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Direct Labor Efficiency Variance

Direct labor efficiency variance (also called direct labor quantity/usage variance) is the product of standard direct labor
rate and the difference between the standard direct labor hours allowed and actual direct labor hours used. The basic
concept of direct labor efficiency variance is similar to that of direct material quantity variance. The following formula
is used to calculate direct labor efficiency variance:

DL Efficiency Variance = ( SH AH ) SR
Where,
SH are the standard direct labor hours allowed
AH are the actual direct labor hours used
SR is the standard direct labor rate per hour
The standard direct labor hours allowed (SH) in the above formula is the product of standard direct labor hours per unit
and number of finished units actually produced.

Analysis
The purpose of calculating the direct labor efficiency variance is to measure the performance of production
department in utilizing the abilities of the workers. A positive value of direct labor efficiency variance is obtained when
the standard direct labor hours allowed exceeds the actual direct labor hours used. Thus a positive value is favorable.
Negative value of direct labor efficiency variance implies that more direct labor hours have been used than actually
needed.
It is necessary to analyze direct labor efficiency variance along with direct labor rate variance. It is quite possible that
unfavorable direct labor efficiency variance is simply the result of recruiting low skilled workers. In which case direct
labor rate variance will become favorable at the expense of direct labor efficiency.

http://accountingexplained.com/managerial/standard-costing/dl-efficiencyvariance

Direct Labor Rate Variance


Direct labor rate variance (also called direct labor price/spending variance or wage rate variance) is the product of
actual direct labor hours and the difference between the standard direct labor rate and actual direct labor rate. Direct
labor rate variance is similar to direct material price variance. The following formula is used to calculate direct labor
rate variance:

DL Rate Variance = ( SR AR ) AH
Where,
SR is the standard direct labor rate
AR is the actual direct labor rate
AH are the actual direct labor hours

Analysis
Direct labor rate variance determines the performance of human resource department in negotiating lower wage rates
with employees and labor unions. A positive value of direct labor rate variance is achieved when standard direct labor
rate exceeds actual direct labor rate. Thus positive values of direct labor rate variance are favorable and negative
values are unfavorable.

However, a positive value of direct labor rate variance may not always be good. When low skilled workers are recruited
at lower wage rate, the direct labor rate variance will be favorable however, such workers will be inefficient and will
generate a poor direct labor efficiency variance. Direct labor rate variance must be analyzed in combination with direct
labor efficiency variance.

http://accountingexplained.com/managerial/standard-costing/dl-rate-variance

Direct Material Price Variance


Direct material price variance (also called the direct material spending/rate variance) is the product of actual quantity
of direct material used and the difference between standard price and actual price per unit of direct material. It is
calculated using the following formula:

DM Price Variance = ( SP AP ) AQ
Where,
SP is the standard unit price of direct material
AP is the actual price per unit of direct material
AQ is the actual quantity of direct material used

Analysis
Direct material price variance is calculated to determine the efficiency of purchasing department in obtaining direct
material at low cost. A positive value of direct material price variance is favorable which means that direct material
was purchased for lesser amount than the standard price. A negative value of direct material price variance is
unfavorable because more than estimated price per unit is paid.
However, a favorable direct material price variance is not always good; it should be analyzed together with direct
material quantity variance. It is quite possible that the purchasing department may purchase low quality raw material
to generate a favorable direct material price variance. Such a favorable material price variance will be offset by an
unfavorable direct material quantity variance due to wastage of low quality direct material.

http://accountingexplained.com/managerial/standard-costing/dm-price-variance

Direct Material Quantity Variance


Direct material quantity variance (also called the direct material usage/efficiency variance) is the product of standard
price of a unit of direct material and the difference between standard quantity of direct material allowed and actual
quantity of direct material used. The formula to calculate direct material quantity variance is:

DM Quantity Variance = ( SQ AQ ) SP
Where,
SQ is the standard quantity allowed
AQ is the actual quantity of direct material used
SP is the standard price per unit of direct material
Standard quantity allowed (SQ) is calculated as the product of standard quantity of direct material per unit and actual
units produced.

Analysis
Direct material quantity variance is calculated to determine the efficiency of production department in converting raw
material to finished goods. In order to improve efficiency, wastage of raw material must be reduced. A negative value
of direct material quantity variance is unfavorable and it implies that more quantity of direct material has been used in
the production process than actually needed. A positive value of direct material quantity variance is favorable implying
that raw material was efficiently converted to finished goods.

http://accountingexplained.com/managerial/standard-costing/dm-quantity-variance

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