Manufacturing Variances

Quick Answer: Manufacturing variances analyze the difference between actual and standard production costs. Each cost element (materials, labor, overhead) is broken into price/rate variances and quantity/efficiency variances to pinpoint whether deviations stem from paying more or using more resources than planned.

Manufacturing variances are essential for cost control in production environments. They help managers understand exactly why actual costs differ from standard costs and who is responsible for each variance.

Direct Materials Variances

Direct materials variances analyze the difference between actual material costs and standard material costs.

Materials Price Variance (MPV)

Formula: $\text{MPV} = (\text{Actual Price} - \text{Standard Price}) \times \text{Actual Quantity Purchased}$

Interpretation:

• Favorable: Paid less than standard price
• Unfavorable: Paid more than standard price

Responsibility: Purchasing Department

Common Causes:

Materials Quantity/Usage Variance (MQV)

Formula: $\text{MQV} = (\text{Actual Quantity Used} - \text{Standard Quantity Allowed}) \times \text{Standard Price}$

Where: Standard Quantity Allowed = Standard Qty per Unit × Actual Output

Interpretation:

• Favorable: Used less material than standard
• Unfavorable: Used more material than standard

Responsibility: Production Department

Common Causes:

Complete Materials Variance Example

Standard: 3 lbs per unit at $4/lb Actual Production: 1,000 units Actual Materials: 3,200 lbs purchased and used at $4.25/lb

Calculations:

• Standard Quantity Allowed = 3 lbs × 1,000 units = 3,000 lbs
• MPV = ($4.25 - $4.00) × 3,200 = $800 U
• MQV = (3,200 - 3,000) × $4.00 = $800 U
• Total Materials Variance = $1,600 U

Direct Labor Variances

Direct labor variances analyze the difference between actual labor costs and standard labor costs.

Labor Rate Variance (LRV)

Formula: $\text{LRV} = (\text{Actual Rate} - \text{Standard Rate}) \times \text{Actual Hours Worked}$

Responsibility: HR/Production Management

Common Causes:

Labor Efficiency Variance (LEV)

Formula: $\text{LEV} = (\text{Actual Hours} - \text{Standard Hours Allowed}) \times \text{Standard Rate}$

Where: Standard Hours Allowed = Standard Hours per Unit × Actual Output

Responsibility: Production Department

Common Causes:

Complete Labor Variance Example

Standard: 2 hours per unit at $15/hour Actual Production: 1,000 units Actual Labor: 2,100 hours at $14.50/hour

Calculations:

• Standard Hours Allowed = 2 hrs × 1,000 units = 2,000 hours
• LRV = ($14.50 - $15.00) × 2,100 = $(1,050) F
• LEV = (2,100 - 2,000) × $15.00 = $1,500 U
• Total Labor Variance = $450 U

Variable Overhead Variances

Variable overhead variances follow a similar pattern to direct labor variances.

Variable Overhead Spending Variance

Formula: $\text{VOH Spending} = \text{Actual VOH} - (\text{Actual Hours} \times \text{Standard VOH Rate})$

This variance captures price differences in variable overhead items.

Variable Overhead Efficiency Variance

Formula: $\text{VOH Efficiency} = (\text{Actual Hours} - \text{Standard Hours Allowed}) \times \text{Standard VOH Rate}$

This variance captures the impact of labor efficiency on variable overhead costs.

Variable Overhead Example

Standard: $6 per direct labor hour Standard Hours Allowed: 2,000 hours Actual Hours: 2,100 hours Actual VOH: $13,000

Calculations:

• VOH Spending = $13,000 - (2,100 × $6) = $13,000 - $12,600 = $400 U
• VOH Efficiency = (2,100 - 2,000) × $6 = $600 U
• Total VOH Variance = $1,000 U

Fixed Overhead Variances

Fixed overhead variances work differently because fixed costs don't change with production volume.

Fixed Overhead Budget (Spending) Variance

Formula: $\text{FOH Budget Variance} = \text{Actual FOH} - \text{Budgeted FOH}$

This variance measures whether the company spent more or less on fixed overhead than budgeted.

Fixed Overhead Volume (Production) Variance

Formula: $\text{FOH Volume Variance} = \text{Budgeted FOH} - \text{Applied FOH}$

Or: $\text{FOH Volume Variance} = (\text{Budgeted Hours} - \text{Standard Hours Allowed}) \times \text{FOH Rate}$

This variance measures the impact of producing more or less than the denominator volume used to set the overhead rate.

Fixed Overhead Example

Budgeted FOH: $50,000 Budgeted Volume: 10,000 direct labor hours (FOH rate = $5/hr) Actual FOH: $52,000 Actual Production: 9,500 standard hours allowed

Calculations:

• FOH Budget Variance = $52,000 - $50,000 = $2,000 U
• Applied FOH = 9,500 × $5 = $47,500
• FOH Volume Variance = $50,000 - $47,500 = $2,500 U
• Total FOH Variance = $4,500 U

Summary of All Manufacturing Variances

Variance Interrelationships

Some variances are interconnected and can influence each other:

1. Materials Price ↔ Materials Quantity: Buying cheaper materials may increase waste
2. Labor Rate ↔ Labor Efficiency: Paying less for workers may reduce efficiency
3. Labor Efficiency ↔ VOH Efficiency: Both use actual vs. standard hours
4. Quality ↔ All Variances: Quality issues can cascade through multiple variances