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Home Standard Costing and Variance Analysis Variance Analysis Example
 
 

Variance Analysis Example:
(A Comprehensive illustration of all variances)

The Springmint Company, a manufacturer of chewing gum, uses a standard cost system. Standard product and cost specifications for 1,000 lbs. of chewing gum are as follows:
 

  Quantity Price = Cost  
Gum base 800   $0.25   $200
Corn syrup 200   $0.40   80
Sugar 200   $0.10   20
 
     
Input 1,200 lbs       $300

$300 / 1,200 lbs = $0.25 per lb.*

 
     
 
Output 1,000 lbs       $300

$300 / 1,000 lbs = $0.30 per lb.*

 
     
 

*Weighted average.

The production of 1,000 lbs. of chewing gum required 1,200 lbs of raw materials. Hence the yield is 1,000 lbs / 1,200lbs. or 5/6 of input. Materials records indicate.
 

Materials Beginning Inventory Purchases in January Ending Inventory
Gum base 10,000 lbs 162,000 lbs@ 0.24 15,000 lbs
Corn Syrup 12,000 lbs 30,000 lbs  @ 0.42  4,000 lbs
Sugar 15,000 lbs

32,000 lbs  @ 0.11

11,000 lbs

To convert 1,200 lbs. of raw materials into 1,000 lbs of finished product required 20 hours at $6.00 per hour or $0.12 per lbs. of finished product. Actual direct labor hours and cost for January are 3,800 hours at $23,104. Factory overhead is applied on a direct labor hour basis at a rate of $5 per hour ($3 fixed , $2 variable), or $ 0.1 per lb. of finished product. Normal overhead is $20,000 with 4,000 direct labor hours. Actual overhead for the month is $22,000, Actual finished production for January is 200,000 lbs.

The standard cost per pound of finished chewing gum is:
 

Materials

$0.30 per lb.

Labor $0.12 per lb.
Factory overhead

$0.10 per lb

Required:

Calculate:

  1. Materials price, mix, quantity and yield variance.
  2. Labor rate, efficiency, and yield variance.
  3. Overhead yield variance using two and three variance methods.

Calculation of Materials Variance:

The materials variances for January consists of  price variance, mix variance,  yield variance, and quantity variance.

Materials Price Variance:

The company calculates the materials price variance using the procedure explained on "direct materials price variance" page and recognizes variances when materials are purchased.

Materials

Quantity

Actual Price

Standard Price

Unit Price Variance

Price variance

Gum base

$162,000

$0.24

$0.25

$(0.01)

(1,620)$

Corn syrup 30,000 $0.42 $0.40 $0.02 $600
Sugar 32,000

$0.11

$0.10

$0.01

$320
 




materials price variance         $(700) fav.

Materials Mix Variance:

The materials mix variance results from combining materials in a ratio different from the standard materials specifications. It is computed as follows:

Actual quantities at individual standard materials costs:    
Gum base 157,000 @ $0.25 $39,250  
Corn syrup 38,000 @ $0.40 $15,200  
Sugar 36,000 @ $0.10 $3,600  
 
$58,050
Actual quantity at weighted average of standard materials cost input 231,000 lbs $0.25   $57,750
   
Materials mix variance (unfavorable)   $300U
   

Materials Yield Variance:

Material yield variance is computed as follows:

Actual quantity at weighted average of standard materials cost input 231,000 lbs $0.25 $57,750
Actual out put quantity at standard materials cost (200,000 lbs $0.30) $60,000
 
Material yield variance (Favorable) $(2,250)F
 

F = Favorable
U = Unfavorable

The yield variance occurred because the actual production of 200,000 lbs. exceeded the expected output of 192,500 lbs. (5/6 of 231,000) by 7,500 lbs. The yield difference multiplied by the standard weighted materials cost of $0.30 per output pound equals the favorable yield variance of $2,250.

The materials quantity variance can be calculated for each item as follows, using the procedure explained on direct materials quantity variance page.

