E-CONTENT

This part of the E-Content contains Unit-IV of the

course “Accounting for Managers” which includes
Variance Analysis as part of Standard Costing. All the

STANDARD major variances have been covered.

Umer Mushtaq Lone

umermushtaqlone@gmail.com

COSTING-
VARIANCE
ANALYSIS
Intended for MBA-FM 1st Semester, Batch-2016
 Standard Costing
Note: For brief and to the point discussion on “Standard Costing”, you may refer to E-Content
on the same title.

Variance Analysis
Introduction:
Control is a very important function of management. Through control, management ensures that
performance of the organization confirms to its plans and objectives. Analysis of variances is
helpful in controlling the performance and achieving the profits that have been planned.

Variance: the deviation of the actual cost or profit or sales from the standard cost or profit or
sales from the standard cost or profit or sales is known as “Variance”.

When actual cost is less than the standard cost or actual profit is better than the standard profit,
it is known as favorable variance and such a variance is usually a sign of efficiency of the
organization.

On the other hand, when actual cost is more than the standard cost or actual profit, or turnover
is less than standard profit or turnover, it is called unfavorable or adverse variance and is usually
an indication of inefficiency of the organization.

The favorable and unfavorable variances are also known as credit and debit variances
respectively.

Variances of different items of cost provide the key to cost control because they disclose whether
the standard set has been achieved or not and to what extent standards set have been achieved.

The deviation of total actual cost from total standard cost is known as total cost variance. It is a
net variance which is the aggregate of all variances relating to various elements of cost, both
favorable and unfavorable.

Analysis of Variances may be done in respect of each element of Cost and Sales, Viz.,

1. Direct Material Variances

2. Direct Labor Variances
3. Overhead Variances
4. Sales Variances
1. Material Variances:

Material Cost Variance

Material Price Variance Material Usage or Quantity

Variance

Material Mix Variance Material Yield Variance

a) Material Cost Variance (MCV): It is the difference between standard materials cost and
actual material cost.
Material cost variance arises due to change in price of materials and variation in use of
quantity of materials.
MCV = Standard Material Cost – Actual Material Cost
Where
SMC = SP/Unit x SQ
AMC = AP/Unit x AQ

MCV = (SP x SQ) – (AP x AQ)

 b) Material Price Variance (MPV): It is that part of material cost variance which is due to the
standard price specified and actual price paid. It may arise due to the following reasons:
I) Change in basic prices of materials
II) Failure to purchase the quantities anticipated at the time when standards were
set.
III) Failure to make bulk purchases and incurring more on freight etc.

MPV = AQ (SP – Actual Price)

AQ = Actual quantity of materials used (in units)
SP = Standard price of material per unit
AP = Actual price of material per unit
c) Material Usage Variance (MUV): Also called material quantity variance (MQV). It is that
part of material cost variance which arises due to difference in standard quantity specified
and actual quantity of material used. The difference between SQ and AQ is multiplied by
SP of material and the resultant figure will be MUV.
It may arise due to the following reasons:
I) Negligence in use of materials
II) More wastage of materials by untrained workers or defective methods of
production.
III) Defective production necessitating the use of additional materials.

MUV/MQV = SP (SQ - AQ)

The following equation may be used for the verification of material cost variance:
1. MCV = MPV + MUV
2. MUV = MMV + MYV
3. MCV = MPV + MMV + MYV
Practical Problems:
Problem/1: The standard material required for production is 10,500 kgs. A price of ₹2 per kg
has been fixed for the materials. The quantity of materials used for the product is 11,000 kgs.
A sum of ₹ 24, 750 has been paid for the materials.
Calculate:
I) Material Cost Variance II) Material Price Variance III) Material Usage Variance
Solution:
I) Material Cost Variance = Standard Material Cost – Actual Material Cost
= Standard Material Cost = SQ x SP
= 10,500 kgs x ₹2
= ₹21,000
MCV = 21,000 – 24,750
= ₹3,750 {ADV.}

II) Material Price Variance = Actual Quantity (SP - AP)

Actual Price = 24,750/11,000 = ₹2.25
MPV = 11,000 (2 – 2.25)
= ₹2,750 {ADV.}

III) Material Usage Variance = Standard Price (SQ - AQ)

= 2 (10,500 – 11,000)
= 2 (-500)
= ₹1,000 {ADV.}
Verification:
MCV = MPV + MUV
₹3,750 {ADV.} = ₹2,750 {ADV.} + ₹1,000 {ADV.}
₹3,750 {ADV.} = ₹3,750 {ADV.}
d) Material Mix Variance (MMV): It is that portion of the material usage variance which is
due to the difference between standard and the actual composition of a mixture. In other
words, this variance arises because the ratio of materials is being changed from the
standard ratio set. It is calculated as the difference between the standard price of a
standard mix and standard price of actual mix. The standard price is used in calculating
this variance.

