Reference no: EM131736068

Variance Analysis

1. Materials Price Variance - Per ounce price - Favorable

Materials price variance is the difference between the actual price paid and standard (or usual) purchase price of materials purchased for production. This can be calculated either at the time of purchase or at the time the materials are used. The purpose of this is to manage the cost of direct materials. This is directly linked with the company's profit. The reason the materials price variance is favorable is because the actual price that was paid per ounce is less than the standard price. It is calculated in 2 ways:

Standard Cost of Actual Quantity of Materials - Actual Cost of Materials
Or
(Actual Quantity × Standard Price) - (Actual Quantity × Actual Price

Materials Quantity Variance-Ounce per unit- Unfavorable

Materials quantity variance measures the difference between the quantity of materials used in production and the quantity that should have been used according to the standard that has been set. The reason for the unfavorable variance is because more materials were used to produce the goods than was allowed per the standard. There are many reason why this can ooccur including, but not limited to, quality of material, defective material, poorly trained employees, changes in product specs, and handling of the material improperly. It is calculated in 2 ways:

Materials quantity variance = (Actual quantity used × Standard price) - (Standard quantity allowed × Standard Price)

or

Materials quantity variance = (Actual quantity used × Standard price) - (Standard quantity allowed × Standard Price)
Labor Rate Variance- Per hour- Unfavorable

Labor rate variance measures the difference between the amount of actual hours worked at actual rate and actual hours worked at standard rate. It measures any deviation from standard to the average hourly rate paid to direct labor workers. The reason the labor rate quantity variance is unfavorable is because the actual rate paid to workers is more than the standard rate. It is calculated by:

Labor rate variance = (Actual hours worked × Actual rate) - (Actual hours worked × Standard rate)

The Labor Efficiency Variance -Time Per Unit - Favorable

The Labor Efficiency Variance measures the productivity of labor time and is strictly supervised because it is the directly linked to productivity of direct labor time. This is the best way to reduced costs. A favorable labor efficiency variance happens when actual labor time is less than the time acceptable by standards. It is calculated by:

Labor efficiency variance = (Actual hours worked × Standard rate) - (Standard hours allowed × Standard rate)

2. Explain how the variances could explain the following situations:

Scrap Material decreased -This could be an outcome of the favorable materials quantity variance and favorable labor efficiency variance. Due to purchase of quality materials and/or skilled workers used on the production line, the scraps would be decreased.

Return Orders increased - If the plant had an increase in return orders, this could mean that unfavorable material was used to produce the actual product and was below than the standard. The materials quantity variance was unfavorably because of a few possible reasons including defects, poor or inferior materials and poor craftsmanship.

Rework Time Increased - This could be because the plant is having internal control issues such as defective, failed, or abnormal issues during or after inspection. The rework process could include disassembly, repair, replacement and reassembly. The Labor rate variance and the Labor efficiency will both be negatively affected. The reasons this could be is because of defective equipment, poor supervision, and/or inadequately trained employees.

Average Unit Cost increased - The average unit cost increased could be because of several reasons. Lower than standard materials were purchased, therefore increasing the materials price variance, the supplier increased costs of materials, factory allocated overhead cost differently than the prior year. This will affect the materials quantity variance and increase the average unit cost increase.

Unexpected Down time increased - Unexpected downtime will negatively affect profitability and productivity. Direct labor hours will be increased, as a result of this. This can happen because of broken equipment, floor plan inefficiencies, and poor management
Sales was less than budgeted - There could be various reasons for less than budgeted sales including, but not limited to, subpar quality of the product, increased competition, economic downturn, a superior product release, and ineffective marketing campaigns.

Volume related revenue was less than anticipated (selling multiple products) - this is the difference between the actual units sold and the budgeted quantity. If the Charlotte plant sales volume is less than anticipated, this could mean that competition was fierce, poor marketing efforts, the price was not accurately set, and also a downturned economy.