    Unit

Standard unit cost = Amount Materials quantity variance
Gum base:

Actual quantity used

157,000 lbs   $0.25   $39,250  
  Standard quantity allowed 160,000 lbs*   $0.25   40,000  
           
$ (750) Favorable
Corn Syrup: Actual quantity used 38,000 lbs   $0.40   $15,200  
  Standard quantity allowed 40,000 lbs**   $0.40   16,000  
           
$ (800) Favorable
Sugar: Actual quantity used 36,000 lbs   $0.10   $3,600  
  Standard quantity allowed 4,000 lbs***   $0.10   4,000  
           
$ (400) Favorable
             
  Total materials quantity variance ---------------------------------------------- $ (1,950) Favorable
 
  • *An output of 200,000 lbs. should require and output of 240,000 lbs., with a standard yield of 1,000 lbs. output for each 1,200 lbs input. Then the 240,000 lbs.  (800 lbs. / 1,200 lbs ) gum base portion of the formula = 160,000 lbs.
  • **The 240,000 lbs. (200lbs. / 1,200 lbs.) corn syrup portion of the formula = 40,000 lbs
  • ***The 240,000 lbs. (200lbs. / 1,200 lbs.) sugar portion of the formula = 40,000 lbs.

The total materials quantity variance can also be determined by comparing actual quantities at standard prices, $58,050 ($39250 + $15,200 + $3,600), to actual output quantity at standard materials cost, $60,000 (200,000 lbs $0.30) for a total favorable variance of $1,950. The mix and yield variances separate the materials quantity variance into two parts:

Materials mix variance $300 unfavorable
Materials yield variance (2,250) favorable
 
Materials quantity variance $(1,950) favorable

The influence of individual raw materials on the total materials mix variance can be calculated in the following manner:

Materials Actual quantity Standard Formula Total Actual Quantity = Actual quantity Using Standard Formula Quantity Variation Standard Unit Price = Materials Mix Variance
Gum base 157,000 lbs 800 / 1,200   231,000 lbs.   154,000 lbs 3,000 lbs   $0.25   $750
Corn syrup 38,000 lbs 200 / 1,200   231,000 lbs.   38,500 lbs (500)   $0.40   (200)
Sugar 36,000 lbs 200 / 1,200   231,000 lbs.   38,500 lbs (2,500)   $0.10   (250)
 
       

     
  231,000 lbs         231,000 lbs -0-       $300
 
       

     

The expected output of 192,500 lbs. of chewing gum should require 3,850 standard labor hours (20 hours per thousand pounds of chewing gum produced). Similarly, the actual out put of 200,000 lbs. of chewing gum should require 4,000 standard labor hours.

The labor variances are labor rate variance, labor efficiency variance and labor yield variance.

Calculation of Labor Variances:

Labor Rate Variance:

labor rate variance is calculated as explained on "direct labor rate variance" page.

Actual payroll $23,104
Actual hours (3,800) Standard labor hours ($6) $22,800
 
Labor rate variance $304 unfavorable
 

Labor Efficiency Variance:

Actual hours (3,800) Standard labor hours ($6) $22,800
Standard hours allowed for expected output (3,850) Standard labor rate ($6) $23,100
 
Labor efficiency variance $(300) favorable
 

The traditional labor efficiency variance, as explained on direct labor efficiency variance page, is calculated as follows:

  Time Rate = Amount
Actual hours worked 3,800 $6 $22,800
Standard hours allowed 4,000 $6 $24,000
 
 
 
Labor efficiency variance (200)   $6   $(1,200) favorable
 
 
 

Labor Yield Variance:

Standard hours allowed for expected output (3,850) Standard labor rate ($6)

$23,100

Standard hours allowed for actual output (4,000) Standard labor rate ($6)

24,000

 
Labor yield variance $(900) favorable

The labor yield variance identifies the portion of the labor efficiency variance attributable to obtaining an unfavorable or, as in this example, a favorable yield [(3,850 standard hours allowed for expected output 4,000 standard hours allowed for actual output) $6 standard labor rate = $900].