In case of MMV, two situations may arise:

I) When actual weight of mix is equal to standard weight of mix

II) When actual weight of mix is different from the standard weight of mix
Situation – I: In this case the formula for calculating mix variance is:
Standard Cost of Standard Mix – Standard Cost of Actual Mix
Where
Standard Cost of Standard Mix = (Standard Price x Standard Quantity)
Standard Cost of Actual Mix = (Standard Price x Actual Quantity)
Or
Standard Unit Cost (SQ- AQ)
In Case standard quantity is revised due to shortage of one material, then the formula will be:
Standard Unit Cost (Revised Standard Quantity – Actual Quantity)
Or
Standard Cost of Revised Standard Mix – Standard Cost of Actual Mix
Problem/2: from the following information, calculate the material mix variance.

Material Standards Actual

A 200 units @ ₹12 160 units @ ₹13
B 100 units @ ₹10 140 units @ ₹10
Due to shortage of material A, it was decided to reduce consumption of A by 15% and increase
that of material B by 30%.
Solution:
Revised Standard Mix is:
Material A: 200 units – 15% of 200 = 170 units
Material B: 100 units + 30% of 100 = 130 units
Material Mix Variance:
Standard Unit Cost (Revised Standard Quantity – Actual Quantity)
Material A: 12 (170 - 160) = ₹120 {FAV.}
Material B: 10 (130 - 140) = ₹100 {ADV.}
MMV = ₹20 {FAV.}
Situation – II: In this case the formula for calculating the material mix variance is:
𝑇𝑜𝑡𝑎𝑙 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝐴𝑐𝑡𝑢𝑎𝑙 𝑀𝑖𝑥
{𝑇𝑜𝑡𝑎𝑙 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑀𝑖𝑥 𝑥 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑀𝑖𝑥} – (Standard Cost of Actual Mix)

In case the standard is revised due to the shortage of one material, then revised standard will be
used instead of standard. The formula will become as follows:
𝑇𝑜𝑡𝑎𝑙 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝐴𝑐𝑡𝑢𝑎𝑙 𝑀𝑖𝑥
{𝑇𝑜𝑡𝑎𝑙 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑀𝑖𝑥 𝑥 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑀𝑖𝑥} – (Standard
Cost of Actual Mix)
 Problem/3: From the data given below, calculate all material Variances:

Consumption for 100 Units of Products

Material Standards Actual
A 40 units @ ₹50/unit 50 units @ ₹50/unit
B 60 units @ ₹40/unit 60 units @ ₹45/unit

Solution:
Working Notes:

Raw
Standard Cost Actual Cost Revised Standard Cost Standard Cost
Material
of Actual Mix
Units Rate(₹) Total(₹) Units Rate(₹) Total(₹) Units Rate(₹) Total(₹)
2,500
A 40 50 2,000 50 50 2,500 44 50 2,200
(i.e. 50 x ₹50)

2,400
B 60 40 2,400 60 45 2,700 66 40 2,640
(i.e. 60 x ₹40)

100 4,400 110 5,200 110 4,840 4,900

I) Material Cost Variance = Standard Cost of Material – Actual Cost of Material

= ₹4,400 - ₹5,200 = ₹800 (ADV.)
II) Material Price = Actual Quantity (Standard Unit Price – Actual Unit Price)
Material A: 50 units (₹50 - ₹50) = Nil
Material B: 60 units (₹40 - ₹45) = ₹300 {ADV.}
Material Price Variance = ₹300 {ADV.}

III) Material Usage Variance

Standard Unit Price (Standard Quantity – Actual Quantity)
Material A: ₹50 (40 units – 50 units) = ₹500 {ADV.}
Material B: ₹40 (60 units – 60 units) = Nil
Material Usage Variance = ₹500 {ADV.}

IV) Material Mix Variance

= Standard Cost of Revised Standard Mix – Standard Cost of Actual Mix
= ₹4,840 - ₹4,900 = ₹60 {ADV.}

Or
Material Mix Variance
𝑇𝑜𝑡𝑎𝑙 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝐴𝑐𝑡𝑢𝑎𝑙 𝑀𝑖𝑥
= {𝑇𝑜𝑡𝑎𝑙 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑀𝑖𝑥 𝑥 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑀𝑖𝑥} – (Standard Cost of Actual
Mix)
50 𝑢𝑛𝑖𝑡𝑠+60 𝑢𝑛𝑖𝑡𝑠
= {40 𝑢𝑛𝑖𝑡𝑠+60 𝑢𝑛𝑖𝑡𝑠 𝑥 ₹4,400} – (₹4,900) = 60 {ADV.}

e) Material Yield (or Sub-Usage) Variance (MYV):

It is that portion of the material usage variance which is due to the difference between
the d=standard yield specified and the actual obtained. This variance measures the
abnormal loss or savings of materials. This variance is particularly important in case of
process industries where certain percentage of loss of material is inevitable.

