Variance Analysis
Variance Analysis
A
variance is the difference between an actual result and an expected
result. The process by which the total difference between standard and
actual results is analysed is known as variance analysis. When actual
results are better than the expected results, we have a favourable
variance (F). If, on the other hand, actual results are worse than
expected results, we have an adverse (A).
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The
direct material total variance is the difference between what the
output actually cost and what it should have cost, in terms of material.
From the example above the material total variance is given by:
| |
$
|
|
1,000 units should have cost (x $50)
|
50,000
|
|
But did cost
|
46,075
|
|
Direct material total variance
|
3, 925 (F)
|
It can be divided into two sub-variances
This is the difference between what the actual quantity of material used did cost and what it should have cost.
| |
$
|
|
4,850 kgs should have cost (x $10)
|
48,500
|
|
But did cost
|
46,075
|
|
Direct material price variance
|
2,425 (F)
|
This
is the difference between how much material should have been used for
the number of units actually produced and how much material was used,
valued at standard cost
|
1,000 units should have used (x 5 kgs)
|
5,000 kgs
|
|
But did use
|
4,850 kgs
|
|
Variance in kgs
|
150 kgs (F)
|
|
Valued at standard cost per kg
|
x $10
|
|
Direct material usage variance in $
|
$1,500 (F)
|
The
direct material price variance is calculated on material purchases in
the period if closing stocks of raw materials are valued at standard
cost or material used if closing stocks of raw materials are valued at
actual cost (FIFO).
The
direct labour total variance is the difference between what the output
should have cost and what it did cost, in terms of labour.
| |
$
|
|
1,000 units should have cost (x $20)
|
20,000
|
|
But did cost
|
21,210
|
|
Direct material price variance
|
1,210 (A)
|
This is the difference between what the actual number of hours worked should have cost and what it did cost.
|
4200hrs should have cost (4200hrs x $5)
|
$21000
|
|
But did cost
|
$21210
|
|
Direct labour rate variance
|
$210(A)
|
The
is the difference between how many hours should have been worked for
the number of units actually produced and how many hours were worked,
valued at the standard rate per hour.
| |
$
|
|
1,000 units should have taken (x 4 hrs)
|
4,000 hrs
|
|
But did take
|
4,200 hrs
|
|
Variance in hrs
|
200 hrs
|
|
Valued at standard rate per hour
|
x $5
|
|
Direct labour efficiency variance
|
$1,000 (A)
|
When
idle time occurs the efficiency variance is based on hours actually
worked (not hours paid for) and an idle time variance (hours of idle
time x standard rate per hour) is calculated.
The
variable production overhead total variance is the difference between
what the output should have cost and what it did cost, in terms of
variable production overhead.
| |
$
|
|
1,000 units should have cost (x $8)
|
8,000
|
|
But did cost
|
9,450
|
|
Variable production o/hd expenditure variance
|
1,450 (A)
|
This is the difference between what the variable production overhead did cost and what it should have cost
| |
$
|
|
4,200 hrs should have cost (x $2)
|
8,400
|
|
But did cost
|
9,450
|
|
Variable production o/hd expenditure variance
|
1,050 (A)
|
This is the same as the direct labour efficiency variance in hours, valued at the variable production overhead rate per hour.
|
Labour efficiency variance in hours
|
200 hrs (A)
|
|
Valued @ standard rate per hour
|
x $2
|
|
Variable production o/hd efficiency variance
|
$400 (A)
|
The total fixed production variance is an attempt to explain the under- or over-absorbed fixed production overhead.
|
Remember that overhead absorption rate =
|
Budgeted fixed production overhead
|
|
Budgeted level of activity
|
If either the numerator or the denominator or both are incorrect then we will have under- or over-absorbed production overhead.
- If actual expenditure ± budgeted expenditure (numerator incorrect) » expenditure variance
- If actual production / hours of activity » budgeted production / hours of activity (denominator incorrect) » volume variance.