The favorable labor efficiency variance of $300 is the portion of the traditional labor efficiency variance that is attributable to factors other than yield. The sum of the two variances, $900 plus $300, equals the $1,200 traditional labor efficiency variance.

Factory Overhead Variances:

Three Variance Method Adapted to Calculate Overhead Yield Variance:

A yield variance can be calculated for factory overhead. When three variance method is used to calculate overhead yield variance, the overhead variances consist of the:

  1. Factory overhead spending variance
  2. Factory overhead idle capacity variance
  3. Factory overhead efficiency variance
  4. Factory overhead yield variance

These variances are computed as follows:

Actual factory overhead   $22,000
Budgeted allowance based on actual hours worked:    
   Fixed expenses budgeted $12,000  
   Variable expenses: 3,800 actual hours $2 variable standard overhead rate $7,600  
 
$19,600
   
Overhead spending variance   $2,400 U
   
Budgeted allowance based on actual hours worked   $19,600
Actual hours (3,800) Standard overhead rate ($5)   $19,000
   
Overhead idle capacity variance   $600  U
   
Actual hours (3,800) Standard overhead rate ($5)   $19,000
Standard hours allowed for expected out put (3,850) Standard overhead rate ($5)   $19,250
   
Overhead efficiency variance   $(250) F
   
Standard hours allowed for expected output (3,850) Standard overhead rate ($5)   $19,250
Standard hours allowed for actual output (4,000) Standard overhead rate ($5)   $20,000
   
Overhead yield variance  

$(750) F

   

F = Favorable
U = Unfavorable
   

The spending and idle capacity variances are calculated in the same manner as explained on factory overhead spending variance page and factory overhead idle capacity variance page respectively. The overhead efficiency variance calculated here and the overhead yield variance when combined , equal the traditional overhead efficiency variance discussed on overhead efficiency variance page. The overhead yield variance measures that portion of the total overhead variance resulting from a favorable yield. [(3,850 hours 4000hours) $5.00 = $750]

Two Variance Method Adopted to Calculate Overhead Yield Variance:

When two variance approach is used, the overhead variances are:

  1. Controllable variance
  2. Volume variance
  3. Yield variance

These variances are calculated as follows:

Actual factory overhead   $22,000
Budgeted allowance based on standard hours allowed:    
Fixed overhead budgeted $12,000  
Variable expenses (3,850 standard hours $2 standard rate) $7,700  
 
$19,700
   
Controllable variance   $2,300 U
   
Budgeted allowance based on standard hours allowed   $19,700
Standard hours allowed for expected output (3,850) standard overhead rate ($5)   $19,250
   
Volume variance   $450 U
   
Standard hours allowed for expected output (3,850) standard overhead rate ($5)   $19,250
Standard hours allowed for actual output (4,000) standard overhead rate ($5)   $20,000
   
Overhead yield variance   $ (750) F

F = Favorable
U = Unfavorable
   

The favorable overhead yield variance is the same as for the three variance approach and can be viewed as consisting of $300 variable cost [(3,850 standard hours allowed for expected output 4,000 standard hours allowed for actual output) $2], and $450 fixed cost [(3,850 4,000) $3].

Relevant Articles:

Definition and Explanation of Standard Cost
Purposes and Advantages of Standard Costing System
Setting Standards
Materials Price Standard
Materials Price Variance
Materials Quantity Standard
Materials Quantity Variance
Direct Labor Rate Standard
Direct Labor Rate Variance
Direct Labor Efficiency Standard
Direct Labor Efficiency Variance
Factory Overhead Cost Standards
Overall or Net Factory Overhead Variance
Overhead Controllable Variance
Overhead Volume Variance
Overhead Spending Variance
Overhead Idle Capacity Variance
Overhead Efficiency Variance
Variable Overhead Efficiency Variance

Fixed Overhead Efficiency Variance

Mix and Yield Variance
Variance Analysis Example
Standard Costing and Variance Analysis Formulas
Management by Exception and Variance Analysis
International Uses of Standard Costing System
Advantages, Disadvantages, and Limitations of Standard Costing

 

 

 

 

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