If the actual loss of material differs from the standard loss of materials, yield variance will
arise. Yield variance is also known as scrap variance. This loss may result into following
two situations:
I) When standard and actual mix do not differ. In such a case, yield variance is
calculated as:
Yield Variance = Standard Rate (Actual Yield – Standard Yield)

Where
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑀𝑖𝑥
Standard Rate = 𝑁𝑒𝑡 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑂𝑢𝑡𝑝𝑢𝑡
(i.e. Gross Output – Standard Loss)

II) When actual mix differs from standard mix. In such case, formula remains almost
same but the weight of actual mix differs from that of standard mix, a revised
standard mix is to be calculated to adjust the standard mix in proportion to the
actual mix and the standard rate is to be calculated using revised standard mix as:

𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑆𝑡𝑛𝑎𝑑𝑎𝑟𝑑 𝑀𝑖𝑥

Standard Rate = 𝑁𝑒𝑡 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑂𝑢𝑡𝑝𝑢𝑡

Yield Variance = Standard Rate (Actual Yield – Revised Standard Yield)

Problem/4: (Case - A): From the following data, calculate material yield variance:

Material Standards Mix Actual Mix

A 200 units @ ₹12/unit 160 units @ ₹13/unit
B 100 units @ ₹10/unit 140 units @ ₹10/unit
Note: Standard Loss allowed is 10% of input. Actual output is 275 units.
Solution:
In this case standard and actual mix do not differ. So there is no need of calculating revised
standard mix.

Material Standard Mix Actual Mix

Unit Rate (₹) Total (₹) Unit Rate (₹) Total (₹)
A 200 12 2,400 160 13 2,080
B 100 10 1,000 140 10 1,400
300 3,400 300 3,480
Less: Loss 30 units (10%) - 25 units -
Output 270 3,400 275 3,480

Standard Cost per unit = ₹3,400/270 = ₹12.593

Yield Variance = Standard Rate (Actual Yield – Standard Yield)
= ₹12,593 (275 units – 270 units)
= ₹12,593 x 5 = ₹62.965 {FAV.}
Problem/5: (Case - B): From the following data, calculate material yield variance:

Material Standards Mix Actual Mix

A 60 units costing ₹3,000 300 units costing ₹15,300
B 40 units costing ₹1,200 200 units costing ₹5,600
Note: Standard loss allowed is 10% of input and standard rate of scrap realization is ₹6 per unit.
Solution:

Material Standard Mix Actual Mix

Units Amount (₹) Units
A 60 3,000 300
B 40 1,200 200
100 4,200 500
60
Less: Loss (10%) 10 (Scrap of 10 units @ 60
₹6 per unit)
Output 90 4,140 440

Standard Cost per unit = 4,140/90 = ₹46

Yield Variance = Standard Cost per unit (Actual Yield – Standard Yield)
Standard Yield = Actual Material Mix – 10% of Actual Material Mix
 = (300 units of A + 200 units of B) – 10/100 x 500
= 500 – 50 = 450 units.
Yield Variance = ₹46 (440 units – 450 units)
= ₹460 {ADV.}
2. Labor Variances:

Labor Cost Variance

Labor Rate of Pay Variance Total Labor Efficiency or Labor Time

Variance

Net Labor Efficiency Variance Idle Time Variance

Labor Mix or Gang Labor Yield or Sub-Efficiency

Composition Variance Variance
 a) Labor Cost Variance: It’s the difference between the standard direct wages specified for
the activity and the actual wages paid. Labor cost variance is the function of labor rate of
pay variance and total labor efficiency or labor time variance.

LCV = Standard Labor Cost for Actual Output – Actual Labor Cost.
= (Standard time for actual output x Standard Wage Rate) – (Actual Time x
Actual Wage Rate)

b) Labor Rate of Pay Variance: It is that part of labor cost variance which arises due to change
specified wage rate. LRV mat arise due to the following reasons:
i. Change in basic wage rate or piece-work rate
ii. Payment of more overtime than fixed earlier.
LRV = Actual Time (Standard Rate – Actual Rate)
c) Total Labour efficiency or Labour Time Variance:
It’s that part of labour cost variance which arises due to the difference between standard
labour hours specified and the actual labour hours paid for including the ‘idle time’.
This variance helps in controlling efficiency of workers.

