# Variance Analysis: Practical Questions and Answers ### Reviewed by Editorial Team

Updated on March 15, 2023

## Practical Question 1

The standard product cost card of a product is shown below.
 Materials 2 feet length, 1/4 inch thick @ \$16 \$32 Factory overhead labor 4 hours @ \$6 \$24 Variable 4 hours @ \$2 \$8 Fixed 4 hours @ \$4 \$16 \$24 Total standard production cost \$80
Fixed overhead was based on 36,000 hours a year. Total fixed overhead estimated at \$144,000 per annum. Actual data for a month has been ascertained as follows:
• Actual hours worked = 3,800
• Units of product produced = 900
• Material used = 1,900 feet in length
• Price per foot = \$15
• Actual labor wage rate = \$5.80
• Actual factory overhead: variable = \$6,200, fixed = \$12,000
Required: Calculate two variances for each of the three elements of the production cost.

## Solution

### 1) Material Cost Variance

Standard quantity of output @ standard price: 900 units x 2 x \$16 = \$28,800 Actual quantity used @ standard price: 1,900 x \$16 = \$30,400 Actual quantity used @ actual price: 1,900 x \$15 = \$28,500 Total material cost variance: \$28,800 - \$28,500 = \$300 (favorable)

### Analysis

Materials usage variance: 28,800 - 30,400 = \$1,600 (unfavorable) Materials price variance: 30,400 - 28,500 = \$1,900 (favorable)

## 2) Labor Cost Variance

Standard hours of output at standard wage rate: 900 units x 4 hours x \$6 = \$21,600 Actual hours for the output at standard wage rate: 3,800 hours x \$6 = \$22,800 Actual hours at actaul wage rate: 3,800 hours x \$5,80 = \$22,040 Total labor cost variance: \$21,600 - \$22,040 = \$440 (unfavorable)

### Analysis

Labor efficiency variance: \$21,600 - \$22,800 = \$1,200 (unfavorable) Labor wage rate variance: \$22,800 - \$22,040 = \$760 (favorable)

Standard hours of output @ standard overhead rate: 900 units x 4 hours x \$6 = \$21,600 Budget for standard hours produced = 900 units x 4 hours = 3,600 hours Variable overhead: 3,600 hours x \$2 = \$7,200 (\$144,000 / 12 months = \$12,000) Total = \$19,200 Actual overhead = \$18,200 Total factory overhead variance: \$21,600 - \$18,200 = \$3,400 Factory overhead volume variance: \$21,600 - \$19,500 = \$2,400 (favorable) Factory overhead controllable variance: \$19,200 - \$18,200 = \$1,000 (favorable)

## Practical Question 2

The data shown below relate to an industrial organization that manufactures household appliances.
 Standard quantity required of materials item 0020 1 kg. Standard price per kg. \$10 Product in a month appliances 100 kgs. Actual quantity of materials used 98 kgs. Actual price paid \$11/kg
The following calculations for variances have been made:
 Material usage variance = 2 kgs. @ \$11 = \$22 Material price variance = 100 kgs. x \$1 = \$100
Required: Do you agree with these calculations? If not, provide a correct calculation for the variances.

## Solution

The above analysis of variances is not correct. The correct calculations are given below:

### Material Usage Variance

= Difference between standard quantity for the output x Standard price = 100 units x 1 kg. x \$10 = \$1,000 (-) 98 kgs. x \$10 = \$980 or 2 kgs. x \$10 = 20 (favorable variance)

### Material Price Variance

= Actual quantity used x Difference between standard price and actual price = 98 kgs. x \$1 = \$98 (unfavorable) Total Variance = \$78 (unfavorable)

## Practical Question 3

The following data pertains to a company's first week of operations in June 2011: Materials:
 Actual purchased = 1,500 units @ \$3.80 per unit Actual usage = 1,350 units Standard usage = 1,020 units @ \$4.00 per unit
Direct Labor:
 Actual hours = 310 hours @ \$12.10 per hour Standard hours = 340 hours @ \$12.00 per hour
Required: Compare the following variances to determine whether they are favorable or unfavorable:
• (A) Material purchase price variance and quantity variance
• (B) Labor rate efficiency variance.

### 1) Material Purchase Price Variance

 Actual quantity purchased x Actual rate (1,500 units x \$3.80) = \$5,700 Actual quantity purchased x Standard rate ( 1,500 units x \$4) = \$6,000 Favorable = \$300

### 2) Material Usage Price Variance

 Actual quantity used x Actual rate ( 1,350 units x \$3.80) = \$5,130 Actual quantity used x Standard rate (1,350 units x \$4) = \$5,400 Favorable = \$270

### 3) Material Quantity Variance

 Actual quantity used x Standard rate (1,350 units x \$4) = \$5,400 Standard quantity allowed x Standard rate (1,020 units x \$4) = \$4,080 Unfavorable = \$1,320

### 1. Labor Rate Variance

 Actual labor hours worked x Actual rate (310 hours x \$12.10) = \$3,751 Actual labor hours worked x Standard rate (310 labor hours x \$12) = \$3,720 Unfavorable = \$31

### 2. Labor Efficiency Variance

 Actual labor hours worked x Standard rate (310 hours x \$12) = \$3,720 Standard hours allowed x Standard rate (340 hours x \$12) = \$4,080 Favorable = \$360

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