Variance Analysis

Management Accounting

1. Variance analysis Jibumon K G

2. Variance and variance analysis A variance  is the difference between a budgeted, planned, or standard cost and the actual amount incurred/sold. Variances can be computed for both costs and revenues. Variance analysis Variance analysis is an analytical tool that managers can use to compare actual operations to budgeted estimates. It refers to the investigation of deviations in financial performance from the standards defined in organizational budgets.

3. . The primary objective of  variance analysis is to exercise cost control and cost reduction . The variances are related to efficiency. A positive efficiency leads to favorable variance. A negative variance leads to inefficiency In the case of unfavorable variance the responsible persons are enquired and find the root causes for such unfavorable variances. and take remedial action.

4. Classification of variance

5. Material cost variance MCV is the difference between actual cost of materials used and the standard cost for the actual output.

6. The material cost variance may arise either on account of change in price or change in quantity or both. Material cost variance further divided in to material price variance and material usage variance Material cost variance Material price Variance Material usage variance

7. Material Price Variance is the difference between the actual cost of direct material and the standard cost of quantity purchased or consumed. If the actual price is more than the standard price the variance would be adverse If the standard price is more than the actual price the variance would be favorable. MPV= Actual quantity used x standard price – Actual Price

8. . Material usage variance Material Usage Variance is the measure of difference between the actual quantity of material utilized during a period and the standard consumption of material for the level of output achieved. MUV = standard cost of actual quantity – standard cost of standard quantity

9. . Labour Cost Variance: It is the difference between the standard cost of labour allowed (as per standard laid down) for the actual output achieved and the actual cost of labour employed. LCV = Standard Labour cost – Actual labour cost Labour Rate Variance   Labour rate variance is the measure of difference between the actual cost of direct labor and the standard cost of direct labor utilized during a period. LRV = Actule time ( Standerd rate – Actual rate )

10. . Total labour efficiency variance Labor Efficiency Variance is the measure of difference between the standard cost of actual number of direct labor hours utilized during a period and the standard hours of direct labor for the level of output achieved. LEV = Standard wage rate ( Standard Time – Actual time ) Labor Idle Time Variance   :- It is the cost of the stand by time of direct labor which could not be utilized in the production due to mechanical failure of equipment, industrial disputes and lack of orders Idle Time Variance:=Number of idle hours x Standard labor rate

11. . Labour mix variance Labour mix variance arises only when two or more different types of workers employed and the composition of actual grade of workers differ from the standard composition of workers. The change in the labour composition may be due to shortage of one grade of labour . This variance indicate how much labour cost variance is there due to the change in labour composition. LMV = Standard Cost of Standard Mix – Standard Cost of Actual Mix

12. . Labor Yield Variance The difference between actual output of worker and standard output of worker specified. Labor yield variance can be obtained from the difference between the labor mix variance and labor idle tim variance. LYV = (Actual yield – Standard yield ) standard cost per unit

13. . Substitution Variance: This is a variance in labour cost which arises due to substitution of labour when one grade of labour is substituted by another. This is denoted by difference between the actual hours at standard rate of standard worker and the actual hours at standard rate of actual worker. Substitution Variance = (Actual Hours x Std. Rate for Std. Worker) – (Actual Hours x Std.Rate for Actual Worker)

14. Over heads cost variance An overhead cost variance is the difference between the amount of overhead applied during the production process and the actual amount of overhead costs incurred during the period. The overhead cost variance can be calculated by subtracting the standard overhead applied from the actual overhead incurred during the period. Overheads cost variance Variable overheads variable Fixed variable overheads

15. . . Variable overheads variable Expenditure Variance Efficiency Variance

16. . 1) Overheads Expenditure Variance It is the difference between the standard variable overhead cost allowed for the actual output achieved and the actual variable overhead cost VO = Actual Output x Standard Variable Overhead Rate – Actual Variable Overheads 2) Overhead Efficiency Variance : The difference between the variable overheads and the absorbed variable overheads is known as Variable Overhead Efficiency Variance. OEV = Standard time for actual production x Standard variable overhead rate per hour — Actual hours worked x Standard variable overhead rate per hour

17. , Fixed variable overheads Expenditure Variance Volume Variance Capacity Variance Calendar Variance Efficiency Variance

18. Fixed variable overheads It is that portion of total overhead cost variance which is due to the difference between the standard cost of fixed overhead allowed for the actual output achieved and the actual fixed overhead cost incurred. FVO = Fixed Overheads Absorbed – Actual Fixed Overheads Fixed variable overheads Fixed Expenditure Variance Fixed expenditure Volume Variance

19. . Budget or Expenditure Variance . It is that portion of the fixed overhead variance which is due to the difference between the budgeted fixed overheads and the actual fixed overheads incurred during a particular period. Expenditure Variance = Budgeted Fixed Overheads – Actual Fixed Overheads Fixed expenditure Volume Variance Fixed overhead volume variance is the difference between fixed overhead applied to good units produced during a given accounting period and the total fixed overheads budgeted for the period. Fixed overhead volume variance is favorable when the applied fixed overhead exceeds the budgeted amount.

20. . FE Volume Variance = Actual Output x Standard Rate – Budgeted Fixed Overheads Capacity variance It is that portion of the volume variance which is due to working at higher or lower capacity than the budgeted capacity This variance is related to the under and over utilisation of plant and equipment due to break-down of the machinery, power failure, shortage of materials and labour , absenteeism, overtime, changes in number of shifts etc… Capacity Variance = Standard Rate (Revised Budgeted Units – Budgeted Units)

21. 2) Calendar variance It is that portion of the volume variance which is due to the difference between the number of working days in the budget period and the number of actual working days in the period to which the budget is applicable.   If the actual working days are more than the standard working days, the variance will be favorable. Calendar Variance = Increase or decrease in production due to more or less working days at the rate of budgeted capacity x Standard rate per unit.

22. . Efficiency Variance It is that portion of the volume variance which is due to the difference between the budgeted efficiency of production and the actual efficiency achieved. This variance is related to the efficiency of workers and plant  FO Efficiency variance = Standard Rate per hour (Standard Hours Produced — Actual Hours)