Reasons for Variance:

i. Lack of proper supervision
ii. Defective machinery and equipment
iii. Insufficient training and incorrect instructions
iv. Bad working conditions etc.
TLEV = Standard Wage Rate (Standard Time for Actual Output – Actual Time paid for)
Note: The actual time, while calculating this variance includes idle time.
Practical Problems:
Problem/1: Calculate labour variances from the following information:

Particulars Details
Direct gross wages (₹) 28,080
Standard hours produced 8,640
Standard rate per hour (₹) 3
Actual hours worked 8,200
Solution:
a) Labour Cost Variance = Standard Labour Cost – Actual Labour Cost
= (Standard Time x Standard Rate) – (Actual Time –
Actual Rate)
28,080
= (8,640 x 3) – (8,200 x 8,200 )
= 25,920 – 28,080 = ₹2160 {ADV.}

b) Labour Rate Pay Variance = Actual Time (Standard Labour Rate – Actual Labour
Rate)
28,080
= 8,200 (3 – )
8,200
= 8,200 (3 – 3.42)
= ₹3,444 {ADV.}

c) Labour Efficiency Variance = Standard Labour Rate (Standard Time – Actual Time)
= 3 (8,640 – 8,200)
= 3 (440)
= ₹1,320 {FAV.}

d) Net Labour Efficiency Variance: It is that part of total labour efficiency variance which
arises due to the difference between the standard hours specified and the actual labour
hours worked excluding idle time.

Net Efficiency Variance = Standard Rate (Standard Time for Actual output – Actual
Time Worked)
Or

= Standard Rate x [(Standard Time) – (Actual Time paid –Idle

Time)]

e) Idle Time Variance: This variance is a sub-variance of LEV. It is the standard cost of actual
time paid to workers for which they have not worked due to abnormal reasons.

ITV = Idle Hours x Standard Rate

f) Labour Mix or Gang Composition Variance: It is like material mix variance and is a part of
LEV. This variance is due to the change in the composition of labour force.

Case-A: When standard time of labour mix is equal to actual time of labour mix.
 Labour Mix Variance =
Standard Cost of Standard Labour Mix – Standard
cost of Actual Labour Mix
Note: Due to non-availability of one grade of labour, there may be a change in standard
labour mix, then revised standard will be used for standard mix.

LMV = Standard Cost of Revised Standard Labour Mix (RSLM) – Standard

Cost of Actual Labour Mix

Case-B: When Standard time of labour mix is different from actual time of labour mix.

𝑇𝑜𝑡𝑎𝑙 𝑇𝑖𝑚𝑒 𝑜𝑓 𝐴𝑐𝑡𝑢𝑎𝑙 𝐿𝑎𝑏𝑜𝑢𝑟 𝑀𝑖𝑥

[(𝑇𝑜𝑡𝑎𝑙 𝑇𝑖𝑚𝑒 𝑜𝑓 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐿𝑎𝑏𝑜𝑢𝑟 𝑀𝑖𝑥 𝑥𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐿𝑎𝑏𝑜𝑢𝑟 𝑀𝑖𝑥) –
Standard Cost Actual Labour Mix]

Note: As in the earlier case, if labour composition is revised due to non-availability of one
grade of labour then revised standard mix will be used instead of standard mix.

𝑇𝑜𝑡𝑎𝑙 𝑇𝑖𝑚𝑒 𝑜𝑓 𝐴𝑐𝑡𝑢𝑎𝑙 𝐿𝑎𝑏𝑜𝑢𝑟 𝑀𝑖𝑥

[(𝑇𝑜𝑡𝑎𝑙 𝑇𝑖𝑚𝑒 𝑜𝑓 𝑥𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑅𝑆𝐿𝑀) −
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐿𝑎𝑏𝑜𝑢𝑟 𝑀𝑖𝑥
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑅𝑆𝐿𝑀]

g) Labour Yield Variance or Sub-Efficiency Variance: It arises due to the standard output
specified and the actual output obtained.

LYV = Standard Labour Cost per unit of Output (Actual Yield – Standard Yield for
Actual Time)

Problem/2: In a manufacturing concern the standard time fixed for a month is 8,000 hours. A
standard wage rate of ₹2.25 P., per hour has been fixed. During one month, 50 workers were
employed and average working days in a month are 25. A worker works for 7 hours in a day.
Total wage bill of the factory for the month amounts to ₹21,875. There was a stoppage of work
due to power failure (idle time) for 100 hours. Calculate various Labour Variances.

