Calculating Labor and Material Variances in Managerial Accounting
Use the formulas mentioned in this section to calculate variances in managerial accounting.
Step Number One: Calculating the Direct Material Price Variance
Find the difference between the standard price and the actual price and multiply the actual materials purchased by this difference to get the direct material price variance.
For example: A company purchases 1,000 widgets as direct materials. Each widget is purchased for $5 and the budget of each widget was $4.5. The formula for calculating the direct material price variance is 1,000*($5-$4.5), which is equal to $500--an unfavorable variance.
Step Number Two: Calculating the Direct Material Quantity Variance
Calculate the difference between the standard quantity and the actual quantity and multiply this value by the standard price to get the direct material quantity variance.
For example: A company spends $3.5 per widget and plans to use 800 widgets. The actual quantity needed is only 1,000 widgets for the production. The formula will be $3.5*(1,000-800) which equals $700--a favorable variance.
Step Number Three: Calculating the Direct Labor Rate Variance
Calculate the difference between the standard amount paid and the actual amount paid per hour. Multiply this difference with the actual hours worked by a laborer to get the direct labor rate variance.
For Example: A company needs 1,000 hours of work and plans to pay $15 an hour, but actually paid $20. The formula is 1,000*($20-$15) which equals $5,000--and that is unfavorable.
Step Number Four: Calculating Direct Labor Efficiency Variance
Find the difference between the standard hours planned to work and the actual hours worked and multiply this difference with the standard rate paid by a company to its employees to get the direct labor efficiency variance.
For Example: A company decides to pay its employees $20 an hour for 1,000 hours of work, but only 800 hours are needed. The formula is $20*(800-1,000) which equals $4,000--a favorable variance.
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