See below for a summary of the six variances
from standard discussed in this chapter.
| Materials price variance = |
(Actual price – Standard price) x Actual
quantity purchased OR
(Actual Price x Actual Qty
purch) – (Standard Price x Actual Quantity
purchased)
|
| Materials usage variance = |
(Actual quantity used –
Standard quantity allowed) x Standard price OR
(Actual qty used x Standard
price) – (Standard Qty allowed x Standard price)
|
| Labor rate variance = |
(Actual rate – standard rate) x Actual hours
worked OR
(Actual rate x Actual hours worked) – (Standard
rate x Actual hours worked)
|
| Labor efficiency variance = |
(Actual hours worked – standard hours allowed)
x Standard rate OR
(Actual hours worked x Standard Rate) – (Standard
hours allowed x Standard Rate)
|
| Variable OH Spending variance = |
(Actual variable OH rate – standard variable
OH rate) x Actual OH base OR
(Actual variable OH rate x Actual OH base) – (Std
variable OH rate x Actual OH base)
|
| Variable OH Efficiency variance = |
(Actual OH base – standard OH base) x Standard
variable OH rate OR
(Actual OH base x Standard variable OH rate) –
(Std OH base x Std variable OH rate)
|
| Fixed OH variance = |
Actual fixed overhead – Budgeted fixed overhead |
Remember, variances are expressed at the absolute
values meaning we do not show negative or positive numbers. We
express variances in terms of FAVORABLE or UNFAVORABLE and negative
is not always bad or unfavorable and positive is not always good or
favorable.
Keep these in mind:
- When actual materials are more than standard (or budgeted), we
have an UNFAVORABLE variance.
- When actual materials are less than the standard, we have a
FAVORABLE variance.
- Same rule applies for direct labor. If actual direct labor
(either hours or dollars) is more than the standard, we have an
UNFAVORABLE variance. A FAVORABLE variance occurs when actual
direct labor is less than the standard.
Accounting in the Headlines
How will the increasing cost of chocolate impact
Hershey’s variances?
The price of chocolate had been
predicted to increase rapidly beginning in late 2013 and continue
into 2014, according to the Wall Street Journal.
The price increase is due to multiple factors, including a shortage
of cocoa beans and an increase in demand by consumers.
Although the demand for all chocolate has been
increasing, consumer tastes have been gradually shifting towards
dark chocolate because of its purported health
benefits. Dark chocolate uses more cocoa beans per ounce than
milk chocolate.
So what does the predicted price increase mean
for companies that use chocolate and/or cocoa beans?
Questions
1. The Hershey Company produces several products
that use chocolate and/or cocoa beans. Which of the following
variances for Hershey’s chocolate products are likely to be
impacted by the projected price increase in the cost of chocolate?
Explain your answer.
- a. Direct material price variance
- b. Direct material quantity variance
- c. Direct labor rate variance
- d. Direct labor efficiency variance
2. Hershey’s Special Dark Mildly Sweet Chocolate
Bar and Hershey’s Milk Chocolate with Almonds Bar both weigh 1.45
ounces. Which bar’s variances are more likely to be impacted by the
increase in the cost of chocolate? Explain your reasoning.
3. Since The Hershey Company’s management knows
that the price of chocolate is likely to increase, it might revise
one or more of its standards. Which standard(s) would be impacted?
What would be the benefit of revising the standard(s) before the
end of the reporting period?
CC licensed
content, Shared previously
- Accounting Principles: A Business Perspective..
Authored by: James Don Edwards, University of
Georgia & Roger H. Hermanson, Georgia State University..
Provided by: Endeavour International Corporation.
Project: The Global Text Project..
License: CC BY:
Attribution
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