Variance Analysis Formula with Example

Variance Analysis refers to the investigation as to the reasons for deviations in the financial performance from the standards set by an organization in its budget. It helps the management to keep a control on its operational performance.

Types of Variance Analysis

Variance Analysis can be broadly classified into the following heads:

  1. Material Variance
  2. Labour Variance
  3. Variable Overhead Variance
  4. Fixed Overhead Variance
  5. Sales Variance

Now, let us look at the scenario of a company, say A, having the following standard and actual figures:

Standard / Budgeted Actual
Price $ 10 per kg. $ 8 per kg.
Quantity 200 kgs. 150 kgs.
Hours 250 300
Rate $8 $7
Output 100 kgs. 80 kgs.
FOH Rate per hour $12 $11.67
FOH Rate per unit $30 $43.75
FOH $3000 $3500
Sales Price per unit 50 65

Material Variance

The difference between the standard cost of direct materials and the actual cost of direct materials that an organization uses for production is known as Material Variance.

Material Cost Variance Formula

 Standard Cost – Actual Cost

In other words, (Standard Quantity x Standard Price) – (Actual Quantity x Actual Price)

= (200 x 10) – (150 x 8)

= 800 (Favorable)

Variance Analysis Types

Material Variance is further sub-divided into two heads:

Material Price Variance

MPV = (Standard Price – Actual Price) x Actual Quantity

= (10 – 8) x 150

= 300 (Favorable)

Material Usage Variance

 MUV = (Standard Quantity – Actual Quantity) x Standard Price

                                 = (200 – 150) x 10

= 500 (Favorable)

Labor Variance

Labor Variance arises when there is a difference between the actual cost associated with a labor activity from the standard cost.

Labor Variance Formula

Standard Wages – Actual Wages

In other words, (Standard Hours x Standard Rate) – (Actual Hours x Actual Rate)

= (250 x 8) – (300 x 7)

= 100 (Adverse)

Labor Variance is further sub-divided into two heads:

Labor Rate Variance

LRV = (Standard Rate – Actual Rate) x Actual Hours

= (8 – 7) x 300

= 300 (Favorable)

Labor Efficiency Variance

 LEV = (Actual Hours – Standard Hours) x Standard Rate

                                 = (300 – 250) x 8

= 400 (Adverse)

Variable Overhead Variance

Variable Overhead Variance arises when there is a difference between the actual variable overhead and the standard variable overhead based on budgets.

Variable Overhead Variance Formula

 Standard Variable Overhead – Actual Variable Overhead

In other words, (Standard Rate – Actual Rate) x Actual Output

= (8 – 7) x 80

= 80 (Favorable)

 Variable Overhead Variance is further sub-divided into two heads:

Variable Overhead Efficiency Variance

VOEV = (Actual Output – Standard Output) x Standard Rate

= (80 – 100) x 8

= 160 (Adverse)

Variable Overhead Expenditure Variance

VOEV = (Standard Output x Standard Rate) – (Actual Output x Actual Rate)

                                   = (100 x 8) – (80 x 7)

= 240 (Favorable)

Fixed Overhead Variance 

  1. It arises when there is a difference between the standard fixed overhead for actual output and the actual fixed overhead.

Fixed Overhead Variance Formula

= (Actual Output x Standard Rate per unit) – Actual Fixed Overhead

= (80 x 30) – 3500

= 1100 (Adverse)

Fixed Overhead Variance is further sub-divided into two heads:

Fixed Overhead Expenditure Variance

FOEV = Standard Fixed Overhead – Actual Fixed Overhead

= 3000 – 3500

= 500 (Adverse)

Fixed Overhead Volume Variance

             FOVV = (Actual Output x Standard Rate per unit) – Standard Fixed Overhead

= (80 x 30) – 3000

= 600 (Adverse)

Sales Variance 

Sales Variance is the difference between the actual sales and budgeted sales of an organization.

Sales Variance Formula

= (Budgeted Quantity x Budgeted Price) – (Actual Quantity x Actual Price)

= (100 x 50) – (80 x 65)

= 200 (Favorable)

Sales Variance is further sub-divided into two heads:

Sales Volume Variance

SVV = (Budgeted Quantity – Actual Quantity) x Budgeted Price

= (100 – 80) x 50

= 1000 (Adverse)  

Sales Price Variance

SPV = (Budgeted Price – Actual Price) x Actual Quantity

= (50 – 65) x 80

= 1200 (Favorable)

Conclusion 

Thus, Variance Analysis is important to analyze the difference between the actual and planned behavior of an organization. If such analysis is not carried out in regular intervals, it may cause a delay in the management action to control its costs.

References:

Last updated on : September 22nd, 2018

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