- The workforce may have been working at a more or less efficient rate than standard to produce a given output » volume efficiency variance (similar to the variable production overhead efficiency variance).
- Regardless of the level of efficiency, the total number of hours worked could have been more or less than was originally budgeted (employees may have worked a lot of overtime or there may have been a strike and so actual hours worked were less than budgeted) » volume capacity variance.
This
is the difference between fixed production overhead incurred and fixed
production overhead absorbed (= the under- or over-absorbed fixed
production overhead)
| |
$
|
|
Overhead incurred
|
25,000
|
|
Overhead absorbed (1,000 units x $24)
|
24,000
|
|
Overhead variance
|
1,000 (A)
|
This
is the difference between the budgeted fixed production overhead
expenditure and actual fixed production overhead expenditure
| |
$
|
|
Budgeted overhead (1,200 x $24)
|
28,800
|
|
Actual overhead
|
25,000
|
|
Expenditure variance
|
3,800 (F)
|
This is the difference between actual and budgeted production volume multiplied by the standard absorption rate per unit.
| |
$
|
|
Actual production at std rate (1,000 x $24)
|
24,000
|
|
Budgeted production at std rate (1,200 x $24)
|
28,800
|
| |
4,800 (A)
|
This
is the difference between the number of hours that actual production
should have taken, and the number of hours actually worked (usually the
labour efficiency variance), multiplied by the standard absorption rate
per hour.
|
Labour efficiency variance in hours
|
200 hrs (A)
|
|
Valued @ standard rate per hour
|
x $6
|
|
Volume efficiency variance
|
$1,200 (A)
|
This
is the difference between budgeted hours of work and the actual hours
worked, multiplied by the standard absorption rate per hour
|
Budgeted hours (1,200 x 4)
|
4,800 hrs
|
|
Actual hours
|
4,200 hrs
|
|
Variance in hrs
|
600 hrs (A)
|
|
x standard rate per hour
|
x $6
|
| |
$3,600 (A)
|
|
KEY.
The
fixed overhead volume capacity variance is unlike the other variances
in that an excess of actual hours over budgeted hours results in a
favourable variance and not an adverse variance as it does when
considering labour efficiency, variable overhead efficiency and fixed
overhead volume efficiency. Working more hours than budgeted produces an
over absorption of fixed overheads, which is a favourable variance.
|
|
Sales
variances |
The
selling price variance is a measure of the effect on expected profit of
a different selling price to standard selling price. It is calculated
as the difference between what the sales revenue should have been for
the actual quantity sold, and what it was.
| |
$
|
|
Revenue from 900 units should have been (x $150)
|
135,000
|
|
But was (x $140)
|
126,000
|
|
Selling price variance
|
9,000 (A)
|
The
sales volume variance is the difference between the actual units sold
and the budgeted quantity, valued at the standard profit per unit. In
other words it measures the increase or decrease in standard profit as a
result of the sales volume being higher or lower than budgeted.
|
Budgeted sales volume
|
1,000 units
|
|
Actual sales volume
|
900 units
|
|
Variance in units
|
100 units (A)
|
|
x standard margin per unit (x $ (150 – 102) )
|
x $48
|
|
Sales volume variance
|
$4,800 (A)
|
|
KEY.
Don’t forget to value the sales volume variance at standard contribution marginal costing is in use.
|
|
Operating
statements |
The most common presentation of the reconciliation between budgeted and actual profit is as follows.
$ $
Budgeted profit before sales and admin costs X
Sales variances - price X
- volume X
X
Actual sales minus standard cost of sales X
Cost variances $ $
(F) (A)
Material price X
Material usage etc __ X
X X X
Sales and administration costs X
Actual profit X
Variances in a standard marginal costing system
- No fixed overhead volume variance
- Sales volume variances are valued at standard contribution margin (not standard profit margin)
Reasons, interdependence and significance
Material price
- (F) – unforseen discounts received, greater care taken in purchasing, change in material standard
- (A)– price increase, careless purchasing, change in material standard.
