PEV & PCR- Is this right?

Nicolaw1702

Hello everybody.

Just wanted to know If I have the right idea with the variances. This is the way I do it

Price
Usage
Rate
Efficiency

Expenditure
Capacity
Efficiency

Price Variance- MATERIALS

We are finding the variance for what the ACTUAL materials should have cost against what ACTUAL materials actually did cost. If paid less this would give a favourable variance if we paid more this would be adverse.

Usage Variance- MATERIALS

We are finding the variance for the amount of materials that should have been used for ACTUAL output against the ACTUAL materials that were used. If we used less this would give us a Favourable variance and if more it would be adverse.

Rate Variance- LABOUR

We are finding the variance between standard rate of pay and actual rate of pay for ACTUAL production.

Efficieny Variance-LABOUR

We are finding the variance between the hours it should have taken to produce actual production and the hours it did take to produce actual production.

Expenditure Variance- FIXED OVERHEADS

We are finding the variance between the budgeted overheads and the actual overheads incurred.

Capacity Variance- FIXED OVERHEAD

We are finding the variance between budgeted Hours and actual hours

Efficiency Variance- FIXED OVERHEAD

We are finding the variance between actual hours and the standard hours it should have taken for actual production.

Please tell me if I am correct? :crying:

Nagra

Sounds fine to me, remember to multiply your variances for Material Usage, Labour & O/H Capacity by standard cost

SandyHood

Good

Price Variance- MATERIALS

We are finding the variance for what the ACTUAL materials should have cost against what ACTUAL materials actually did cost. If paid less this would give a favourable variance if we paid more this would be adverse.

Just in case you get a question where issues to the production department is not the same as purchases remember to compare like with like
I like to add the word purchased to the what the ACTUAL materials should have cost to distinguish it from the actual materials issued which is used for the usage variance

That way you compare the standard cost of what we purchased with the actual cost of what we purchased.

Similarly the material usage variance should compare the standard material cost (kg x £/kg) of what we made with the standard material cost of what was issued to production.

This is only applicable in a specific situation. Otherwise your definitions are super.

Marg22

message for Sandy Hood

Hi Sandy

Please would you explain what you mean with this quote? I would be grateful if you could give me an illustration of this.

Thanks



Quote

Just in case you get a question where issues to the production department is not the same as purchases remember to compare like with like
I like to add the word purchased to the what the ACTUAL materials should have cost to distinguish it from the actual materials issued which is used for the usage variance

That way you compare the standard cost of what we purchased with the actual cost of what we purchased.

Similarly the material usage variance should compare the standard material cost (kg x £/kg) of what we made with the standard material cost of what was issued to production.

SandyHood

A manufacturer makes The Marg a product with a raw material requirement of 2kg per unit and a standard cost per kg of £30

During October 250 were made
600kgs were purchased at a cost of £17,500
the stock went into stores at standard cost
and 480 kgs were issued to production.

We now know
Standard usage: 250 units at 2kg = 500kg
Actual usage in production: 480kg
Actual purchases: 600kg

Can you apply Nicola's formulae to produce the usage and price variances?

CathG

Is this right....


Material Usage Variance:
Std Usage 500 - Actual Usage 480 x Std cost £30 = £600 favourable (used 20kg less than expected)

Material Price Variance:
Actual cost =£17500/600*480 = £14000 - std cost 480*30 = £14400 ( £400 favourable)

Which can be reconciled:
Standard cost = 500 kgs (250 units*2kg@ £30) = £15,000
Usage Variance ...............................................(£600) favourable
Price Variance .................................................(£400) favourable
Actual Cost = ......................£17500/600*480 = £14,000

I hope that's right otherwise I've got more revision than I thought to do!

I'm finding variances tricky, I work them out a different way to our tutor, so at home I think I understand the workings, then when I go to college get completely confused. Though I have noticed the exam answers give both workings so I should be ok - hopefully!

definite.studies

I agree with your calculations Cathy. When I was doing this, I thought a good way to remember it was to think about FAIRNESS in allocating CREDIT or BLAME for the total material cost variance.

We are dealing with two separate departments here - Production and Purchasing. It is only fair that the Production department should be allowed to use standard prices when calculating their responsibility for any variance in the production costs, so the usage variance only changes with the quantity of material used per unit not with the actual cost.

In the case of Purchasing, they cannot control the quantity of materials used by Production so the material price variance takes the actual quantity used as a given, with the price variance being favorable or unfavorable only depending on the difference between the standard price and the actual price per unit.

Hope this helps!

CathG

Thanks I hadn't looked at it like that before.

I'll think about that when I do my next practice exam paper.

Marg22

Sandy,

Thank you for explaining it. I did work it out without looking at other peoples answers and got it completely correct.

Regards

Marg