Direct Material Price Variance:

Cement PLC manufactured 10,000 bags of cement during the month of January. Following raw
materials were purchased and consumed by Cement PLC during the period:
Material Quantity Actual Price Standard Price

Limestone 100 tons $75/ton $70/ton

Clay 150 tons $20/ton $24/ton
Sand 250 tons $10/ton $12/ton
Step 1: Calculate Actual Cost
Actual Cost = Actual Quantity x Actual Price

Limestone: 100 tons x $75 = $7,500

Clay: 150 tons x $20 = $3,000
Sand: 250 tons x $10 = $2,500
Step 2: Find the Standard Cost of Actual Quantity
Standard Cost = Actual Quantity x Standard Price

Limestone: 100 tons x $70 = $7,000

Clay: 150 tons x $24 = $3,600
Sand: 250 tons x $12 = $3,000
Step 3: Calculate the Variance
Material Price Variance = Actual Cost (Step 1) - Standard Cost (Step 2)

Limestone: $7,500 - $7,000 = ($500) Adverse

Clay: $3,000 - $3,600 = $600 Favorable
Sand: $2,500 - $3,000 = $500 Favorable

Total Price Variance $600 Favorable

Analysis
A favorable material price variance suggests cost effective procurement by the company.
Reasons for a favorable material price variance may include:
 An overall decrease in the market price level
 Purchase of materials of lower quality than the standard (this will be reflected in adverse
material usage variance)
 Better price negotiation by the procurement staff
 Implementation of better procurement practices (e.g. invitation of price quotations from
multiple suppliers)
 Purchase discounts on larger orders
An adverse material price variance indicates higher purchase costs incurred during the period
compared with the standard.
Reasons for adverse material price variance include:
 An overall hike in the market price of materials
  Purchase of materials of higher quality than the standard (this will be reflected in favorable
material usage variance)
 Increase in bargaining power of suppliers
 Loss of purchase discounts due to smaller order sizes
 Inefficient buying by the procurement staff

Direct Labor Rate Variance:

DM is a denim brand specializing in the manufacture and sale of hand-stitched jeans trousers.
DM manufactured and sold 10,000 pairs of jeans during a period.
Information relating to the direct labor cost and production time per unit is as follows:
Actual Hours Standard Hours Actual Rate Standard Rate
Per Unit Per Unit Per Hour Per Hour

Direct Labor 0.50 0.60 $12 $10

Step 1: Calculate Actual hours
Actual Hours = 10,000 units x Actual Price
= 5,000 hours.
Step 2: Calculate the actual cost
Actual Cost = Actual Hours x Actual Rate
= 5,000 hours (Step 1) x $12 per hour
= $60,000.
Step 3: Calculate the standard cost of actual number of hours
Standard Cost of actual hours = Actual Hours x Standard Rate
= 5,000 hours (Step 1) x $10 per hour
= $50,000.
Step 4: Calculate the variance
Labor Rate Variance = Actual Cost - Standard Cost of the Actual Hours
= $60,000 (Step 2) - $50,000 (Step 3)
= $10,000 Adverse.
Analysis
A favorable labor rate variance suggests cost efficient employment of direct labor by the
organization.
Reasons for a favorable labor rate variance may include:
 Hiring of more un-skilled or semi-skilled labor
 Decrease in the overall wage rates in the market due to an increase in the supply of labor
which may be caused, for example, due to the influx of immigrants as a result of the
relaxation of immigration policy
 Inappropriately high setting of the standard cost of direct labor which may, in the hindsight,
be attributed to inaccurate planning
An adverse labor rate variance indicates higher labor costs incurred during a period compared with
the standard.
Causes for adverse labor rate variance may include:
 Increase in the national minimum wage rate
 Inefficient hiring by the HR department
 Effective negotiations by labor unions
 Direct Material Mix Variance:
Cement PLC manufactured 10,000 bags of cement during the month of January. Consumption of
raw materials during the period was as follows:
Material Quantity Used Standard Mix Per Bag Actual Price Standard Price

Limestone 100 tons 11 KG $75/ton $70/ton

Clay 150 tons 14 KG $21/ton $20/ton
Sand 250 tons 26 KG $11/ton $10/ton
Step 1: Calculate the total consumption of raw materials
Total Raw Materials Consumption (100 + 150 + 250) = 500 tons
Step 2: Calculate the Standard Mix
We need to calculate the quantity of each raw material which would have been consumed had the total usage
of raw materials (500 tons) been based on the standard mix.
Limestone: 500 tons units x 11 / 51* = 108 tons
Clay: 500 tons units x 14 / 51* = 137 tons
Sand: 500 tons units x 26 / 51* = 255 tons
* Total Quantity under Standard Usage (11 + 14 + 26) = 51 KG per bag
Note that the sum of the standard mix of raw materials calculated above equals the actual total
consumption of 500 tons. This is because in material mix variance, we are not concerned about the
efficiency of raw material consumption but rather their relevant proportions.
Step 3: Calculate the Variance
Material Usage Variance = [Actual Mix - Standard Mix (Step 2)] x Standard
Price

