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Variance Analysis

A variance is the difference between an actual result and an expected result. The process by which the total difference between standard and actual results is analysed is known as variance analysis. When actual results are better than the expected results, we have a favourable variance (F). If, on the other hand, actual results are worse than expected results, we have an adverse (A).

Variance Components

Material variance
Material Cost Variance

Price Variance

Quantity Variance

Mix Variance

Yield Variance

Material Cost Variance. It represents the difference between actual cost of material used and standard cost of material specified for output achieved. Material cost variance arises due to variation in prices and usage of materials. Difference between (actual quantity of materials used x actual rate) and (standard quantity of material required for the specified output x standard rate) will be material cost variance. Material cost variance: (SQ*SP ) - (AQ* AP) SP - STANDARD PRICE; AP - ACTUAL PRICE; SQ - STANDARD QUANTITY; AQ - ACTUAL QUANTITY.

Material Quantity Variance It is part of cost variance occurred due to difference between actual quantity used and standard quantity specified for output. It helps to identify whether the materials are used in proper manner. A debit balance of material usage variance indicates that material used was in excess of standard requirements. Credit balance shows will show savings in the use of material. Material Quantity Variance = (SQ AQ) * SP SP - STANDARD PRICE ; SQ - STANDARD QUANTITY; AQ - ACTUAL QUANTITY. Material Price variance When actual price paid for the materials is more or less than the standard price of the materials, the difference is called direct materials price variance. If actual price paid is more than the standard price the difference is called unfavourable materials price variance. And if the actual price paid is less than the standard price of the materials, the difference is called favourable materials price variance. Material Price variance = (SP AP) AQ SP - STANDARD PRICE; AP - ACTUAL PRICE; AQ - ACTUAL QUANTITY Material Mix Variance The variance is that part of material usage variance which is due to difference between actual composition of mix and standard composition of mixing the different types of materials. Short supply is the most common reason for this variance. Material Mix Variance = (SM- AM ) * SP SP - STANDARD PRICE; AP - ACTUAL PRICE; SQ - STANDARD QUANTITY; AQ - ACTUAL QUANTITY

Material Yield Variance Output depends on input of material. In this circumstances, if 10% of input material in course of normal loss of production. Then, 90% of total input of material will be expected output. If actual yield obtained happens to be different from the standard yield specified, there will be a yield variance. Material Yield Variance = (SY- AY)* SR SP - STANDARD PRICE; AP - ACTUAL PRICE; SQ - STANDARD QUANTITY; AQ ACTUAL QUANTITY EXAMPLE
The following information has been furnished by AB ltd. which has adopted standard costing: Standard: Materials for 150 kg finished products Price of materials Actual: Output Materials used Cost of materials

200 Kg Rs.4 per kg 300000 kg 360000 kg Rs.684000

Calculate: (a) Material cost variance; (b) Material price variance & (c) Material usage variance. Solution: Standard quantity of material required for actual output:=300000 * 200 Actual quantity of material 150 Standard price Actual price = 684000 360000 (a) Material cost variance: Standard Cost-Actual Cost = (400000*Rs.4) Rs.684000 (b) Materials price variance: Actual quantity * Price Difference = 360000 * (Rs.4.00-1.90) (c) Material Usage Variance: Standard price * Usage difference = Rs.4 * (400000-360000) Check: Material cost variance = Price + Usage Rs.916000 Favourable

400000 Kg 360000 kg Rs.4 per kg Rs.1.90 per kg

Rs. 756000 Favourable

Rs.160000 Favourable

Rs.916000 Favourable

Labour cost variance

LCV Labour Cost Variance

LRV Labour Rate Variance

LEV Labour Efficiency Variance

LITV Labour Idle Time Variance

LYV Labour Yield Variance (Or) Sub Usage/Efficiency Variance

LMV Labour/Labor Mix Variance (Or) Gang Composition Variance

Labour cost variance Direct labour cost variance is the difference between the standard cost for actual production and the actual cost in production Labour cost variance = (AH * AR SH *SR)

Labour rate variance Direct labour rate variance is the difference between the amount of actual hours worked at actual rate and actual hours worked at standard rate. Labour rate variance = (Actual rate Standard rate ) * Actual hours Labour efficiency variance Difference between the amount of labour time that should have been used and the labour that was actually used, multiplied by the standard rate. Labour efficiency variance = (Actual hours worked Standard rate) (Standard hours allowed Standard rate)

