Variance Analysis Where the Standard Cost Itself Is Suspect
Bramwell Foods manufactures a single product. The standard cost card for the year was set in December 2024: 2.5 kg of raw material at $8.00/kg, and 0.4 direct labour hours at $32/hour, giving a standard prime cost of $32.80 per unit. Budgeted production was 40,000 units. Actual results for 2025: production 44,000 units, material purchased and used 114,400 kg at an average $8.60/kg, and direct labour 18,700 hours at $31.20/hour. The purchasing manager secured a bulk discount on a lower grade of material, which caused 3,200 kg of abnormal spoilage recorded within the material usage. The production manager is paid a bonus tied to the material usage variance. At the year-end review, the production manager claims his usage variance is favourable and should be rewarded.
1. Calculate the material price and usage variances on a marginal (contribution) basis, flexing for actual output, and assess the production manager's claim.
Read the worked answer
Flex the standard for actual output. Standard quantity allowed = 44,000 × 2.5 kg = 110,000 kg.
Material price variance = (Standard price − Actual price) × Actual quantity purchased = ($8.00 − $8.60) × 114,400 = $68,640 adverse
Material usage variance = (Standard quantity allowed − Actual quantity used) × Standard price = (110,000 − 114,400) × $8.00 = $35,200 adverse
Assessing the claim. The usage variance is adverse, not favourable. The production manager has likely compared actual usage to the original budget quantity (40,000 × 2.5 = 100,000 kg) rather than the flexed allowance of 110,000 kg. Using the un-flexed budget, actual usage of 114,400 kg still looks adverse, so the claim fails on any basis.
Root cause matters. Of the 4,400 kg excess usage, 3,200 kg is abnormal spoilage caused by the cheaper, lower-grade material bought by the purchasing manager. The price variance ($68,640 adverse) is the purchasing manager's responsibility; the usage variance is contaminated by that decision. Splitting responsibility is essential: the production manager should be accountable only for the residual 1,200 kg ($9,600 adverse).
Behavioural point. Rewarding the production manager on the usage variance while the purchasing manager is rewarded on price creates a classic goal-congruence conflict - each optimises their own metric at the expense of total cost. A joint total material cost variance, or a shared metric, would align incentives.
2. The labour variances show a favourable rate variance and an adverse efficiency variance. Explain what combination of causes could produce this pattern and what management should investigate.
Read the worked answer
Compute the variances.
- Standard hours allowed = 44,000 × 0.4 = 17,600 hours
- Labour rate variance = (Standard rate − Actual rate) × Actual hours = ($32.00 − $31.20) × 18,700 = $14,960 favourable
- Labour efficiency variance = (Standard hours − Actual hours) × Standard rate = (17,600 − 18,700) × $32.00 = $35,200 adverse
Plausible causes of favourable rate + adverse efficiency.
- Cheaper, less-skilled labour mix. Hiring lower-grade workers reduces the average rate but slows production, increasing hours. The two variances are two sides of the same decision.
- Overtime or shift patterns. Overtime premiums would normally push the rate variance adverse, so this is less likely here, but shift scheduling that spreads work across more hours can do it.
- Learning-curve or training effects. New staff are paid less while learning, producing more hours.
- Machine downtime or rework. Idle time paid at standard rate inflates hours without changing the rate.
What to investigate. Obtain a breakdown of actual hours into productive, idle, rework and training time; review the labour mix and pay grades against the standard; and check whether the standard rate and standard hours are still valid given the material downgrade (lower-grade material may require more handling time). The $35,200 adverse efficiency variance is nearly 2.4 times the $14,960 favourable rate variance, so the net labour variance is $20,240 adverse - the cheaper labour did not pay for itself. Management should not reward either manager on their individual variance alone.