Standard Quantity per Unit — defines the amount of direct materials that should be used for

each unit of finished product, including an allowance for normal inefficiencies. such as scrap
and spoilage !
Standard Price per Unit — defines the price that should be paid for each unit of direct
materials and it should reflect the final, delivered cost of those materials !
Standard Hours per Unit — defines the amount of direct labor hours that should be used to
produce one unit of finished goods!
Standard Rater per Hours — defines the company’s expected direct labor wage per hour,
including employment taxes and fringe benefit !
!
Concept: Variances arise for reasons relating to activity level (activity variances) and reasons
not relating to activity levels (revenue and spending variances)!
Spending variances have two parts:!
! - price (or rate) variances!
! - quantity (or efficiency) variances !
!
General Model Diagram — PPT!
*Materials Price Variance = Actual Quantity Purchases x (AP - SP)!
*Materials Quantity Variance = SP x (Actual Quantity Used in Production - SQ)!
! AP = actual price per unity of the input!
! SP = standard price per unit of the input!
! SQ = standard quantity allowed for the actual output !
*Labor Rate Variance = Actual Hours x (AR - SR)!
*Labor Efficiency Variance = SR x (Actual Hours - SH)!
! AR = actual rate per hour!
! SR = standard rate per hour!
! SH = standard hours allowed for the actual output!
!
Izzy Co. manufactures giant stuffed huskies for children. Izzy’s variable manufacturing overhead
is applied to production based on direct labor-hours and standard cost card per unit is as
follows:!
Direct materials: 5 pounds at $8.00 per pound $ 40.00 !
Direct labor: 2 hours at $14 per hour $ 28.00 !
Variable overhead: 2 hours at $5 per hour $10.00 !
The planning budget for March was based on producing and selling 25,000 units. !
However, during March the company actually produced and sold 30,000 units and incurred the
following three costs: (1) Purchased 160,000 pounds of raw materials at a cost of $7.50 per
pound. All of this material was used in production. (2) Direct laborers worked 55,000 hours at a
rate of $15.00 per hour. (3) Total variable manufacturing overhead for the month was $280,500.!
!
2. What raw materials cost would be included in the company’s flexible budget for March?!
! SP x SQ = $8 /lb x (5 lb/hat x 30,000 hats) = $1,200,000!
3. What is the materials price variance for March?!
! Actual Quantity Purchases x (AP - SP) = 160,000 lbs x (7.50 /lb - 8 /lb) = $80,000 !
! (Favorable - cost less than thought)!
4. What is the materials quantity variance for March?!
! SP x (Actual Quantity Used in Production - SQ) = 8 /lb x (160,000 lb - 150,000 lb) = !
! $80,000 (Unfavorable - using more pounds than thought)!
5. If Izzy had purchases 170,000 lbs. of materials at $7.50 per lb and used 160,000 pounds in
production, what would be the materials price variance for March?!
! Actual Quantity Purchased x (AP - SP) = 170,000 lbs x (7.50 / lb - 8 /lb) = $85,000 (F)