8.5 Variance Summary

See below for a summary of the six variances from standard discussed in this chapter.

Materials price variance = (Actual price – Standard price) x Actual quantity purchased OR

(Actual Price x Actual Qty purch) - (Standard Price x Actual Quantity purchased)
Materials usage variance = (Actual quantity used – Standard quantity allowed) x Standard price OR

(Actual qty used x Standard price) - (Standard Qty allowed x Standard price)
Labor rate variance = (Actual rate – standard rate) x Actual hours worked OR

(Actual rate x Actual hours worked) - (Standard rate x Actual hours worked)
Labor efficiency variance = (Actual hours worked – standard hours allowed) x Standard rate OR

(Actual hours worked x Standard Rate) - (Standard hours allowed x Standard Rate)
Variable OH Spending variance = (Actual variable OH rate – standard variable OH rate) x Actual OH base OR

(Actual variable OH rate x Actual OH base) - (Std variable OH rate x Actual OH base)
Variable OH Efficiency variance = (Actual OH base – standard OH base) x Standard variable OH rate OR

(Actual OH base x Standard variable OH rate) - (Std OH base x Std variable OH rate)
Fixed OH variance = Actual fixed overhead - Budgeted fixed overhead
Remember, variances are expressed at the absolute values meaning we do not show negative or positive numbers.  We express variances in terms of FAVORABLE or UNFAVORABLE and negative is not always bad or unfavorable and positive is not always good or favorable.

Keep these in mind:

  • When actual materials are more than standard (or budgeted), we have an UNFAVORABLE variance.
  • When actual materials are less than the standard, we have a FAVORABLE variance.
  • Same rule applies for direct labor.  If actual direct labor (either hours or dollars) is more than the standard, we have an UNFAVORABLE variance.  A FAVORABLE variance occurs when actual direct labor is less than the standard.

Accounting in the Headlines

How will the increasing cost of chocolate impact Hershey’s variances?

Although the demand for all chocolate has been increasing, consumer tastes have been gradually shifting towards dark chocolate because of its purported health benefits.  Dark chocolate uses more cocoa beans per ounce than milk chocolate.

So what does the predicted price increase mean for companies that use chocolate and/or cocoa beans?


1. The Hershey Company produces several products that use chocolate and/or cocoa beans.  Which of the following variances for Hershey’s chocolate products are likely to be impacted by the projected price increase in the cost of chocolate?  Explain your answer.

  • a.  Direct material price variance
  • b. Direct material quantity variance
  • c. Direct labor rate variance
  • d. Direct labor efficiency variance

2.  Hershey’s Special Dark Mildly Sweet Chocolate Bar and Hershey’s Milk Chocolate with Almonds Bar both weigh 1.45 ounces.  Which bar’s variances are more likely to be impacted by the increase in the cost of chocolate? Explain your reasoning.

3. Since The Hershey Company’s management knows that the price of chocolate is likely to increase, it might revise one or more of its standards. Which standard(s) would be impacted?  What would be the benefit of revising the standard(s) before the end of the reporting period?

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