Direct Material Variances

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sair_19
sair_19 Registered Posts: 7 New contributor 🐸
I am really struggling to understand the direct material/labour variances. I seem to get confused when calculating the total variance and then the price variances or labour rate variance. I can't seem to understand the difference! Does anyone have any tips on learning these?? I have tried and tried and seem to be failing! My tutor has tried to help but i still dont understand! :001_unsure:

Thanks

Sarah

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  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034 mod
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    Sarah
    My advice is to not try to learn formulae.
    Think about what you are measuring the sums will follow.

    Try this link
    http://www.aat.org.uk/forums/showthread.php?t=17789
    there are more links from this one

    Keep your variance analysis practical and let that help you to understand it. Then the numbers can follow after.
    Sandy
    sandy@sandyhood.com
    www.sandyhood.com
  • definite.studies
    definite.studies Registered Posts: 88 Regular contributor ⭐
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    Hi Sarah,

    For material & labour variances I think it is useful to think about who should be held accountable for the different components of the variances and what is the fairest way of doing that. In the case of materials we have the price and usage variances, which can be allocated to the Purchasing and Production departments respectively.

    It is as if there is an agreement between Purchasing and Production to supply (within reasonable limits) any quantity of material at the standard price. This will be a price per kilogram or square metre of material, as Purchasing can not be expected to be reponsible for the usage of material per product. If the materials were purchased at a higher price than the standard, then that results in a price variance to be explained by Purchasing. If the quantity used by Production is above the standard quantity for the actual ouput, then this difference has to be justified by the Production department as the usage variance and is calculated using standard prices.

    If the production output is measured in Units and the material in kilograms, we have:

    Standard Material Cost of Production = Standard Material Cost Per Unit of Production x Actual Quantity of Production in Units
    Transfer Cost between Purchasing & Production = Standard Cost Per kilogram of Material x Actual Quantity of Material in kilograms
    Actual Cost of Materials Used = Actual Cost Per kilogram of Material x Actual Quantity of Material in kilograms

    Then we can reconcile the costs as follows (where adverse variances have positive values):

    Standard Material Cost of Production
    + Direct Material Usage Variance
    Transfer Cost
    + Direct Material Price Variance
    Actual Cost of Materials Used
    ======================

    Usually the Standard and Actual Costs can be worked out directly from the question. If we calculate the Transfer Cost, the Variances are then the missing figures in the overall reconciliation.

    Similarly with direct labour variances, we can imagine that there is an agreement between Human Resources and Production departments to provide any amount of labour at a standard hourly rate. If the actual hourly rate is different that has to be explained by HR (rate variance), and if actual labour usage is different from the standard hours for actual output then this has to be explained by Production (efficiency variance). Efficiency variance is the responsibility of Production, but they only use the standard rate in their calculation as the actual pay rate is outside their control.

    If the production output is measured in Units and the direct labour in hours, we have:

    Standard Direct Labour Cost of Production = Standard Labour Cost Per Unit of Production x Actual Quantity of Production in Units
    Transfer Cost between HR & Production = Standard Direct Labour Rate x Actual Labour Hours
    Actual Direct Labour Cost = Actual Direct Labour Hourly Rate x Actual Direct Labour Hours

    Then we can reconcile the costs as follows (where adverse variances have positive values):

    Standard Direct Labour Cost of Production
    + Direct Labour Efficiency Variance
    Transfer Cost
    + Direct Labour Rate Variance
    Actual Direct Labour Cost
    ======================

    Hope this helps a bit!

    Pete.
    (AAT Student)
  • Andrewh26
    Andrewh26 Registered Posts: 69 Regular contributor ⭐
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    I've barely started looking at this. 1 month to go before pev, dcr and dfs. So i've started revising since the last week or so. Have I left it too late, anyone with experience of doig technician level? Again just like intermediate level, I feel I have lots to learn and always learn most of what I need to know by looking at past papers! how about everyone else?
  • definite.studies
    definite.studies Registered Posts: 88 Regular contributor ⭐
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    Hi Andrew,
    As your comment has very little connection with the topic of this thread, perhaps you would get some more helpful responses if you started a new thread called "How to revise PEV, PCR & DFS in one month" or something like that.
    Regards, Pete.
  • visha
    visha Registered Posts: 218 Dedicated contributor 🦉
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    Hi You have 3 papers to sit and each with 10 past exam papers. You may want to attempt them twice (10 x 3 x 2) = 60 papers to do and learn from them. Each paper on average will want 2 hrs (60 x 2) = 120 hrs

    120 hrs divide by 4 weeks = 30 hrs per week study.

    You may just do it!
  • Andrewh26
    Andrewh26 Registered Posts: 69 Regular contributor ⭐
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    Thanks, I wasn't planning to study all of the past exam papers, moreso the ones from the past few years i think. I'm almost resigned that i'll be doing 1 or more in december, but i'll give it my best shot
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