Solution:

Standard Time = 8,000 hours

Standard Wage = ₹2.25 per hour
Actual Time = 8750 hours (50 x 25 x 7)

21875
Actual Wage Rate = ( ) = ₹2.50 per hour
8750
 a) Labour Cost Variance = Standard Labour Cost – Actual Labour Cost
= (Std. Time x Std. Rate) – (Actual Time x Actual Rate)
= (8,000 x 2.25) – (8,750 x 2.50)
= 18,000 – 21,875
= ₹3,875 {ADV.}

b) Labour Rate of Pay Variance = Actual Time (Std. Labour Rate – Actual
Labour Rate)
= 8,750 (2.25 – 2.50)
= ₹2,187.50 {ADV.}

c) Net Efficiency Labour Variance = Std. Labour Rate (Std. Time – Actual Time
Worked)
= 2.25 (8,000 – 8,650)
= ₹1,462.50 {ADV.}
Note: Though the total hours worked amounted to 8,750 but there has been stoppage of worked
due to power failure which lead to the idle of 100 hours. Thus actual time worked are 8650.

d) Idle Time Variance = Idle Time x Standard Rate

= 100 x 2.55
= ₹255 {ADV.}
Verification: LCV = LRV + NLEV + ITV
-3,875 = -2,187.50 – 1,462.50 – 225
-3,875 = -3,875

Problem/3: The following data is taken out from the books of a manufacturing concern:
Budgeted Labour composition for producing 100 articles Actual Labour composition for producing 100 articles
20 Men @ ₹1.25 per hour for 25 hours 25 Men @ ₹1.50 per hour for 24 hours
30 Women @ ₹1.10 per hour for 30 hours 25 Women @ ₹1.20 per hour for 25 hours

Calculate: Labour Cost Variance, Labour Rate Variance, Labour Efficiency Variance and Labour
Mix Variance.

Solution:

a) Labour Cost Variance = Standard Labour Cost – Actual Labour Cost

Men = (20 x 25 x 1.25) – (25 x 24 x 1.50)
= 625 – 900
= ₹275 {ADV.}
Women = (30 x 30 x 1.10) – (25 x 25 x 1.20)
 = 990 – 750
= ₹240 {FAV.}
LCV = -275 + 240 = ₹35 {ADV.}

b) Labour Rate Variance = Actual Time (Standard Rate – Actual Rate)

Men = 600 (1.25 – 1.50)
= 600 (-0.25)
= ₹150 {ADV.}
Women = 625 (1.10 – 1.20)
= 625 (-0.10)
= ₹62.50 {ADV.}
LRV = -150 + (-62.50) = ₹212.50 {ADV.}

c) Lab. Efficiency Variance = Standard Rate (Standard Time – Actual Time)

Men = 1.25 (500 - 600)
= 1.25 (-100)
= ₹125 {ADV.}
Women = 1.10 (900 -625)
= 1.10 (275)
= ₹302.50 {FAV.}

LEV = -125 + 302.50 = ₹177 {FAV.}

d) Labour Mic Variance:

Standard Time for Men and Women = 1,400 hours {(20 x 25) + (30 x 30)}
Actual Time for Men and Women = 1,225 hours {(25 x 24) + (25 x 25)}
When standard time of labour mix is different from the actual time of labour mix, the
formula for calculating labour mix variance is:

𝑇𝑜𝑡𝑎𝑙 𝑇𝑖𝑚𝑒 𝑜𝑓 𝐴𝑐𝑡𝑢𝑎𝑙 𝐿𝑎𝑏𝑜𝑢𝑟 𝑀𝑖𝑥

[(𝑇𝑜𝑡𝑎𝑙 𝑇𝑖𝑚𝑒 𝑜𝑓 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐿𝑎𝑏𝑜𝑢𝑟 𝑀𝑖𝑥 𝑥𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐿𝑎𝑏𝑜𝑢𝑟 𝑀𝑖𝑥) –
Standard Cost Actual Labour Mix]
1,225
[{ 𝑥 (20𝑥25𝑥1.25) + (30x30x1.10)} – {(25x24x1.25) + (25x25x1.10)}
1,400

Solving the above we get

1,413.12 – 1,437.50 = ₹24.38 {ADV.}

OVERHEAD VARIANCES:

Introduction:
Overhead costs are the operating costs of a business which can’t be identified or allocated but
which can be apportioned to, or absorbed by Cost Centres or cost units.

Thus overhead cost are indirect costs and are important for the management for the purpose of
cost control.

Over Cost Variance can be defined as the difference between the standard costs of overhead
allowed for actual output (in terms of production units or labour hours) and the actual overhead
cost incurred.

