Variance Analysis

COST VARIANCES
Concept of Favorable and Adverse Variance:
Favorable Means Standard > Actual
Adverse Means Actual > Standard
1) Material Variances [Single Raw Material]

Case – I Material quantity purchased = Material quantity consumed

(i) Total material cost variance
Here:
= {TSQ for Actual production x SP} – TAQ used x AP}
OR SP = Standard price per Kg
= MPV + MQV
AC = Actual price per Kg
(ii) Material Price Variance TAQ = Actual Total quantity used for
= (SP-AP) x TAQ of material Purchases actual output

(iii) Material Usage Variance TSQ = Standard total quantity which

should have been used for actual output
= (TSQ for Actual production– TAQ used) x SP

Case – II Material quantity purchased ≠ Material quantity consumed

(a) If inventory is measured at standard cost (i.e. MPV is recovered at the time of purchase)
I. Total material cost variance
= (TSQ for Actual production x SP)– [(TAQ Purchased x AP ) – SC x Inventory
increase]
OR
= MPV + MQV
II. Material Price variance
= (SP-AP) x TAQ of material Purchases

III. Material Usage Variance (Material Quantity Variance

= (TSQ for Actual production– TAQ used) x SP

(b) If inventory is measured at actual cost (i.e. MPV is recorded at the time of issuance)
(if nothing is mentioned even then assume this case in question)
(i) Total Material cost variance
= {TSQ for Actual production x SP} – TAQ used x AP}
OR
= MPV + MQV
 (ii) Material price variance
= (SP-AP) x TAQ of material used

(iii) Material usage variance

= (TSQ for Actual production– TAQ used) x SP

2) Direct labor variance (single type of labor)

Case – I No separate record of idle time is kept OR hours worked = hours paid
(i) Total Cost variance Here:
= {TSH for Actual production x SR} – TAH paid x AR}
SR = Standard rate per hour
OR
AR = Actual rate per hour
=LRV+ LEV
(ii) Labor rate variance TAH = Total actual Hours used for actual
output
= (SR– AR) x TAH Paid
(iii) Labor efficiency variance TSH = Standard total Hours which should have
been
= TSH for Actual Production- TAH worked) x SR
Case – II Separated record of idle hours is kept OR Hours worked ≠ hours paid
(a) Idle time is not paid of standard cost (i.e. ignored in standard card) (default case in exam)
i. Total Labor cost variance
= {TSH for Actual production x SR} – TAH paid x AR}
OR
= LRV + LEV + idle time variance
ii. Labor rate variance
= (SR– AR) x TAH Paid
iii. Labor efficiency variance
= TSH for Actual Production- TAH worked) x SR
iv. Idle time variance
= (TAH worked-TAH paid) x SR
(b) Idle time is made part of standard cost as a separate element
I. Total Labor cost variance ( same )
= {TSH for Actual production x SR} – TAH paid x AR}
OR
= LRV + LEV + idle time variance
II. Labor rate variance ( same )
= (SR– AR) x TAH Paid
III. Labor efficiency variance
= TSH for Actual Production- TAH worked) x SR
IV. Idle time variance
= (Expected Idle time – Actual Idle time) x SR
There are two methods to calculate TSH for Actual Production and expected idle time.
a) Actual production units x Standard labour hour per unit ( without idle time )
Expected idle time = Actual production x Standard idle time per unit.
b) Actual production units x Standard labour hour per unit ( with idle time ) –Expected idle time
Expected idle time = Hour paid x % idle time.

For both cases Actual idle time = Total hours paid – total hours worked

3) VOH Variance

(i) Total Variance OH cost variance Here:

= (TSH for actual production x SVR – TAH worked x
SVR = Standard rate per hour (machine or labor)
AVR)
AVR = Actual rate per hour (machine or labor)
OR
= Spending variance + efficiency variance TAH = Actual total hour (machine or labor) used
for actual output
(ii) VOH Expenditure / spending variance
TSH = Standard total hours (machine or labor) Which
= (SVR-AVR) x TAH worked should have been used for actual output
(iii) VOH Efficiency variance
= (TSH for actual production-TAH worked) x SVR
4) Fixed OH Variance

