University:
Baltimore City Community College
Course:
ACT 221 | Principles of Financial Accounting I
Academic year:

2024
Views:

109

Pages:

2
Author:

Danny A.

Evaluating Direct Material Variances Direct material variances may be due to changes in external factors such as price increases, errors in setting the original standards, or inefficient performance. The use of the management by exception philosophy by a company requires that the cause of a variance must be investigated promptly and that the responsibility for deviations be assigned if budgetary control is to be achieved. A thorough examination of a particular variance may provide a reasonable explanation for its cause. For example, a particular order may require that a product be manufactured to more rigid specifica-tions, thereby causing more direct material waste than normal. Care must be exercised in assigning blame for direct material price and quantity variances, for inefficient management is only one of a number of factors that might be causing deviations from a standard. Direct Labor Standards Direct labor standards are established in much the same manner as are direct material standards. The direct labor rate (or cost) standard is influenced by: 1. Average wage rates in the community. 2. Union contracts. 3. The type of wage system (hourly or piece rate). 4. The experience of the work force. 5. The level of skill required. The direct labor efficiency (or quantity) standard measures the productivity of the work force and is therefore probably the most important of the standards. This standard can be developed through one or a combination of the following factors: 1. Engineering specifications such as time and motion studies. 2. Test runs that measure performance under controlled conditions. 3. Average past performance that sets the standard at what was accomplished under actual conditions. The calculation of direct labor variances is similar to the calculation of direct material variances. The two direct labor variances, termed the direct labor rate variance and the direct labor efficiency variance, are determined as follows: The Bellow Corporation has a standard of one-half hour of direct labor per unit of the product at a standard labor rate of $6 per hour. During January 1992, 20,000 units were produced using 9,500 hours at an actual cost of $6.10 per hour resulting in a total direct labor cost of $57,950. The company's direct labor rate and direct labor efficiency variances are calculated as follows: