# 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

1. Material Variance
2. Labour 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 Cost Variance.

### Material Cost Variance Formula

Standard Cost – Actual Cost

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

= {(200 x 80 /100)} x 10) – (150 x 8)

= (160 x 10) – (150 x 8)

= 400 (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 for actual output – Actual Quantity) x Standard Price

= (160 – 150) x 10

= 100 (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 for actual output x Standard Rate Per Hour) – (Actual Hours x Actual Rate Per Hour)

= {(250 x 80 /100) x 8} – (300 x 7)

= (200 x 8) – (300 x 7)

Labor Variance is further sub-divided into two heads:

### Labor Rate Variance

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

= (8 – 7) x 300

= 300 (Favorable)

### Labor Efficiency Variance

LEV = (Standard Hours for Actual Out Put – Actual Hours) x Standard Rate

= (200 – 300) x 8

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

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

= (8 – 7) x 80

= 80 (Favorable)

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

= (80 – 100) x 8

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

= (100 x 8) – (80 x 7)

= 240 (Favorable)

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

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

= (80 x 30) – 3500

= 3000 – 3500

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

= (80 x 30) – 3000

## 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

### 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.1,2

1.
What is variance analysis? kfknowledgebank.kaplan.co.uk. August 2019. [Source]
2.
Variance analysis —  AccountingTools. AccountingTools. December 2018. [Source]
Last updated on : September 24th, 2019