours
  • SR: Standard Rate

Analyzing Labor Variances

• Favorable variance in labor context indicates lower costs than expected
• Can result from lower wage rates or fewer hours worked than standard
• Unfavorable variance suggests higher labor costs than anticipated
• May stem from higher wage rates or more hours worked than standard
• These variances help managers assess workforce productivity and labor cost management

Variance Analysis Methods

Two-Way Analysis

• Two-way analysis separates total variance into price and quantity components
• Provides a simplified view of variances for both materials and labor
• For materials includes direct material price variance and direct material quantity variance
• For labor encompasses direct labor rate variance and direct labor efficiency variance
• Helps identify whether cost discrepancies stem from price/rate issues or quantity/efficiency factors

Four-Way Analysis

• Four-way analysis offers a more detailed breakdown of variances
• Splits total variance into four components for more comprehensive understanding
• For materials includes price variance, quantity variance, mix variance, and yield variance
• For labor comprises rate variance, efficiency variance, mix variance, and yield variance
• Mix variance assesses impact of changes in proportion of different materials or labor types used
• Yield variance evaluates effect of overall output differences on cost variances
• Provides deeper insights for complex production processes or diverse resource utilization