Material usage
- (F) – material used of higher quality than standard, more effective use made of material
- (A) – defective material, excessive waste, theft, stricter quality control
Labour rate
- (F) – use of workers at rate of pay lower than standard
- (A) – wage rate increase
- Machine breakdown, non-availability of material, illness
- (F) – output produced more quickly than expected because of work motivation, better quality of equipment or materials
- (A) – lost time in excess of standard allowed, output lower than standard set because of deliberate restriction, lack of training, sub-standard material used.
- (F) – savings in cost incurred, more economical use of services.
- (A) – increase in cost of services used, excessive use of services, change in type of services used
- (F) – production greater than budgeted
- (A) – production less than budgeted
The cause of one (adverse) variance may be wholly or partly explained by the cause of another (favourable) variance.
- Material price or material usage and labour efficiency
- Labour rate and material usage
- Sales price and sales volume
The
decision as to whether or not a variance is so significant that it
should be investigated should take a number of factors into account.
- The type of standard being used
- Interdependence between variances
- Controllability
- Materiality
The
materials usage variance can be subdivided into a materials mix
variance and a materials yield variance if the proportion of materials
in a mix is changeable and controllable.
The mix variance indicates the effect on costs of changing the mix of material inputs.
The yield variance indicates the effect on costs of material inputs yielding more or less than expected.
Standard input to produce 1 unit of product X:
| | |
$
|
|
Material A
|
20 kgs x $10
|
200
|
|
Material B
|
30 kgs x $5
|
150
|
| | |
350
|
In period 3, 13 units of product X were produced from 250 kgs of material A and 350 kgs of material B.
Mix Variance
Kgs
Standard mix of actual use: A: 2/5 x (250+350) 240
B: 3/5 x (250+350) 360
600
===
A B
Mix should have been 240 kgs 360 kgs
But was 250 kgs 350 kgs
Mix variance in kgs 10 kgs (A) 10 kgs (F)
x standard cost per kg x $10 x $5
Mix variance in $ $100 (A) $50 (F)
===== ===
50 (A)
Total mix variance in quantity is always zero.
Yield variance
A B
13 units of product X should have used 260 kgs 390 kgs
but actual input in standard mix was 240 kgs 360 kgs
Yield variance in kgs 20 kgs (F) 30 kgs (F)
x standard cost per kg x $10 x $5
$200 (F) $150 (F)
===== =====
$350 (F)
====
Therefore, Budgeted weighted average price =$350/50 = $7 per kg
• Mix variance
A B
13 units of product X should have used 260 kgs 390 kgs
but did use 250 kgs 350 kgs
Usage variance in kgs 10 kgs (F) 40 kgs (F)
x individual price per kg – budgeted
weighted average price per kg
$ (10 – 7) x $3
$ (5 – 7) ____ x ($2)
$30 (F) $80 (A)
=== ===
$50 (A)
===
• Yield variance
A B
Usage variance in kgs 10 kg (F) 40 kg (F)
x budgeted weighted average
Price per kg x $7 x $7
$70 (F) $ 280 (F)
=== ====
$350 (F)
====
The sales volume variance can be subdivided into a mix variance if the proportions of products sold are controllable.
This variance indicates the effect on profit of changing the mix of actual sales from the standard mix.
It can be calculated in one of two ways.
- The difference between the actual total quantity sold in the standard mix and the actual quantities sold, valued at the standard margin per unit.
- The difference between actual sales and budgeted sales, valued at (standard profit per unit – budgeted weighted average profit per unit)
This variance indicates the effect on profit of selling a different total quantity from the budgeted total quantity.
It can be calculated in one of two ways.
- The difference between actual sales volume in the standard mix and budgeted sales valued at the standard margin per unit.
- The difference between actual sales volume and budgeted sales valued at the budgeted weighted average profit per unit.
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KEY.
