Question

At the end of the year, your company had the following variances:

Direct material price variance $3,000 F

Direct material usage variance $3,500 U

Direct labor rate variance $5,200 U

Direct labor efficiency variance $7,000 U

Give at least one possible cause for each of the variances and discuss the possible relationships between them.

Answer 1

Answer

Direct material price variance $3,000 F - It means that the actual price at which the raw material is available is lower than budgeted by the Company and hence a favorable condition.

Direct material usage variance $3,500 U -It means that the actual quantity of raw material consumed is higher than quantity budgeted by the Company and hence an unfavorable condition.

Direct labor rate variance $5,200 U -It means that the actual rate at which the labor is available is higher than the rate budgeted by the Company and hence an unfavorable condition.

Direct labor efficiency variance $7,000 U-It means that the actual hours of labor consumed is higher than total hours budgeted by the Company and hence unfavorable condition.

The manager in-charge of production department is generally considered responsible for labor efficiency variance. However, purchase manager shall be held responsible if the purchase of poor materials resulted in excessive labor processing time.