Calculating Direct Materials & Direct Labor Variances

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  • 0:00 Accounting Variance
  • 0:45 Calculating Labor Variances
  • 1:34 Calculating Materials…
  • 2:25 Calculating Overhead Variances
  • 2:55 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Since many budgets are only forecasts, direct materials and direct labor variance calculations allow for changes in actual production costs. In this lesson, we will discuss the details of these variance calculations.

Accounting Variance

In a perfect world, actual costs would always align with the standard costs in a budget. However, it's not a perfect world. Instead, accountants and other business professionals use variances to provide for inevitable budgetary changes, particularly in spending. Variances exist when an actual expense differs from the standard cost which was budgeted for. There are two major types of variances. Favorable variances occur when an organization spends less for something than was planned. Unfavorable variances occur when an organization pays more for something than was planned. Both types of variances can occur within labor, materials and overhead budgets.

Calculating Labor Variances

A labor variance exists when the actual cost of labor for manufacturing a product differs from the standard, or forecast, cost of labor. There are three main types of labor variance. The labor price variance is found by subtracting the actual paid rate from the standard budgeted rate and then multiplying it by the actual hours worked. The labor quantity variance is found by multiplying the standard rate by the difference of the standard hours budgeted minus the actual worked hours budgeted. Finally, the total direct labor variance is calculated by multiplying the standard rate by the standard quantity of hours, then subtracting the product of the actual rate and the actual number of hours. In all cases you must make sure to pay attention to negative numbers; it could mean the difference between lower costs or higher costs.

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