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

Or

(Standard Hours for Actual Output x Standard Overhead

Rate per hour) – Actual Overhead Cost

Classification of Overhead Costs:

Class – A: Variable Overhead Costs
Class – B: Fixed Overhead Costs

Based on the classification of the overhead costs, the variances that take place in both the cases
may be termed as

1. Variable Overhead Variances

2. Fixed Overhead Variances
 3. Overhead Variances:

Total Overhead Cost

Variances

Fixed Overhead Variances

Variable Overhead Variances

Expenditure Efficiency Expenditure Volume

Variance Variance Variance Variance

Capacity Calendar Efficiency

Variance Variance Variance

1. Variable Overhead Variance: Variable Overheads vary directly with the volume of output
and hence, the standard variable overhead rate remains uniform.

Thus VOCV is the difference between the standard variable overhead cost for actual
output and the actual variable overhead cost.

VOCV = (Actual Output x Standard VOH Rate* per unit) – Actual VOHs
*Where Std., VOH Rate = Budgeted VOHs/Std., Output Specified
 Or
VOCV = (Standard Hours for Actual Output x Standard VOH Rate per unit) – Actual
VOHs
Note: In case information relating to standard hours allowed for actual output and the actual
time (hours) taken is available, VOHC Variance may be further analyzed as shown in the flow
diagram.
I. Variable Overhead Expenditure Variance&
II. Variable Overhead Efficiency Variance

I. Variable Overhead Expenditure Variance =

(Actual Hours Worked x Std., VOH Rate per hour) – Actual VOH
Or
Actual Hours (Std., VOH Rate – Actual VOH Rate)

II. Variable Overhead Efficiency Variance =

Std., VOH Rate (Std., Hours for Actual Output) – Actual Hours

2. Fixed Overhead Variance:

FOHV = (Actual Output x Std., Fixed Overhead Rate) – (Actual Fixed

Overheads)

Where
Std., FOH Rate = Budgeted FOH/Std., Output Specified
Note: Fixed Overhead Variance may be further divided into expenditure and volume variances as
shown in the flow diagram.
I. Overhead Expenditure Variance = (Budgeted FOHs) – (Actual FOHs)

II. Volume Variance: This variance shows a variation in overhead recovery due to
budgeted production being more or less than actual production. When actual
production is more than the standard production it will show an over-recovery of fixed
overheads and the variance will be favorable. On the other hand, if actual production
is less than the standard production it will show an under recovery and the variance
will be unfavorable.
 Volume may arise due to change in efficiency or change in budgeted and actual
number of working days.

Volume Variance* = (Actual Output x Std., Rate) – Budgeted FOHs

Or
= Std., Rate per hour (Std., Hours produced – Actual
Hours)
*Volume Variance: (Actual Volume Worked x FOH Rate – Budgeted FOHs)

Note: This variance is sub-divided into the following:

a) Capacity Variance: It is that portion of volume variance which arises due to

over-utilization or under-utilization of plant and equipment.

Capacity Variance = Std., Rate (Revised Budgeted Units –

Budgeted Units)
Or
= Std., Rate (RBHrs* - BHrs)
RBHrs* = BFOHs/Budgeted Production x Actual Production

b) Calendar Variance: This variance arises due to the difference between actual
number of days and budgeted days.

Calendar Variance* = Change in number of units by change in

actual and Std., number of days x Std., Rate

Calendar Variance*: Increase or decrease in production due to more or less working days x
Std., Rate

III. Efficiency Variance: This is the part of volume variance which arises due to increased
or reduced output because of more or less efficiency than expected.

Efficiency Variance = Std., Rate (Actual Quantity – Std., Quantity)

Or
= Std., Rate per hour (Std., Hours produced – Actual
Hours)
Or
= Fixed Overhead Rate (Actual Hours – Revised Std.,
Hours)
Practical Problems:
Problem/1: From the Following data, calculate Variable Overhead Variances:

Particulars Details
Budgeted Production for January 2011 3000 units
Budgeted Variable Overhead ₹15,000
Standard time for one unit 2 hours
Actual Production for January 2011 2,500 units
Actual hours worked 4,500 hours
Actual Variable Overhead ₹13,500

Solution:
1. Variable Overhead Cost Variance (VOCV) = (Actual Output x Standard VOH Rate
Per unit*) – Actual VOHs
Standard VOH Rate per unit = BVOHs/BP
= 15,000/3000 = ₹5/unit
VOCV = (2,500 x 5) – 13,500
= ₹1,000 {ADV.}

