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7 - Variance Analysis

This chapter discusses variance analysis and how to calculate different types of variances. It explains how to calculate direct material, direct labor, and overhead cost variances. It also discusses sales variances that can be analyzed by turnover or profit, including price, volume, mix, and quantity variances. The chapter provides formulas for calculating each variance and identifies their causes.

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Rakeysh Rakyesh
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47 views15 pages

7 - Variance Analysis

This chapter discusses variance analysis and how to calculate different types of variances. It explains how to calculate direct material, direct labor, and overhead cost variances. It also discusses sales variances that can be analyzed by turnover or profit, including price, volume, mix, and quantity variances. The chapter provides formulas for calculating each variance and identifies their causes.

Uploaded by

Rakeysh Rakyesh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Chapter 4.

Variance Analysis
Cost Variances
The deviation of the actual from the standard is known as
variance. Variance may be favourable or adverse.
Cost Variance may be depicted in the following manner:

Cost Variances

Direct Material Direct Labour Over Head


Cost Variance Cost Variance Cost
Variance

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Direct Material Variance
Direct Material Cost Variance

Direct Material Price Variance Direct Material Usage Variance

Direct Material Mix Direct Material Yield


Variance Variance

 Direct Material Cost Variance: It is the difference between the


standard cost of direct material specified for the output achieved
and the actual cost of direct material used.
= (Total Standard cost for actual output) – Total Actual Cost
= ( Std. Price x Std Quantity for _ ( Actual Price x Actual
actual output)
quantity) 3
Direct Material Variance ( Contd )
 Direct Material Price Variance : That portion of direct
material cost variance which is due to the difference between
the standard price specified and actual price paid.
= ( Actual Qty used) x ( Std Price – Actual Price )
 Direct Material Usage Variance : That portion of direct
material cost variance which is due to the difference between
the standard quantity specified and the actual quantity used.
= ( Std. Rate ) x ( Std. qty for actual output – Actual qty )
 Direct Material Mix Variance: That portion of direct material
usage variance which is due to the difference between the
standard and actual composition of a mixture.
= ( Std. Price ) x (Revised Std. Qty – Actual Qty)

4
Direct Material Variance ( Contd )
where, Revised Std Qty = (Total weight of Actual Mix) x Std. Qty
( Total Weight of Std. Mix )
 Material Yield Variance : It is that portion of direct material
usage variance which is due to the difference between the
standard yield specified and the actual yield obtained.
= ( Std. Cost per unit ) x ( Std. Output for Actual Mix
- Actual Output )

5
Direct Labour Variance
Direct Labour Cost Variance

Direct Labour Rate Variance Direct Labour Efficiency


Variance

Direct Labour Mix Direct LabourYield


Variance Variance

 Direct Labour Cost Variance: It is the difference between standard


direct wages specified for the activity achieved and the actual
direct wages paid.
= ( Std. cost for actual output ) - ( Actual Cost )
= ( Std rate x Std Time for Actual Output) –
( Actual rate x Actual Time )

6
Direct Labour Variance ( Contd )
 Direct Labour Rate Variance : That portion of direct labour
cost variance which is due to the difference between the
standard rate of pay specified and the actual rate paid.
= Actual Time x ( Std. Rate – Actual Rate )
 Direct Labour Efficiency Variance: That portion of direct
labour cost variance which is due to the difference between
the standard labour hours specified for the activity achieved
and the actual labour hours expended.
= Std Rate x ( Std. Time for Actual Output – Actual Time)
 Direct Labour Mix Variance : This variance arises if during a
particular period, the grades of labour used in production are
different from those budgeted.
= Std. Rate x ( Revised Std. Time – Actual Time )
7
Direct Labour Variance ( Contd )

where, Revised Std. Time = (Total Actual Time ) x Std. Time


( Total Std. Time)
 Direct Labour Yield Variance : It is the variance in labour
cost on account of increase or decrease in yield or output as
compared to the relative standard.
= Std. Cost per unit x ( Std. Output of _ Actual
Actual mixture output )
 Total Direct Labour Efficiency Variance : In those cases
where there is an idle time variance ;
Total Direct Labour efficiency variance = ( Idle Time variance )+
(Direct Labour efficiency variance)
Idle Time Variance = Idle Time x Std. Rate
8
Overhead Variances