EXAMPLE The information regarding composition and weekly wages rates of labour force engaged in a particular job is as follows: Workers Std. No. Std. Rate Actual No. Actual Rate as per skill Hours per hour Hours per hour ------------------------------------------------------------------------

Skilled Semi-skilled Unskilled

75 45 60

60 40 30

70 30 80

70 50 20

Calculate the following: LCV LRV LEV Solution 1. Labour Cost Variance (LCV) = (SH x SR) (AH x AR) Skilled = (75 x 60) (70 x 70) = 4500 - 4900 Semi-skilled = (45 x 40) (30 x 50) = 1800 1500 = (60 x 30) (80 x 20) = 1800 1600


300 F


Total LCV = 2. Labour Cost Variance LRV = AH (SR AR) Skilled = 70 (60 70) Semi-Skill = 30 (40 -50) Unskilled = 80 (30-20

200 F -------100 F -------

= 700(A) = 300(A) = 8000(F) -------Total LRV = 200 A --------= 300 F = 600 F = 600 A --------Total LEV = 300 (F) ---------

3. Labour efficiency Variance LEV = SR (SH AH) Skilled = 60 (75-70 Semi-skilled = 40 (45-30) Unskilled = 30 (60-80

Verification LCV = LRV + LEV 100 (F) = 200 (A) + 300 (F) 100 (F) = 100 (F)

IDEL TIME VARIANCE The difference between the number of hours budgeted for work and the number of paid hours not spent working (idle time). Idel Time Variance = Actual time Standard time For example, if employees of a company were budgeted to make products for 8,000 hours, but only did work for 7,800 hours, then 200 hours were spent in idle time. This is often further calculated by multiplying the idle time by the wage rate. If the wage rate is Rs.10/hour, then the idle time carried a cost of Rs2,000 (200 hours x Rs.10/hour).
1. SH = Standard Hours 2. SR = Standard Rate per hour 3. AH = Actual Hour 4. AR = Actual Rate per hour 5. RSH = Revised Standard Hour 6. LCV = Labour Cost Variance 7. LRV = Labour Rate Variance 8. LEV = Labour Efficiency Variance 9. LMV = Labour Mix Variance 10. LITV = Labour Idle Time Variance

Labour Mix Variance (LMV)

It is also known as Gang composition Variance. It is similar to Material Mix variance and is a part of labour efficiency 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. It is calculated with the help of the following formula: Labour Mix Variance = Standard Cost of Standard Mix Standard Cost of Actual Mix Labour Yield Variance (LYV) It is similar to Material Yield Variance. It studies the impact of actual yield on labour cost where output varies from the standard. The formula for LYV is: Labour Yield Variance = (Actual yield Standard yield) X Standard labour cost per unit of output

Overheads cost variance TOHCV Total Overhead Cost Variance

VOHCV Variable Overhead Cost Variance

FOHCV Fixed Overhead Cost Variance

VOHEfV VOHExV FOHVV Variable Overhead Variable Overhead Fixed Overhead Efficiency Variance Expenditure Variance Volume Variance

FOHEV Fixed Overhead Expenditure Variance

FOHCapV Fixed Overhead Capacity Variance

FOHCalV Fixed Overhead Calendar Variance

FOHEfV Fixed Overhead Efficiency Variance

Total Overhead Cost Variance

The difference between the absorbed overhead and incurred overhead is what we call the under/over absorbed overhead. Overhead variance is nothing but this. We call this the Total Overhead Cost Variance. TOCHV=Actual overhead incurred Std hours for the actual output * Std overhead rate per hour.

Variable overheads cost variance

The difference between the actual variable overhead cost and std variable overhead allowed for the actual output achieved. We call this the Variable Overhead Cost Variance. VOHCV=Actual overhead cost (actual output * variable overhead rate per unit)

Fixed Overhead Cost Variance

The difference between the actual fixed overhead cost and std fixedoverhead cost allowed for the actual output achieved.

FOHCV=Actual overhead cost fixed overheads absorbed

Variable Overhead Efficiency Variance

The difference between actual hours worked multiplied by standard overhead rate and standard hours allowed times the standard overhead rate.

VOHEfV = (actual labour-hours - standard labour-hours allowed for actual production) X standard variable overhead rate.

Variable Overhead Expenditure Variance

The difference between actual variable overhead and budgeted variable overhead based on actual hours worked . VOHExV= Actual variable overhead Budgeted variable overhead

Fixed Overhead Expenditure Variance

It is the difference between actual fixed overhead incurred and budgeted fixed overhead. This variance is not affected by the level of production. Fixed overhead, by definition, does not change with the level of activity. The spending (flexible budget) variance is caused solely by events such as unexpected changes in prices and unforeseen repairs.

