Variable Cost Variance Analysis
Practice As You Learn
Cost Accounting
Follow these steps when asked to compute variable cost variances.
1) Write the column headings/formula:
AQ x AP AQ x SP SQ x SP
Do this for each section: material, labor, and variable overhead.
For material: do two AQ x SP in the middle,
one for actual quantity purchased and one for actual quantity used.
2) Go to the problem and find the actual information and plug it in to the AQ and AP
3) Go to the problem and find the SP information and plug it in to the SP.
This information may be described as “standard”, “budgeted”, “estimated”, or “per the cost sheet”
4) Find the actual units produced/manufactured/made and the amount that is supposed to be used to produce one product (this will be the standard) and multiply these together to get the SQ
5) Do the math and calculate the variances:
Favorable: the amount on the left is smaller because you have actually spent less (actual) than you thought you would (standard).
Variable Costs Variances – Learn as You Practice – problem 1.
KKR Company is a manufacturing company with the following data.
Standard
| Materials | 3 pounds at $3 per pound |
| Labor | 5 hours at $10 per hour |
| Variable Overhead | $7 per labor hour |
| Budgeted production for the year | 5,000 units |
Actual
| Materials Purchased | 15,000 pounds for $46,210 |
| Materials Used | 15,300 pounds |
| Direct Labor | 24,860 hours at $239,500 |
| Variable Overhead | $168,600 |
| Fixed overhead | $142,600 |
| Units produced | 5,200 |
Calculate all variances and answer the following.
1a. The material price variance is
a. 900 favorable
b. 1,210 unfavorable
c. 0
d. 1,800 favorable
1.b. The material quantity variance is
a. 900 favorable
b. 0
c. 1,210 favorable
d. 1,800 favorable
1.c. The labor rate variance is
b. 9,100 favorable
c. 6,600 favorable
d. 11,400 favorable
1.d. The labor efficiency variance is
a. 1,400 favorable
b. 9,100 favorable
c. 6,600 unfavorable
d. 11,400 favorable
1.e. The variable overhead spending variance is
a. 7,980 favorable
b. 980 favorable
c. 5,420 favorable
d. 32,000 favorable
1.f. The variable overhead efficiency variance is
a. 7,980 favorable
b. 980 favorable
c. 5,420 favorable
d. 32,000 favorable
Answer
a. B
b. A
c. B
d. D
e. C
f. A
Material:
| AQ x AP AQ x SP AQ x SP SQ x SP (Purchased) Purchased Used (used)
$46,210 15,000 x $3 15,300 x $3 5,200 x 3 x $3 Variance $1,210 U $900 F |
Labor:
| AQ x AP | AQ x SP | SQ x SP |
| $239,500 | 24,860 x $10 = $248,600 |
5,200 x 5 x $10 $260,000 |
| Variance | $9,100 F | $11,400 F |
Variable Overhead:
| AQ x AP | AQ x SP | SQ x SP |
| $168,600 | 24,860 x $7 = $174,020 |
5,200 x 5 x $7 = $182,000 |
| Variance | $5,420 F | $7,980 F |
Important to Notice:
For variable overhead the quantities that were used were the labor quantities, because the rate is “per hour”
The budgeted production is not used for variable cost variances. It was used initially to calculate the variable manufacturing cost per hour using the predetermined overhead calculation and is not correct.
Variable Costs Variances – Practice as You Learn – Problem 2.
Follow the same 5 steps described above.
The following activity took place at Octy Manufacturing Company during this year:
| Number of units produced | 500 units |
| Actual direct labor cost per hour | $10.25 |
| Material purchased | 1,600 feet |
| Actual machine hours used | 1,246 |
| Material used | 872 feet |
| Actual variable overhead $ spent | $11,212 |
| Actual cost per foot for material | $4 |
| Actual fixed overhead $ spent | $32,076 |
| Direct labor hours worked | 1,822 |
The standard cost sheet shows management estimated that 1.6 feet of material would be used for each product and materials would cost $4.20 per foot; it would take labor 4 hours to make 1 product at a cost of $10 per hour; variable overhead cost is expected to be $8.50 per machine hour used and it should take 2.2 machine hours to make one product. Fixed manufacturing overhead is expected to be $25 per machine hour. The company expected to produce 550 units during the year.
Calculate all variances and answer the following.
2a. The material price variance is
a. 320 favorable
b. 302 unfavorable
c. 4,620 unfavorable
d. 3,360 unfavorable
2.b. The material quantity variance is
a. 320 favorable
b. 302 unfavorable
c. 4,620 unfavorable
d. 3,360 unfavorable
2.c. The labor rate variance is
a. 1,780 favorable
b. 456 unfavorable
c. 3,780 unfavorable
d. 13,220 unfavorable
2.d. The labor efficiency variance is
a. 1,780 favorable
b. 456 unfavorable
c. 3,780 unfavorable
d. 13,220 unfavorable
2.e. The variable overhead spending variance is
a. 6,409 favorable
b. 306 unfavorable
c. 621 unfavorable
d. 1,241 unfavorable
2.f. The variable overhead efficiency variance is
a. 6,409 favorable
b. 306 unfavorable
c. 621 unfavorable
d. 1,241 unfavorable
Answer
a. A
b. B
c. B
d. A
e. C
f. D
Material:
| AQ x AP AQ x SP AQ x SP SQ x SP (purchased) Purchased Used (Used) 1,600x $4 1,600 x $4.20 872 x $4.20 500 x 1.6 x $4.20 = $6,400 =$6,720 = $3,662 =$ 3,660
Variance $320 F $302 U |
Labor:
| AQ x AP AQ x SP SQ x SP 1,822 x $10.25 1,822 x $10 500 x 4 x $10 =$18,676 =$18,220 =$20,000
Variance $456 U $1,780 F |
Variable Overhead:
| AQ x AP AQ x SP SQ x SP $11,212 1,246 x $8.50 500 x 2.2 x $8.50 = $10,591 = $9,350
Variance $621 U $1,241 U |
Important to Notice:
Use Machine hour information for variable overhead because the variable overhead rate is per machine hour
The SQ is the actual units made x the standard that each one takes.
Material uses to differ AQ x SP, one for used and one for purchased.