Certain Important terms related to Overhead Variances:


 Standard Overhead rate per unit = Budgeted Overheads
Budgeted Output
 Standard Overhead rate per hr = Budgeted Overheads
Budgeted Hours
 Standard hrs for Actual Output = Budgeted hrs x Actual Output
Budgeted Output
 Standard Output = Budgeted Output x Actual Hrs
Budgeted hrs
 Recovered Overheads = (Std rate per hr) x (Std hrs for actual
output)
 Budgeted Overheads = (Std. Rate per unit) x (Budgeted Output)
 Standard Overheads = (Std. rate per unit) x (Std. Output
for actual time)
 Actual Overheads = (Actual rate per unit) x (Actual output)
9
Overhead Variance ( Contd )
Overhead Cost Variance

Variable Overhead Cost Fixed Overhead Cost


Variance Variance

Fixed Overhead Expenditure Fixed Overhead Volume


Variance Variance

Fixed Overhead Efficiency Fixed Overhead Capacity


Variance Variance

 Overhead Cost Variance = Recovered Overheads – Actual


Overheads
 Variable Overhead Cost Variance:
= Recovered Variable Overheads – Actual Variable Overheads
10
Variable Overheads ( Contd )
 Fixed Overhead Cost Variance :
= Recovered fixed Overheads – Actual Fixed Overheads
 Fixed Overhead Expenditure Variance:

= Budgeted Fixed Overheads – Actual Fixed Overheads


 Fixed Overhead Volume Variance :

= Recovered Fixed Overheads – Budgeted Fixed Overheads


 Fixed Overhead Efficiency Variance :

= Std Fixed Overhead x ( Std. Hrs for _ Actual


rate per hour Actual production Hours )
 Fixed Overhead Capacity Variance :

= Std Fixed Overhead x ( Actual Hrs _ Budgeted


Rate per hr Worked Hours )
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Sales Variance
Sales Variance

With Reference to Turnover With Reference to Profit

Value Variance

Price Volume

Mixture Quantity
With Reference to Turnover:
 Value Variance = Budgeted Sales – Actual Sales

 Price Variance = Actual Qty Sold x ( Std. Price – Actual price)

= (Standard Sales – Actual Sales)


 Volume Variance = Std. Price x ( Budgeted Qty – Actual Qty )

= Budgeted Sales – Standard Sales


12
Sales Variance ( Contd )
 Mix Variance :
- Based On Quantity :
Mix Variance = Std. Price x ( Revised Std. Qty – Actual Qty.)
= Revised Std. Sales – Std. Sales
- Based on Value :
Mix Variance = Revised Std. Sales – Std. Sales
where,
Revised Std. Sales = Budgeted Ratio of Sales x Std. Sales
where,
Budgeted Ratio of Sales = Budgeted Sales of a Product
Total Budgeted Sales
 Quantity Variance = Budgeted Sales – Revised Std. Sales

13
Sales Variance ( Contd )
With Reference to Profit :
 Value Variance = Budgeted profit – Actual Profit

 Price Variance = Std. Profit – Actual Profit

= Actual Qty Sold x ( Std. Profit – Actual Profit per unit )


 Volume Variance = Budgeted Profit – Standard Profit

= Std. Rate of Profit x ( Budgeted Qty – Actual Qty )


 Mix Variance = Revised Std. Profit – Std. Profit

 Quantity Variance = Budgeted profit – Revised Std. Profit

14
Summary
In this chapter you have studied :
 The concept of different cost and sales variances
 Computation of different types of variances
 Identification of the causes for different types of variances

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