Planning and Operational Variances for material & labour

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Planning and operational variances for materials and labour

For materials and labour, planning and operational variances can be calculated by comparing original and revised budgets (planning) and revised budgets with actual results (operational).

A material price planning variance is really useful to provide feedback on just how skilled managers are in estimating future prices.

The operational variance is more meaningful as it measures the purchasing department’s efficiency given the market conditions that prevailed at that time. It ignores factors which cannot be controlled by purchasing department.

Illustration 1

Budgeted Material price per kg is $5
Budgeted Material per unit = 4kg
Actual Output is 10,000 units

The standard price for the raw material purchased should have been $6 per kg.

The material price planning variance is:

  • Solution

    Standard price $6 - Budgeted price $5 = $1 

    $1 x 4kg x 10,000 units = $40,000 (A) - adverse

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