With
all variance calculations, from the most basic (such as variable cost
variances) to the more complex (such as mix and yield / mix and
quantity variances), it is vital that you do not simply learn
formulae. You must understand what your calculations are supposed are
supposed to show.
|
Question 1
Standard Cost for Product RBT
| |
£
|
|
Materials (10kg x £8 per kg)
|
80
|
|
Labour (5hrs x £6 per hr) ¬
|
30
|
|
Variable O/Hds (5hrs x £8 per hr)
|
40
|
|
Fixed O/Hds (5hrs x £9 per hr)
|
45
|
| |
195
|
|
Budgeted Results
| |
|
Production
|
10000 units
|
|
Sales
|
7500 units
|
|
Selling Price
|
£300 per unit
|
|
Actual Results
| |
|
Production
|
8000 units
|
|
Sales
|
6000 units
|
|
Materials
|
85000 kg Cost £700000
|
|
Labour
|
36000 hrs Cost £330900
|
|
Variable O/Hds
|
£400000
|
|
Fixed O/Hds
|
£500000
|
|
Selling Price
|
£260 per unit
|
Calculate
- Material total variance
- Material price variance
- Material usage variance
- Labour total variance
- Labour rate variance
- Labour efficiency variance
- Variable overhead total variance and all sub- variances
- Fixed Production overhead total Variance and all sub-variances
- Selling price variance
- Sales volume variance
Question 2
|
Standard Cost for Product TUH
| |
| |
£
|
|
Materials (10kg x £8 per kg)
|
80
|
|
Labour (5hrs x £6 per hr) ¬
|
30
|
|
Variable O/Hds (5hrs x £8 per hr)
|
40
|
|
Fixed O/Hds (5hrs x £9 per hr)
|
45
|
| |
195
|
|
Budgeted Results
| |
|
Production
|
11000 units
|
|
Sales
|
7500 units
|
|
Selling Price
|
£300 per unit
|
|
Actual Results
| |
|
Production
|
9000 units
|
|
Sales
|
7000 units
|
|
Materials
|
85000 kg Cost £700000
|
|
Labour
|
36000 hrs Cost £330900
|
|
Variable O/Hds
|
£410000
|
|
Fixed O/Hds
|
£520000
|
|
Selling Price
|
£260 per unit
|
Calculate
- Material total variance
- Material price variance
- Material usage variance
- Labour total variance
- Labour rate variance
- Labour efficiency variance
- Variable overhead total variance and all sub- variances
- Fixed Production overhead total Variance and all sub-variances
- Selling price variance
- Sales volume variance
Question 3
|
Standard Cost for Product TD
| |
| |
£
|
|
Materials (10kg x £5 per kg)
|
50
|
|
Labour (5hrs x £6 per hr) ¬
|
30
|
|
Variable O/Hds (5hrs x £8 per hr)
|
40
|
|
Fixed O/Hds (5hrs x £9 per hr)
|
45
|
| |
165
|
|
Budgeted Results
| |
|
Production
|
8000 units
|
|
Sales
|
7500 units
|
|
Selling Price
|
£300 per unit
|
|
Actual Results
| |
|
Production
|
11000 units
|
|
Sales
|
10000 units
|
|
Materials
|
85000 kg Cost £700000
|
|
Labour
|
36000 hrs Cost £330900
|
|
Variable O/Hds
|
£400000
|
|
Fixed O/Hds
|
£500000
|
|
Selling Price
|
£320 per unit
|
Calculate
- Material total variance
- Material price variance
- Material usage variance
- Labour total variance
- Labour rate variance
- Labour efficiency variance
- Variable overhead total variance and all sub- variances
- Fixed Production overhead total Variance and all sub-variances
- Selling price variance
- Sales volume variance
Question 4
|
Standard Cost for Product WXYZ
| |
| |
£
|
|
Materials (4kg x £8 per kg)
|
32
|
|
Labour (5hrs x £10 per hr) ¬
|
50