2. Variable Overhead Expenditure Variance = (Actual Rate x Standard Overhead

Rate) - (Actual VOHs)
= (4,500 x 2.5) – 13,500
= 11,250 – 13,500
= ₹2,250 {ADV.}

3. Variable Overhead Efficiency Variance = Std., Variable Overhead Rate x

(Std., Hours for Actual Output –
Actual Hours)
= 2.50 (5,000 – 4,500)
= ₹1,250 {FAV.}

Problems on FOHVs:
Problem/2: From the following information compute:
a) Fixed Overhead Variance
b) Expenditure Variance
c) Volume Variance
d) Capacity Variance
 e) Efficiency Variance

Particulars Budgeted Actual

Fixed Overheads for November ₹20,000 ₹20,400
Units of Production in November 10,000 10,400
Standard time for one unit 2 hours -
Actual Hours worked - 20,100

Solution:
Standard Time = 10,000 x 2 = 20,000 hours
Fixed Overhead Rate = 20,000/20,000 = ₹1
a) Fixed Overhead Variance = Actual Hours x Fixed Overhead Rate – Actual Fixed
Overheads
= 20,100 x 1 – 20,400
= ₹300 {ADV.}

b) Expenditure Variance = (Budgeted Fixed Overheads – Actual FOHs)

= 20,000 – 20,400
= ₹400 {ADV.}

c) Volume Variance = Actual Hours Worked x (FOHs Rate – Budgeted

Overheads)
= 20,100 x (1 – 20,000)
= ₹100 {ADV.}

d) Capacity Variance = FOHs Rate (RBHrs - BHrs)

Revised BHrs = 20,000/10,000 x 10,400 = 20,800 Hrs

Capacity Variance = 1 (20,800 – 20,000)

= ₹800 {ADV.}

e) Efficiency Variance = FOHs Rate (Actual Hours – Revised Std., Hours)

= 1 (20,100 – 20,800)
= ₹700 {ADV.}
SALES VARIANCES:
Introduction:

The analysis of variances will be complete only when the difference between the actual profit
and standard profit is fully analyzed. It is necessary to make an analysis of sales variances to have
a complete analysis of profit variances because profit is the difference between sales and cost.

Sales variances may be calculated in two different ways:

These may be computed so as to show the effect on profit or these may be calculated to show
the effect on sales value.

Value Method of Computing Sales Variances:

1. Sales Value Variance (SVV): It is the difference between the standard value and the actual
value of sales effected during a period.
This variance may arise due to the change in sales price, sales volume or sales mix.

Sales Value Variance = (Actual Value of Sales) – (Budgeted Value of Sales)

2. Sales Price Variance (SPV): It is that portion of sales value variance which arises due to the
difference between actual price and standard price specified.

Sales Price Variance = Actual {sold} Quantity (Actual Price – Standard Price)

3. Sales Volume Variance (SVV): It is that portion of sales value variance which arises due to
the difference between actual quantity of sales and standard quantity of sales.

SVV = Standard Price (Actual Quantity of Sales – Budgeted

Quantity of Sales)
Note: Sales volume variance can be further divided into two parts as follows:

a) Sales Mix Variance (SMV): It arises due to the difference in the proportion in which
various articles are sold and the standard proportion in which various articles were to
be sold.

SMV = Standard Value of Actual Mix – Standard Value of

Revised Standard Mix
b) Sales Quantity Variance (SQV): It is that part of sales volume variance which arises due
to the difference between revised standard sales quantity and budgeted sales
quantity.
 SQV = Standard Selling Price (Revised Sales Quantity –
Budgeted Sales Quantity)

Profit Method of Computing Sales Variances:

In this method the effect of change in sales quantities and sales prices on the profit of the concern
is determined.
1. Total Sales Margin Variance (TSMV):
TSMV = Actual Profit – Budgeted Profit
Or
= (Actual Quantity of Sales x Actual Profit per unit) – (Budgeted
Quantity of Sales x Budgeted Profit per unit)

2. Sales Margin Variance (SMV) due to Selling Price: It is that portion of total sales margin
variance which is due to the difference between the actual price of quantity of sales
effected and the standard price of those sales effected.

SMV (due to SP) = Actual Quantity of Sales (Actual Selling Price per unit
– Standard Selling Price per unit)

3. Sales Margin Variance (SMV) due to Sales 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 (due to Sales Volume) = Standard Profit per unit (Actual Quantity of Sales –
Budgeted Quantity of Sales)

Note: Sales margin variance due to volume can be further divided into two parts:

a) Sales Margin Variance (SMV) due to Sales Mixture: It is that portion of sales margin
variance due to volume which arises because of different proportion of actual sales
mix.

