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Equation based On Standard Costing System with a Flexible Budget. Under Flexible Budget model is prepared on different level of sales of units. As mentioned, using standard costing system equation will be same but direct labor variance numbers will be different due to different level of items of sales.
For Price Variance = Standard labor price (SP) less actual labor price (AP) multiply by actual hours used (AHU). SP-AP*AHU
For Efficiency Variance (Usage variance) = Standard hours allowed (SHA) less actual hours used (AHU) multiply by standard labor price (SP). SHA-AHU*SP
USE OF PRICE VARIANCE AND QUANTITY (USAGE) VARIANCE EQUATION:
For Price Variance (SP-AP*AHU) = $11-$12*11,900 = ($11,900)
For Efficiency (usage) Variance (SHA-AHU*SP) = 10,200-11,900*$11 = ($18,700)
Total Unfavorable Direct Labor Variance (Price Variance + Efficiency Variance) = ($11,900) + ($18,700) = ($30,600)
Example for Flexible Budget:
Units Sold = 1700
Standard hours per unit = 6
Standard price per unit = $11
Budgeted Direct Labor Cost = 1,700*6*$11 = $112,200
Actual hour used = 7
Actual price per unit = $12
Actual Direct Labor Cost = 1,700*7*$12 = $142,800
Unfavorable Variance = $112,200 - $142,800 = ($30,600)