|
|
Variable O/Hds (5hrs x £8 per hr)
|
40
|
|
Fixed O/Hds (5hrs x £6 per hr)
|
30
|
| |
152
|
|
Budgeted Results
| |
|
Production
|
10000 units
|
|
Sales
|
7500 units
|
|
Selling Price
|
£300 per unit
|
|
Actual Results
| |
|
Production
|
8000 units
|
|
Sales
|
6000 units
|
|
Materials
|
85000 kg Cost £700000
|
|
Labour
|
36000 hrs Cost £330900
|
|
Variable O/Hds
|
£400000
|
|
Fixed O/Hds
|
£500000
|
|
Selling Price
|
£260 per unit
|
Calculate
- Material total variance
- Material price variance
- Material usage variance
- Labour total variance
- Labour rate variance
- Labour efficiency variance
- Variable overhead total variance and all sub- variances
- Fixed Production overhead total Variance and all sub-variances
- Selling price variance
- Sales volume variance
Question 5
|
Standard Cost for Product RTY
| |
| |
£
|
|
Materials (10kg x £8 per kg)
|
80
|
|
Labour (5hrs x £6 per hr) ¬
|
30
|
|
Variable O/Hds (5hrs x £8 per hr)
|
40
|
|
Fixed O/Hds (5hrs x £9 per hr)
|
45
|
| |
195
|
|
Budgeted Results
| |
|
Production
|
13000 units
|
|
Sales
|
10000 units
|
|
Selling Price
|
£300 per unit
|
|
Actual Results
| |
|
Production
|
12000 units
|
|
Sales
|
9000 units
|
|
Materials
|
90000 kg Cost £750000
|
|
Labour
|
40000 hrs Cost £350000
|
|
Variable O/Hds
|
£500000
|
|
Fixed O/Hds
|
£600000
|
|
Selling Price
|
£350 per unit
|
Calculate
- Material total variance
- Material price variance
- Material usage variance
- Labour total variance
- Labour rate variance
- Labour efficiency variance
- Variable overhead total variance and all sub- variances
- Fixed Production overhead total Variance and all sub-variances
- Selling price variance
- Sales volume variance
Question 6
|
Standard Cost for Product RED
| |
| |
£
|
|
Materials (10kg x £7 per kg)
|
70
|
|
Labour (5hrs x £6 per hr) ¬
|
30
|
|
Variable O/Hds (5hrs x £8 per hr)
|
40
|
|
Fixed O/Hds (5hrs x £9 per hr)
|
45
|
| |
185
|
|
Budgeted Results
| |
|
Production
|
10500 units
|
|
Sales
|
7800 units
|
|
Selling Price
|
£310 per unit
|
|
Actual Results
| |
|
Production
|
8500 units
|
|
Sales
|
6200 units
|
|
Materials
|
87000 kg Cost £700000
|
|
Labour
|
36000 hrs Cost £330900
|
|
Variable O/Hds
|
£400000
|
|
Fixed O/Hds
|
£550000
|
|
Selling Price
|
£270 per unit
|
Calculate
- Material total variance
- Material price variance
- Material usage variance
- Labour total variance
- Labour rate variance
- Labour efficiency variance
- Variable overhead total variance and all sub- variances
- Fixed Production overhead total Variance and all sub-variances
- Selling price variance
- Sales volume variance
Question 7
|
Standard Cost for Product BUZZ
| |
| |
£
|
|
Materials (3kg x £8 per kg)
|
24
|
|
Labour (5hrs x £10 per hr) ¬
|
50
|
|
Variable O/Hds (5hrs x £9 per hr)
|
45
|
|
Fixed O/Hds (5hrs x £10 per hr)
|
50
|
| |
169
|
|
Budgeted Results
| |
|
Production
|
10000 units
|
|
Sales
|
7500 units
|
|
Selling Price
|
£300 per unit
|
|
Actual Results
| |
|
Production
|
8000 units
|
|
Sales
|
6000 units
|
|
Materials
|
85000 kg Cost £700000
|
|
Labour
|
36000 hrs Cost £330900
|
|
Variable O/Hds
|
£400000
|
|
Fixed O/Hds
|
£500000
|
|
