Variance computa.ons and interpreta.on of the variances1.
Variance Method of computa.on Interpreta.on of variance
Favorable, when we achieve to purchase for less
than the standard costs.
Material price variance Actual quan0ty x (Standard Price – Actual Price)
Unfavorable, when we must purchase for more than
the standard costs.
Unfavorable, using more materials than the cost
Material quan0ty variance Standard Price x (Standard Quan0ty – Actual Quan0ty)
standard allows.
Total Materials Variance = Material price variance + Material quan0ty variance
Unfavorable, using highly paid employees to
Labor rate variance Actual hours x (Standard Hourly rate – Actual Hourly rate) perform lower pay scale jobs. Excessive over0me
costs.
Favorable, workers are able to complete the
scheduled produc0on in fewer hours than expected
Efficiency variance Standard Hourly rate x (Standard Hours – Actual Hour) by the standard.
Unfavorable, wasted 0me and/or low produc0vity.
Total Labor Variance = Labor rate variance + Efficiency variance
1
Materials price is the same as costs. Hourly rate is the same as wage rate.
Favorable, meaning we paid less than the standard
Standard Overhead (at Actual produc0on Level) – Actual
Spending variance
Overhead. Unfavorable, meaning we paid more than the
standard
Natural result of fluctua0on in the level of
produc0on (should be balanced out during the
year).
Favorable, actual produc0on > normal produc0on
Volume variance Applied Overhead (at Standard Rate)2 – Actual Overhead
à overapplied.
(at Actual produc0on Level)
Unfavorable, actual produc0on < normal produc0on
à underapplied à addi0onal overhead costs must
be charged to the units produced.
Total Overhead Variance = Spending variance + Volume variance
Global variance = Total Materials Variance + Total Labor Variance + Total Overhead Variance
2
Applied Overhead (at Standard Rate) is calculated according to the applica>on rate.
