How to Calculate Material & Labor Variances

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Material and labor variances allow a comparison between the budgeted amount of material and labor used compared to the actual amount of material and labor used. This allows management to tell if there is a favorable or unfavorable variance. Once management makes these determinations, they can determine proper changes in budgets and planning in the future.

Material Variances

  • Determine the actual quantity of a product produced, the price to produce the product, the budgeted price of the product, the actual material used and the budgeted material used. For example, Firm A produces widgets. During the year it produced 2,000 widgets at a cost of $3 per widget, and $3.50 was budgeted per widget. The company budgeted 1,000 units for direct materials, but it took 1,300 units to produce the widgets.

  • Multiply actual quantity purchased by the difference of actual price and budgeted price. This equals the direct materials price variance. In the example, direct materials price variance is $2,000 X ($3.50 - $3) which equals $1,000.

  • Multiply the budgeted price by the difference between actual materials used and budgeted materials. This equals the direct materials quantity variance. In the example, direct materials quantity variance is $3.50 X (1,300 - 1,000) which equals $1,050.

Labor Variances

  • Determine the actual hours worked, the actual rate charged for labor, the budgeted rate for labor, the actual hours of worked and the budgeted hours for the period. Firm A has employees work 400 hours for a planned $6 an hour, but it actually cost $6.50 due to overtime. The firm budgeted for 350 hours of work.

  • Multiply actual hours worked by the difference between actual rate and budgeted rate. This is direct labor rate variance. In the example, direct labor rate variance is 400 X ($6.50 - $6) which equals $200.

  • Multiply the standard rate by the difference between actual hours worked and standard hours worked. This is the direct labor efficiency variance. In the example, $6 X (400 - 350) which equals $300.

References

  • Photo Credit Calculator image by Alhazm Salemi from Fotolia.com
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