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.
Table of Contents
Types of Variance Analysis
Variance Analysis can be broadly classified into the following heads:
- Material Variance
- Labour Variance
- Variable Overhead Variance
- Fixed Overhead Variance
- 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)
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
- 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:
- http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Variance%20Analysis.aspx
- https://www.accountingtools.com/articles/what-is-variance-analysis.html
- http://www.accountingexplanation.com/variance_analysis_formulas.htm
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