Variance Analysis

Analysis of Variances
Analysis of variance is helpful in
controlling the performance and achieving
the profits that have been planned.
Analysis of variance is helpful in controlling
the performance and achieving the profits
that have been planned.
The deviation of the actual cost or profit
or sale from the standard cost or profit or
sales is known as variance.

Analysis of Variances
When actual cost is less than standard cost
or actual profit is better than standard
profit, it is known as favourable variance
and such variance is usually a sign of
efficiency of the organization.
When actual cost is more than standard
cost or actual profit or turnover is less than
standard profit or turnover, it is called
unfavourable variance and is usually an
indicator of inefficiency of the organization.

Analysis of Variances
Analysis of variance may be done
in respect of each elements of cost
and sales.
Direct Material Variance
Direct Labour Variance
Overheads Variance
Sales Variance

Analysis of Variances
Direct Material Variance
Material Cost Variance
Material Price Variance
Material Usage or Quantity
Variance
Material Mix Variance
Material Yield Variance

Formulae
Material Cost Variance
Difference between standard cost of materials
specified and actual cost of material used.
MCV = Std Material Cost for actual output(SMC)
(-) Actual Material Cost(AMC)
SMC = Std price per unit x Std Qty of materials
AMC = Actual Price per unit x Actual Qty of
materials

Formulae
Material Price Variance
Difference between standard price
and the actual price of the material.
MPV = Actual Qty (Std price Actual
price)
Material Usage Variance
Difference between std qty of
material and actual qty used.
MUV = Std Price (Std Qty Actual Qty)

Analysis of Variances
Material Mix Variance (MMV)
Material mix variance is the difference
between standard and the actual
composition of a mixture. This
variance arises because the ratio of
materials being changed from the
standard ratio set. It is calculated as
difference between the standard price
of standard mix and standard price of
actual mix.

Analysis of Variances
Actual weight of mix and the standard weight of
mix do not differ
Standard unit cost x (standard quantity
actual quantity)
Standard cost of standard mix ()
Standard cost of actual mix
If the standard is revised due to shortage of a
particular type of material, the material mix
variance is calculated as follows:
Standard unit cost x (Revised standard quantity
Actual quantity)
Standard cost of revised standard mix ()
Standard cost of actual mix

Analysis of Variances
Material Yield Variance (MYV)
It is that portion of the material usage
variance which is due to the difference
between the standard yield specified
and the actual yield obtained. This
variance measures the abnormal loss
or saving of materials.

Analysis of Variances
When standard and actual mix do not differ
Yield variance = Standard rate x
(Actual yield Standard yield)
Standard rate = Standard cost of standard mix
Net standard output Standard loss
When actual mix differs from standard mix
Yield variance = Standard rate x
(Actual yield Revised Standard yield)
Standard rate = Standard cost of revised standard
mix
Net standard output

Analysis of Variances
Labour Variances
Labour cost variance
Labour rate variance
Total labour efficiency variance
Labour efficiency variance
Labour idle time variance
Labour mix variance
Labour yield variance

Analysis of Variances
Labour cost variance
It is the difference between the standard cost of labour
allowed for the actual output achieved and the actual cost
of labour employed. It is also known as wages variance.
Labour variance =
(Standard cost of labour Actual cost of labour)
Labour rate variance
It is that portion of the labour cost variance which arises
due to the difference between the standard rate specified
and the actual rate paid.
Labour rate variance =
Actual time taken (Standard rate Actual rate)

Analysis of Variances
Total labour efficiency variance
It is that part of labour cost variance which arises
due to the difference between standard labour
cost of standard time for actual output and
standard cost of actual time paid for.
Total labour efficiency variance =
(Standard time for actual output Actual time
paid for)
Labour efficiency variance
It is that portion of labour cost variance which
arises due to the difference between the standard
labour hours specified for the output achieved
and the actual labour hour spend.

Analysis of Variances
Labour idle time variance
It is suitable to calculate only when there is abnormal
idle time. It is that portion of labour cost variance
which is due to the abnormal idle time of workers.
Idle time variance = (Abnormal idle time x standard
rate)
Labour mix variance
Like materials mix variance and is a part of labour
efficiency variance. The variance shows to the
management as to how much of labour cost variance
is due to the change in the composition of labour force.

Analysis of Variances
Labour mix variance =
Standard cost of standard composition ( )
(Actual time taken)
Standard cost actual composition
(Actual time worked)
Labour yield variance
Like material yield variance and arises due to the difference
between yield that should have been obtained by actual
time utilized on production and actual yield obtained.
Standard labour cost per unit =
Actual yield in units Standard yield in units expected from
the actual time worked on production

Analysis of Variances
Overhead Variance
Overhead cost can be defined as the
difference between the standard cost of
overhead allowed for the actual output
achieved and the actual overheads cost
incurred. Overhead cost variance is under or
over absorption of overheads.
Overhead cost variance =
Actual output x Standard overhead rate per
unit () Actual overhead cost

Analysis of Variances
Overhead cost variance can be classified as :
Variable overhead variance
Variable overhead expenditure variance
Variable overhead efficiency variance