Selling Price
|
£260 per unit
|
Calculate
- Material total variance
- Material price variance
- Material usage variance
- Labour total variance
- Labour rate variance
- Labour efficiency variance
- Variable overhead total variance and all sub- variances
- Fixed Production overhead total Variance and all sub-variances
- Selling price variance
- Sales volume variance
Question 8
|
Standard Cost for Product RST
| |
| |
£
|
|
Materials (10kg x £20per kg)
|
200
|
|
Labour (5hrs x £16 per hr) ¬
|
80
|
|
Variable O/Hds (5hrs x £8 per hr)
|
40
|
|
Fixed O/Hds (5hrs x £9 per hr)
|
45
|
| |
365
|
|
Budgeted Results
| |
|
Production
|
1000 units
|
|
Sales
|
7500 units
|
|
Selling Price
|
£800 per unit
|
|
Actual Results
| |
|
Production
|
8000 units
|
|
Sales
|
6000 units
|
|
Materials
|
85000 kg Cost £700000
|
|
Labour
|
36000 hrs Cost £330900
|
|
Variable O/Hds
|
£400000
|
|
Fixed O/Hds
|
£500000
|
|
Selling Price
|
£260 per unit
|
Calculate
- Material total variance
- Material price variance
- Material usage variance
- Labour total variance
- Labour rate variance
- Labour efficiency variance
- Variable overhead total variance and all sub- variances
- Fixed Production overhead total Variance and all sub-variances
- Selling price variance
- Sales volume variance
Question 9
|
Standard Cost for Product FGT
| |
| |
£
|
|
Materials (10kg x £8 per kg)
|
80
|
|
Labour (5hrs x £6 per hr) ¬
|
30
|
|
Variable O/Hds (5hrs x £8 per hr)
|
40
|
|
Fixed O/Hds (5hrs x £9 per hr)
|
45
|
| |
195
|
|
Budgeted Results
| |
|
Production
|
10000 units
|
|
Sales
|
7500 units
|
|
Selling Price
|
£300 per unit
|
|
Actual Results
| |
|
Production
|
13000 units
|
|
Sales
|
6000 units
|
|
Materials
|
85000 kg Cost £700000
|
|
Labour
|
36000 hrs Cost £330900
|
|
Variable O/Hds
|
£400000
|
|
Fixed O/Hds
|
£500000
|
|
Selling Price
|
£260 per unit
|
Calculate
- Material total variance
- Material price variance
- Material usage variance
- Labour total variance
- Labour rate variance
- Labour efficiency variance
- Variable overhead total variance and all sub- variances
- Fixed Production overhead total Variance and all sub-variances
- Selling price variance
- Sales volume variance
Question 10
|
Standard Cost for Product White Diamond
| |
| |
£
|
|
Materials (7kg x £9 per kg)
|
63
|
|
Labour (6hrs x £9 per hr) ¬
|
54
|
|
Variable O/Hds (6hrs x £6 per hr)
|
36
|
|
Fixed O/Hds (6hrs x £7 per hr)
|
42
|
| |
195
|
|
Budgeted Results
| |
|
Production
|
12500 units
|
|
Sales
|
8500 units
|
|
Selling Price
|
£500 per unit
|
|
Actual Results
| |
|
Production
|
15000 units
|
|
Sales
|
8000 units
|
|
Materials
|
8750 kg Cost £85000
|
|
Labour
|
5200hrs Cost £52900
|
|
Variable O/Hds
|
£25500
|
|
Fixed O/Hds
|
£84000
|
|
Selling Price
|
£600 per unit
|
- Material total variance
- Material price variance
- Material usage variance
- Labour total variance
- Labour rate variance
- Labour efficiency variance
- Variable overhead total variance and all sub- variances
- Fixed Production overhead total Variance and all sub-variances
- Selling price variance
- Sales volume variance
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