Limestone: (100 - 108) x $70 = ($560) Favorable

Clay: (150 - 137) x $20 = $260 Adverse
Sand: (250 - 255) x $10 = ($50) Favorable

Total Usage Variance ($350) Favorable

Explanation
Material Mix Variance quantifies the effect of a variation in the proportion of raw materials used in a
production process over a period.
While material usage variance illustrates the overall efficiency of raw material consumption during a
period (in terms of the difference between the amount of materials which should have been used and
the actual usage), material mix variance focuses on the aspect of proportion of raw materials used in
the production process.
Material mix variance is only suitable for performance measurement and control where the proportion
of inputs to the production process can be altered without reducing the effectiveness of the final
product. It may not therefore be used in industries that require a high degree of precision in the input
variables such as in the pharmaceuticals sector.
Analysis
A favorable material mix variance suggests the use of a cheaper mix of raw materials than the
standard. Conversely, an adverse material mix variance suggests that a more costly combination of
materials have been used than the standard mix.
A change in the material mix must also be analyzed in the context of other organization wide
implications that may follow. Some of the effects a change in direct material mix include:
 Change in the quality, performance and durability of the final product
  Price offered by customers may vary as a result of a change in perceived quality of the product
 Change in material mix may affect the workability of materials which may in turn affect labor
efficiency

Sales Volume Variance

Wrangler Plc is a manufacturer of jeans trousers and jackets.
Information relating to Wrangler Plc's sales during the last period is as follows:
Trousers Jackets
Units Units

Budgeted 12,000 5,000

Actual 10,000 8,000
Standard costs and revenues per unit of trouser and jacket are as follows:
Trousers Jackets
$ $

Revenue 20 50
Direct labor 5 10
Direct Material 6 15
Variable Overheads 4 10
Fixed Overheads 2 5
Wrangler Plc uses marginal costing to prepare its operating statement.
Step 1: Calculate the standard contribution per unit
Trousers Jackets
$ $

Revenue 20 50
Direct labor (5) (10)
Direct Material (6) (15)
Variable Overheads (4) (10)

Standard contribution per unit 5 15

Step 2: Calculate the difference between actual units sold and budgeted sales
Trousers Jackets
Units Units

Actual 10,000 8,000

Budgeted (12,000) (5,000)

Difference (2,000) 3,000

Step 3: Calculate the variance for each product
Trousers Jackets
 Standard contribution per unit (Step 1) $5 $15
Actual Units Sold - Budgeted Sales (Step 2) x (2000 units) x 3000 units

Variance $10,000 Adverse $45,000 Favorable

Step 4: Add the individual variances

Sales Volume Variance ($10,000 - $45,000) = $35,000 Favorabl
Analysis
Favorable sales volume variance suggests a higher standard profit or contribution than the
budgeted profit or contribution.
Reasons for favorable sales volume variance include:
 Favorable sales quantity variance (i.e. higher total number of units sold than budgeted)

Adverse sales volume variance indicated a lower standard profit or contribution than the budgeted
profit or contribution.
Causes for an adverse sales volume variance include:
 Adverse sales quantity variance (i.e. lower total number of units sold than budgeted)
Favorable sales volume variance can be achieved in case of a favorable sales mix variance even if
the total number of units of all products sold during the period are lower than the total budgeted units
(and vice versa).
It is therefore important to investigate the sales volume variance by analyzing it further into sales
quantity and sales mix variances in case where an organization sells more than one product.
 Sales Mix Variance
Aliengear Inc. is a small company that specializes in the manufacture and sale of gaming computers.
Currently, the company offers two models of gaming PCs:

 Turbox - A professional gaming PC with a water-cooling system priced at $2,500

 Speedo - An entry level gaming PC with standard fan cooling priced at $1,000
Aliengear budgeted sales of 1,600 units of Turbox and 2,400 units of Speedo in the last year. The
standard variable costs of a single unit of Turbox and Speedo were set at $1,500 and $750
respectively.
The sales team at Aliengear managed to sell 1,300 units of Turbox and 3,700 units of Speedo during
the last year.