Standard Costs are budgeted costs for Direct Materials, Direct Labor and
Manufacturing Overhead in a Manufacturing environment. Standard costs do not exist in
a Merchandising-Walmart, Target etc.-or a Service-Banking, Accounting, Legal,
etc-environments. Variances are created when their is a difference between the
Standard Price and Quantity costs. Example: for Direct Materials, an Unfavorable Price
Variance would exist when the Actual Price for the Materials exceeds the Standard
Price/Cost-perhaps due to an increase in supplier prices or being forced by the
competition to use higher quality materials. However, a Favorable Quantity Variance will
occur when the Actual Quantity of Materials is less than the Standard Quantity. This
could occur when state of the art machinery purchased reduces 'waste' or better training
of the workforce.
REQUIRED: What would cause Price/Wages (lower or higher wages), and Quantity
(less or more labor hours) for Direct Labor?
Sample Solution