Here:
Marginal cost variance
TAH = Actual total hours (machine or labor) used
Fixed OH expenditure variance for actual output.
= Budgeted Total fixed OH – Actual Total fixed OH TSH = Standard total hours (machine or labor) Which
should have been used for actual output
BH = Standard total hours (machine or labor) Which
should have been used for budgeted output
Absorption Costing Variance
Fixed FOH absorbed on the basis of units
Standard fixed rate per unit
Budgeted Total Fixed cost
OAR =
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑈𝑛𝑖𝑡𝑠
Total Fixed OH cost variance
Applied/Absorbed fixed OH
(Standard fixed cost for actual production)
Standard fixed rate x actual production xx
Actual Fixed OH (xx)
Under/Over Absorbed xx
Numerator
Fixed OH expenditure variance
= Budgeted Total fixed OH – Actual Total fixed OH

Denominator
Fixed OH volume variance
= (Actual production Units- budgeted production units) X standard rate
= Applied fixed OH – Budgeted fixed OH

Fixed FOH absorbed on the basis of Direct labour hours or Machine hours
Standard fixed rate per Hour
 Budgeted Total Fixed cost
OAR =
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐻𝑜𝑢𝑟𝑠
Total Fixed OH cost variance
Applied/Absorbed fixed OH
(Standard fixed cost for actual production)
(Standard fixed rate/hour x standard hour/unit) x Actual production xx
Actual Fixed OH (xx)
Under/Over Absorbed xx
Numerator
Fixed OH expenditure variance
= Budgeted Total fixed OH – Actual Total fixed OH
Denominator
Fixed OH volume variance
= (Actual production Units- budgeted production units) X standard rate/unit
= Applied fixed OH – Budgeted fixed OH
Volume can be further analyzed into:
(a) Fixed OH efficiency variance
= (TSH for actual production-TAH worked) x Standard fixed rate/hour
(b) Fixed OH capacity variance
= TAH worked-Total budgeted hours for budgeted units) x Standard fixed rate/hour

SALES VARIANCES
- Concept of favorable and adverse variances:
Favorable variance means Actual > Budgeted
Adverse means Budgeted > Actual

1) Sales Price Variance

= Actual price –Standard price) x Actual sales quantity

 2) Sales Volume Variance

(a) Sales profit volume variance [used in case of absorption costing]

= [AQ (sales) – BQ (sales)] x Standard profit per unit

(b) Sales contribution volume variance [used in case of marginal costing]

= [AQ (sales) – BQ (sales)] X standard contribution per unit

PROFIT RECONCILIATION [i.e. Operating Statement]

Budgeted GP X
Sales Variance:
Sale price variance X
Sales volume variance X X
Cost Variance:
Material Price Variance X
Material Usage Variance X
Labor rate Variance X
Labor Efficiency Variance X
Labor Idle time Variance X
VOH spending Variance X
VOH efficiency Variance X
FOH spending Variance X
FOH Volume Variance [Only for absorption costing] X X
Actual Profit X

Notes:
1) Add all “favorable” and deduct all “Adverse” variances
2) If FG and WIP stocks are valued at actual cost then an adjustment is required as follow:
[Actual Cost of closing stock – Standard cost of closing stock]
[standard cost of opening stock – standard cost of opening stock]
3) Replace “fixed OH efficiency and capacity variances” with “fixed OH volume variance” and
“Material yield and mix variance” with “Material usage variance” if separately required in
question
4) If process costing is mixed, then SH/AH and SQ/AQ will be based on “equivalent produced
units” for the period calculated using FIFO Bases “ instead of actual unit produced for the period”
 3) Material usage variance

Material Usage Variance can be further analyzed into:

(i) Mixed Variance
Following formula is applied to each RM individually and then totaled:

= [AQ in SM – AQ in AM] x SC

Here:

AQ in SM = Actual Total, of all material quantities used, split in standard mix

AQ in AM = Actual material quantities used

Material TAQ used TAQ used Variance in Standard Mix

in standard in actual Kgs price/kg variance
mix( AQ in MIX( AQ
SM) in AM)
A
B

(i) Yield Variance

Following formula is applied to each RM individually and then totaled:

= [SQ in SM – AQ in SM] x SC

Here:

AQ in SM = Actual Total, of all material quantities used, split in standard mix

SQ in SM = Standard material of each material to be used for actual output

Material TSQ for actual TAQ used in Variance Standard Yield variance
production in Standard MIX in Kgs price/kg
standard mix ( AQ in SM)
( SQ in SM)

A
B
Notes:
- If losses are given in standard:
If FG is given in units:
SQ in SM = Standard material (kg) x Actual FG production (units) /FG units for which standard is set
If FG is given in Kgs:
SQ in SM = Standard material (kg) x Actual FG production (kg) / FG kgs of which standard is set