SMV (due to Sales Mixture) = Standard Profit per unit (Actual Quantity of
Sales – Standard proportion for Actual Sales)
Or
= Standard Profit – Revised Standard Profit
 b) Sales Margin Variance (SMV) 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.

SMV (due to Sales Quantities) = Standard Profit per unit (Standard

Proportion for Actual Sales – Budgeted
Quantity of Sales)
Or
= Revised Standard Profit – Budgeted Profit

Practical Problems:
Problem/1: From the following particulars calculate all sales variances according to
(A) Profit Method &
(B) Value Method.

Product Standard Actual

Quantity in
Cost per unit Price per unit Quantity in Cost per unit Price per unit
Units
(₹) (₹) Units (₹) (₹)
X 3,000 10 12 3,200 10.50 13
Y 2,000 15 18 1,600 14.00 17

Solution:
WORKING TABLE FOR CALCULATING VARIOUS VARIANCES
Budgeted Actual Std., Std.,
Std., Prop.
Total Total Value of Value of
Product Qty. Price Value Cost Profit Qty. Price Value Cost Profit For Actual
Profit Profit Actual Revised
Units (₹) (₹) (₹) (₹) Units (₹) (₹) (₹) (₹) Sales
(₹) (₹) Sales Sales
34,560
2,880 38,400
X 3,000 12 36,000 10 2 6,000 3,200 13 41,600 10.50 2.50 8,000
(4,800x3/5) (3,200x5)
(2,880x
12)
28,800 34,560
1,920
Y 2,000 18 36,000 15 3 6,000 1,600 17 27,200 14 3 4,800
(4,800x2/5)
(1,600x (1,920x
18) 18)
Total 5,000 7,200 12,000 4,800 68,800 12,800 4,800 67,200 69,120

(A) Profit Method:

1. Total Sales Margin Variance = Actual Profit – Budgeted Profit
= ₹12,800 - ₹12,000 = ₹800 {FAV.}
 2. Sales Margin Variance due to Selling Price =
Actual Quantity of Sales (Actual Sales Price per unit Budgeted Sales Price per unit)
X = 3,200 (₹13 - ₹12) = ₹3,200 {FAV.}
Y = 1,600 (₹17 - ₹18) = ₹1,600 {ADV.}
Net Variance = ₹1,600 {FAV.}

3. Sales Margin Variance due to Volume =

Standard Profit per unit (Actual Quantity of Sales – Budgeted Quantity of Sales)
X = ₹2 (3,200 – 3,000) = ₹400 {FAV.}
Y = ₹3 (1,600 – 2,000) = ₹1,200 {ADV.}
Net Variance = ₹800 {ADV.}

4. Sales Margin Variance due to Sales Mix =

Standard Profit per unit (Actual Quantity of Sales – Standard Proportion for Actual
Sales)
X = ₹2 (3,200 – 2,880) = ₹640 {FAV.}
Y = ₹3 (1,600 – 1,920) = ₹960 {ADV.}
Net Variance = ₹320 {ADV.}

5. Sales Margin Variance due to Sales Quantity =

Standard Profit per unit (Standard Proportion for Actual Sales – Budgeted Quantity
of Sales)
X = ₹2 (2,880 – 3,000) = ₹240 {ADV.}
Y = ₹3 (1,920 – 2,000) = ₹240 {ADV.}
Net Variance = ₹480 {ADV.}

(B) Value Method:

1. Sales Value Variance = Actual Value of Sales – Budgeted Value of
Sales
= ₹68,800 - ₹72,000 = ₹3,200 {ADV.}

2. Sales Price Variance = Actual Quantity of Sales (Actual Price –

Budgeted Price)
X = ₹3,200 (₹13 - ₹12) = ₹3,200 {FAV.}
Y = ₹1,600 (₹17 - ₹18) = ₹1,600 {ADV.}
 Net Variance = ₹1,600 {FAV.}

3. Sales Volume Variance = Standard Price (Actual Quantity of Sales –

Budgeted Quantity of Sales)
X = ₹12 (3,200 – 3,000) = ₹2,400 {FAV.}
Y = ₹18 (1,600 – 2,000) = ₹7,200 {ADV.}
Net Variance = ₹4,800 {ADV.}

4. Sales Mix Variance = Standard Value of Actual Mix – Standard

Value of Revised Standard Mix
= ₹67,200 ₹39,120 = ₹1,920 {ADV.}

5. Sales Quantity Variance = Standard Selling Price (Revised Sales

Quantity – Budgeted Sales Quantity)
X = ₹12 (2,880 – 3,000) = ₹1,440 {ADV.}
Y = ₹18 (1,920 – 2,000) = ₹1,440 {ADV.}
Net Variance = ₹2,880 {ADV.}