The Pure Rate Variance

36 Pages Posted: 12 Oct 2004

See all articles by John H. Bradshaw

John H. Bradshaw

Victoria University of Wellington - School of Accounting and Commercial Law

Stephen P. Keef

Victoria University of Wellington - School of Accounting and Commercial Law

Melvin Roush

Pittsburg State University; Victoria University of Wellington - School of Accounting and Commercial Law

Date Written: October 8, 2004

Abstract

The direct material cost variance can be subdivided into a price variance, a quantity variance and a price-quantity interaction variance. The price-quantity interaction variance is rarely mentioned in the literature because the traditional price variance does not acknowledge an interaction variance. For a number of pragmatic reasons, this approach may be justified for the direct material price variance. The direct labor cost variance is conceptually similar to the direct material cost variance. Accordingly, the traditional direct labor rate variance also includes a rate-efficiency interaction variance. However, the justifications for incorporating the interaction variance into the direct material price variance do not apply to the direct labor rate variance. This paper explores the possibility of separating the rate-efficiency interaction variance from the direct labor rate variance. This approach may be more aligned with the concept of responsibility accounting than the traditional method of calculating the direct labor rate variance. Thus, it may provide more reliable information feedback for decision-making purposes.

Keywords: Variance analysis, pure price variance

JEL Classification: M40, M46, G34

Suggested Citation

Bradshaw, John H. and Keef, Stephen and Roush, Melvin, The Pure Rate Variance (October 8, 2004). Available at SSRN: https://ssrn.com/abstract=602067 or http://dx.doi.org/10.2139/ssrn.602067

John H. Bradshaw (Contact Author)

Victoria University of Wellington - School of Accounting and Commercial Law ( email )

Faculty of Commerce and Administration
PO Box 600
Wellington
New Zealand

Stephen Keef

Victoria University of Wellington - School of Accounting and Commercial Law ( email )

Faculty of Commerce and Administration
PO Box 600
Wellington
New Zealand

Melvin Roush

Pittsburg State University ( email )

1701 S. Broadway
Pittsburg, KS 66762
United States

Victoria University of Wellington - School of Accounting and Commercial Law ( email )

Faculty of Commerce and Administration
PO Box 600
Wellington
New Zealand
64 4 471 5365 (Phone)
64 4 495 5076 (Fax)

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