FOHEV=Actual fixed overhead Budgeted fixed overhead

Fixed Overhead Volume Variance

This variance results when the actual level of activity differs from the denominator activity used in determining the standard fixed overhead rate. Note that the denominator used in the formula is the expected annual activity level. Fixed overhead volume variance is a measure of the cost of failure to operate at the denominator (budgeted) activity level, and may be caused by such factors as failure to meet sales targets, idleness due to poor scheduling, and machine breakdowns. The volume variance is calculated as follows:
FOHVV= Budgeted overhead applied to actual output Budgeted fixed overhead based on std hour allowed for actual output.

Reasons of occurrence of Volume Variance are: a. b. c. d. There is a decrease in the consumer demand. Plant capacity is in excess. Due to poor scheduling or input bottlenecks, there is a stoppage of plant. Allowances have not been made as a result of fluctuations of calendar.

Fixed Overhead capacity Variance

Under- or over-recovery of overhead arises as a result of a change in capacity, other things being equal; because, an equivalent overhead recovery or non-recovery will be there for every hour difference. Therefore, the difference between the budgeted & actual hour which is multiplied by overhead rate per hour is known as the fixed overhead capacity variance.

FOHCapV = Standard fixed overhead rate per hour * (Budgeted hours Actual hours) Reasons of occurrence of Fixed Overhead Capacity Variance is (i.e. the reasons why actual activity & normal activity are not equal): a. There are bottlenecks & low output which arises as a result of poor production scheduling. b. There are machine breakdowns which are not expected. c. There is a shortage of skilled operatives or materials. d. Strikes e. Natural calamities such as flood etc.

Fixed Overhead Calendar Variance

Where the budget of the fixed overhead is done on a monthly basis & the number of working days in the month varies, a calendar variance may be included in the volume variance. Even in situations when the whole year has been divided into a number of budget periods, & equal number of days is there in each budget period, calendar variance may result from the uneven number of holidays falling within each period. For the year, the sum of the calendar variances will always be nil.

FOHCalV= Excess/ deficit hours worked * Standard fixed overhead rate per hour

Fixed Overhead Efficiency Variance

With labour efficiency variance, this variance is closely related to. Under- or over- recovery of fixed overhead arises as a result of a change in efficiency & thereby fixed overhead efficiency variance arises. A change in efficiency means that the actual hours which have been worked will be different from the standard hours of output. Only on the basis of production, recovery of fixed overhead will be done, thus resulting in under- or overrecovery. FOHEfV= Standard fixed overhead rate per hour * (Actual hours Standard hours of actual output)

EXAMPLE At a certain factory budgeted quantity of 2000 units of a product are to be produced for a 20 working day month. Rs.100000 was the budgeted amount of fixed overhead for the period. During the month actual quantity of 1500 units was produced. Rs. 120000 was the actual amount of fixed overhead incurred for the period. At 100 units per working day was set the standard rate of production. Only 18 days were actually worked during the month. Calculate the fixed overhead variance. Solution: Standard Fixed Overhead per unit = Budgeted Overhead Budgeted Production = 100000 = 50 per unit. 2000 Fixed Overhead recovered by Actual production = Actual Production * Standard rate = 1500 * 50 = 75000 Standard Production in actual days = Actual days worked * Standard rate of production = 18 * 100 = 1800 units (a) Fixed Overhead Variance = Overhead Recovered Actual Overhead = Rs.75000 Rs. 120000

Rs. 45000 A

(b) Fixed Overhead Expenditure variance = Budgeted Overhead Actual Overhead = Rs. 100000 Rs. 120000 (c) Fixed Overhead Volume Variance = Standard Rate per unit * (Budgeted Production Actual Production) = Rs.50 * (2000 1500) Check: Fixed Overhead Variance = Expenditure + Volume 25000 A 45000 A 20000 A

The volume variance can be analysed now into sub-variances, viz., capacity & efficiency. (d) Fixed Overhead Capacity Variances: Standard Rate per unit * (Budgeted Production Standard Production) = Rs. 50 * (2000 1800) 10000 A

(e) Fixed Overhead Efficiency Variance: Standard Rate per unit * (Standard Production Actual Production) = Rs. 50 * (1800 1500) 15000 A