# Cost Variances – Illustrations

Asha Engineering has developed the following standard costs for a unit of production:

Material cost 5 lbs @ Rs 2 Rs 10
Direct labor 6 hrs@ Rs 3 Rs18

Standard cost per unit Rs 31

During April 1981, 1000 units were manufactured. The following is the summary of the transaction which occurred during the month:

1) Purchase 6,000 lbs of materials at a price of Rs 2.10 per lb
2) The time card data revealed that 8,000 hours of labor were required during the month and the average rate paid per hour was Rs 2.75.
3) Actual manufacturing overheads for the period was Rs 2,500

Fid out the following variances: (1) material price variance, (2) Material usage variance, (3) Labor rate variance, (4) Labor efficiency variance (5) Manufacturing overhead variance.

Assume that there was no any stock of opening or closing inventories.

Solution:

Materials Price Variance (MPV)

= AQ (AP – SP)
= 6,000 lbs ( Rs 2.10 – Rs 2)
= 6,000 x Rs 0.10
= Rs 600 unfavorable

Material usage Variance (MUV)

= SP (AQ – SQ)
= Rs 2(6,000 lbs – 5,000 lbs)

SQ is 5,000 lbs for 1000 units or 5 lbs per units
= Rs 2 x 1,000lbs
=Rs 2,000 unfavorable

Labor Rate Variance (LRV)

= AH (AR – SR)
= 8,000 hrs. ( Rs 2.75 – Rs 3)
= 8,000 hrs x Rs 0.25
=Rs 2,000

Labor efficiency Variance (LEV)

= SR ( AH – SH)
= S ( 8,000 hrs — 6,000hrs)
= (SH for 1 unit is 6 hrs., so for 1,000 units, 6,000 hrs.)
= Rs 3 x 2,000 hrs.
= Rs 6,000 unfavorable

= AO – SO
= Rs 2,500 – Rs 3,500
SO for one unit is Rs 3, so for 1,000 units, Rs 3,000
= Rs 500 favorable.

Reasons of the variances: Various variances are analyzed by reasons for the control purposes. The possible reasons for certain importance variances are as under:

Reasons for material price variance:

1) Change in the price
2) When quantity discount is considered while setting the standard price and it is not tapped while making the purchases.
3) Similarly, where cash discount is not tapped
4) Excessive inward transport cost, purchasing and store keeping expenses which are debited to purchase account.
5) Purchase of material other than standard material.

Reasons form material usage variance:

1) Poor workmanship resulting into greater wastages
2) Purchase of defective or sub standard materials
3) Greater degree of rejection during inspections
4) Use of materials other than standard material.
5) Deviation from the standard material mix.
6) Pilferage, theft etc

Reasons for labor rate variance

1) Changes in wage rates
2) Employing highly or poorly paid operator than a standard operator.
3) Where standards have ignored overtime operations and a part of the production is carried on over time basis.

Reasons for labor efficiency:

1) employment of sub- standard operator
2) Inefficient operations caused by poor working conditions, inefficient supervision, poor machines, equipment and tools, inefficient production planning resulting into waiting and rushing.
3) Idle labor time.