Material and labour variances

Material and labour variances are the most frequently examined calculations in Area E. Section A questions ask for a single variance, and the wrong options are built from the classic slips: budgeted output instead of actual output, hours paid instead of hours worked, actual price instead of standard price. Section B questions give a standard cost card and a month's actual results and ask for a set of variances. This lesson gives you one method that works for every cost variance, the formulas for materials and labour, and a fully worked example.

What a variance is

A variance is the difference between a standard or budgeted figure and the actual figure. A cost variance is favourable (F) when actual cost is below standard, which raises profit, and adverse (A) when actual cost is above standard, which lowers it. Always label every variance F or A.

The key rule: costs are compared for the actual output. The standard cost of what was actually produced is the flexed standard. Comparing actual cost with the budget for a different output mixes up volume and efficiency and tells management nothing.

Total cost variance for an element = standard cost of actual output − actual cost.

Notation used in ICAN answers: AQ actual quantity, SQ standard quantity for actual output, AP actual price, SP standard price; AH actual hours, SH standard hours for actual output, AR actual rate, SR standard rate.

Material variances

A positive answer is favourable and a negative one adverse. Usage is always valued at the standard price, so that the effect of price stays in the price variance.

When purchases differ from usage. If the quantity bought differs from the quantity used and raw material inventory is valued at standard cost, base the price variance on the quantity purchased (it arises when the material is bought) and the usage variance on the quantity used. If 35,000 metres are bought at ₦1,950 against a standard of ₦2,000, the price variance is 35,000 × ₦50 = ₦1,750,000 F, however much is used. Unless told otherwise, assume purchases equal usage.

Labour variances

Workers are paid for every hour on the payroll, but output comes only from the hours actually worked. Hours paid but not worked, because of power failures, machine breakdowns, material shortages or poor scheduling, are idle time.

With no idle time, hours paid equal hours worked and the idle time variance is nil.

Worked example

Osisioma Garments Ltd uses the standard cost card from lesson 1: fabric 3 metres × ₦2,000 = ₦6,000, and direct labour 2 hours × ₦1,500 = ₦3,000 per kaftan. Budgeted output was 10,000 kaftans. Actual results for the quarter ended 31 March 2027:

• output: 10,400 kaftans;
• fabric: 31,800 metres bought and used, costing ₦62,010,000;
• labour: 22,000 hours paid, costing ₦34,100,000; failures of grid power caused 800 idle hours, so 21,200 hours were worked.

Required: calculate the material and labour variances.

Step 1: standards for the actual output. SQ = 10,400 × 3 = 31,200 metres. SH = 10,400 × 2 = 20,800 hours. The budgeted output of 10,000 is not used in any of these variances.

Step 2: material variances.

Check: ₦1,590,000 F − ₦1,200,000 A = ₦390,000 F. The actual price was ₦62,010,000 ÷ 31,800 = ₦1,950 a metre, ₦50 below standard.

Step 3: labour variances.

Check: ₦1,100,000 + ₦1,200,000 + ₦600,000 = ₦2,900,000 A. The actual rate was ₦34,100,000 ÷ 22,000 = ₦1,550 an hour, ₦50 above standard.

What the figures suggest. The fabric was ₦50 a metre cheaper than standard, but 600 metres more than standard were used: a cheaper, lower-quality fabric that wastes more in cutting would explain both. Tailors were paid ₦50 an hour above standard, perhaps overtime to make up for the power failures; 800 paid hours produced nothing; and the hours worked were 400 more than standard, perhaps because the cheaper fabric was harder to sew. Lesson 4 deals with causes, remedies and the links between variances.

Working backwards. Suppose another quarter's labour rate variance was ₦440,000 A on 22,000 hours paid, with a standard rate of ₦1,500. Actual cost = (22,000 × ₦1,500) + ₦440,000 = ₦33,440,000, so the actual rate = ₦33,440,000 ÷ 22,000 = ₦1,520 an hour. Write the formula, put in what you know and solve for the unknown, remembering that an adverse cost variance means actual cost exceeded standard.

Common mistakes

• Using budgeted output instead of actual output to find SQ and SH.
• Valuing the usage variance at the actual price instead of the standard price.
• Using hours paid in the efficiency variance, which counts the idle time twice.
• Calculating the rate variance on hours worked instead of hours paid.
• Basing the price variance on the quantity used when the question says material is held at standard cost from purchase.
• Leaving off F or A, or deciding it from the sign of a subtraction done the wrong way round: ask "did this raise or lower profit?"

Exam technique

Write SQ and SH for the actual output first, as workings, because almost every variance uses them. Then give each variance its own line: name, formula with figures, answer, and F or A. Prove each total (price + usage; rate + idle time + efficiency): it takes one line and catches most slips. ICAN's examiners regularly criticise answers that give figures without workings, and a variance without its label or working earns little even when the number is right. In Section A, expect the wrong options to come from the mistakes listed above.

Study with AI

I am studying ICAN Management Accounting (A3), material and labour variances. Give me
a standard cost card and actual results in naira for an invented Nigerian
manufacturer, with idle time and an actual output different from budget. Ask me for
the material price and usage variances and the labour rate, idle time and efficiency
variances one at a time. After each answer, show the correct working and say whether
it is favourable or adverse.

AI assistants can make arithmetic and labelling mistakes: check every answer against these notes.

Lecturer's note: Every cost variance in this lesson splits one gap into a price part and a quantity part, and the trick is to change only one thing at a time. The price or rate variance holds the quantity at actual and asks what the price difference cost; the usage or efficiency variance holds the price at standard and asks what the quantity difference cost. Idle hours never had the chance to be efficient or inefficient, so they are taken out first.

Key points

• A variance is favourable if it raises profit and adverse if it lowers it; always label it.
• Standards are flexed to actual output: SQ and SH are for the units actually produced.
• Material price = (SP − AP) × AQ; usage = (SQ − AQ) × SP.
• Labour rate uses hours paid; idle time = idle hours × SR (adverse); efficiency = (SH − hours worked) × SR.
• The parts must add up to the total variance: standard cost of actual output less actual cost.

Quick check

1. The standard is 4 kg per unit at ₦500 per kg. 2,000 units were made using 8,300 kg, which cost ₦4,067,000. Calculate the material price and usage variances.
2. The standard is 0.5 hours per unit at ₦2,000 per hour. 3,000 units were made. 1,700 hours were paid, costing ₦3,315,000, of which 100 hours were idle. Calculate the rate, idle time and efficiency variances.
3. A material price variance was ₦96,000 A on 12,000 kg bought, with a standard price of ₦300 per kg. What was the actual cost?

Answers

1. Price: (8,300 × ₦500) − ₦4,067,000 = ₦4,150,000 − ₦4,067,000 = ₦83,000 F. Usage: (8,000 − 8,300) × ₦500 = ₦150,000 A.
2. Rate: (1,700 × ₦2,000) − ₦3,315,000 = ₦85,000 F. Idle time: 100 × ₦2,000 = ₦200,000 A. Efficiency: SH 1,500, hours worked 1,600: (1,500 − 1,600) × ₦2,000 = ₦200,000 A.
3. (12,000 × ₦300) + ₦96,000 = ₦3,696,000, which is ₦308 per kg.