Fixed overhead variance

Expenditure variance
Volume variance
Capacity variance
Calendar variance
Efficiency variance

Analysis of Variances
Variable overhead variance
It is the difference between the standard variable
overhead cost allowed for the actual output
achieved and the actual variable overhead cost.
This variance is represented by expenditure
variance only because variable overhead cost will
vary in proportion to production so that only a
change in expenditure can cause such variance.
Actual output x Standard variance overhead rate
(-)
Actual variable overheads

Analysis of Variances
Variable overhead expenditure variance
VOEV = Actual hours worked x
Standard variable overhead rate per hour (-)
Actual variable overhead
Variable overhead efficiency variance
VOEV =
Standard time for actual production
x
Standard variable rate per hour ()
Actual hour worked x Standard variable
overhead rate per hour

Analysis of Variances
Fixed overhead variance
It is that portion of total overheads cost variance which is
due to the difference between the standard cost of fixed
overheads allowed for the actual output achieved and the
actual fixed overhead cost incurred.
FOV = Actual output x Standard fixed overhead
rate per unit ( ) Actual fixed overheads
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.
EV = Budgeted fixed overheads () Actual fixed overheads

Analysis of Variances
Volume variance
It is that portion of the fixed overhead variance
which arises due to the difference between the
standard cost of fixed overhead allowed for the
actual output and the budgeted fixed overhead for a
period during which the actual output has been
achieved.
This variance shows the over or under absorption of
fixed overheads during a particular period. If the
actual output is more than the budgeted output,
there is over-recovery of fixed overheads and
volume variance is favourable and vice versa
if
the actual output is less than the budgeted output.
This is so because fixed overheads are not expected

Analysis of Variances
Capacity variance
It is that portion of volume variance which is due to
working at higher or lower capacity than the budgeted
capacity. Capacity variance is related to the under and
over utilization of plant and equipment and arises due
to idle time, strikes and lock-out, breakdown of the
machinery, power failure, shortage of materials and
labour, absenteeism, overtime, changes in number of
shifts. The variance arises due to more or less working
hours than the budgeted working hours.
CV = Standard rate (Revised budgeted unit Budgeted
units)

Analysis of Variances
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 variable will be favourable and vice
versa if the actual working days are less than the
standard days.
CV = Increase or decrease in production due to
more or less working days at the rate of
budgeted capacity
x Standard rate per unit

Analysis of Variances
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 plan.
EV = Standard rate per unit x
(Actual production Standard
production)

Analysis of Variances
Sales Variances
Sales variances have complete analysis of profit
variance because profit is the difference between sales
and cost.
Sales variance may be calculated in two different ways.
The first method of calculating sales variances is profit
method of calculating sales variances and the second is
known as value method of calculating sales variance.
These may be computed so as to show the effort on
profit or to show the effect on sales value.
Sales variance showing the effect on profit are more
meaningful, so these would be considered first.

Analysis of Variances
Profit method of calculating
sales variances
Total sales margin variance
Sales margin variance due to
selling price
Sales margin variance due to
volume
Sales margin variance due to sales
mixture

Analysis of Variances
Value method of calculating
sales volume
Sales value variance
Sales price variance
Sales volume variance
Sales mix variance
Sales quantity variance

Analysis of Variances
Profit method of calculating sales volume
Total sales margin variance
TSMV = (Actual profit Budgeted profit)
Sales margin variance due to selling price
It is that position of total sales margin variance
which is due to the difference between the actual
price of quantity of sale effected and the standard
price of those sales.
TSMV = Actual quantity of sales x
(Actual selling price per unit Standard price per
unit)

Analysis of Variances
Sales margin variance due to volume
It is that portion of total sales margin variance which
arises due to the number of articles sold being more or
less than the budgeted quantity of sales.
SMV = Standard profit per unit x
(Actual quality of sales Budgeted quality of sales)
Sales margin variance due to sales mix
Which arises because of different portion of actual sales
mix. It is taken as different between the actual and
budgeted quantities of each product of which the sales
mixture is composed, valuing the difference of
quantities at standard profit.

Analysis of Variances
SMVSM = Standard profit per unit
x
(Standard proportion for actual sales Budgeted
quantity of sales)
Sales margin variance due to sales quantities
It is that portion of sales margin variance due to
volume which arises due to the difference between
the actual and budgeted quantity sold of each
product.
SMVSQ = Standard profit per unit x
(Standard proportion for actual sales Budgeted
quantity of sales)

Analysis of Variances
Value method of calculating sales variances
Sales value variances
It is the difference between the standard value and
actual value of sales effected during the period.
SVV = (Actual value of sales Budgeted value of sales)
Sales price variance
It is that portion of sales value variance which arises
due to the difference between actual price and standard
price specified.
SPV = Actual quantity sold (Actual price Standard
price)

Analysis of Variances
Sales volume variance
It is that portion of the sales value
variance which arises due to difference
between actual quantity of sales and
standard quantity of sales.
SVV
= Standard price
x
(Actual quantity Budgeted quantity of
sales)