Direct materials total variances refers to the difference between the standard direct material cost of the actual production volume and the actual cost of the direct material. The direct materials total variances is a sum of two sub-variances, namely,
- Direct Material Price Variance, and
- Direct Material Usage Variance.
The Direct Material Price Variance Refers to the difference between the standard price and the actual purchase price for the actual quantity of materials. It can be calculated at the time of purchase or time of usage. The latter is specific to the quantity of material utilized in production. But generally, in the calculation of direct material price variance, the quantity purchased is used as the basis of the variance.
Direct Material Usage (Efficiency) Variance: Refers to the difference between the actual quantity used and the standard quantity specified for the actual production, all valued at the standard purchase price.
- Direct Labour Total Variance
This is the difference between the standard direct labour cost and the actual direct labour cost incurred for the production achieved. It is a sum total of the direct labour rate variance and the direct labour efficiency variance.
Direct Labour Rate Variance: This is the difference between the actual direct labour rate and the standard direct labour rate for the total hours worked.
Direct Labour Efficiency Variances This is the difference between the standard hours allowed for the actual production achieved and the hours actually worked, all valued at THE standard labour rate.
Developing and Insight into Material and Labour Variance
The calculation of material and labour variances is not enough; we need to know how the variance could have typically occurred in the first place, and whether there is any connection between one cause of the variance to another. For example, a higher price of materials could have resulted in an unfavourable direct material price variance: but, due to the high quality (though high priced) input materials; this could have led to a favourable efficiency variance!
The above paragraph leads to an important question. What typically causes variances of direct labour and direct materials? This question is answered in the sections that follow.
Typical Causes of Material Variances
- Paying higher or lower prices than planned.
- Losing or gaining quantity discounts by buying in smaller or larger quantities than planned.
- Buying lower or higher quality than planned.
- Buying substitute material due to unavailability of planned material.
Usage (Efficiency) Variances
- Greater or lower field from material than planned.
- Gains or losses due to use of substitute or gather/lower quality than planned.
- Inefficiency or efficient machinery.
- Grater or lower rate of scrap than anticipated.
- Poorly trained workers or extremely high quality labour.
Typical Causes of Labour Variances
Labour Rate Variances
- Higher rates being paid than planned due to wage (increase) awards.
- Higher or lower grade of workers being used than planned.
- Payment of unplanned overtime or bonus.
Labour Efficiency Variances
- Use of incorrect grade of labour e.g. poorly trained personnel.
- Poor workshop organization or supervision.
- Incorrect materials or machine problems.
- Use of better quality labour
- Increase labour or decrease labour efficiency.
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