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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).
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The direct material total variance is the difference between what the output actually cost and what it should have cost, in terms of material.
From the example above the material total variance is given by:
| $ | |
| 1,000 units should have cost (x $50) | 50,000 |
| But did cost | 46,075 |
| Direct material total variance | 3, 925 (F) |
It can be divided into two sub-variances
The direct material price variance
This is the difference between what the actual quantity of material used did cost and what it should have cost.
| $ | |
| 4,850 kgs should have cost (x $10) | 48,500 |
| But did cost | 46,075 |
| Direct material price variance | 2,425 (F) |
The direct material usage variance
This is the difference between how much material should have been used for the number of units actually produced and how much material was used, valued at standard cost
| 1,000 units should have used (x 5 kgs) | 5,000 kgs |
| But did use | 4,850 kgs |
| Variance in kgs | 150 kgs (F) |
| Valued at standard cost per kg | x $10 |
| Direct material usage variance in $ | $1,500 (F) |
The direct material price variance is calculated on material purchases in the period if closing stocks of raw materials are valued at standard cost or material used if closing stocks of raw materials are valued at actual cost (FIFO).
The direct labour total variance is the difference between what the output should have cost and what it did cost, in terms of labour.
| $ | |
| 1,000 units should have cost (x $20) | 20,000 |
| But did cost | 21,210 |
| Direct material price variance | 1,210 (A) |
This is the difference between what the actual number of hours worked should have cost and what it did cost.
| 4200hrs should have cost (4200hrs x $5) | $21000 |
| But did cost | $21210 |
| Direct labour rate variance | $210(A) |
The direct labour efficiency variance
The is the difference between how many hours should have been worked for the number of units actually produced and how many hours were worked, valued at the standard rate per hour.
| $ | |
| 1,000 units should have taken (x 4 hrs) | 4,000 hrs |
| But did take | 4,200 hrs |
| Variance in hrs | 200 hrs |
| Valued at standard rate per hour | x $5 |
| Direct labour efficiency variance | $1,000 (A) |
When idle time occurs the efficiency variance is based on hours actually worked (not hours paid for) and an idle time variance (hours of idle time x standard rate per hour) is calculated.
2. Variable production overhead total variances
The variable production overhead total variance is the difference between what the output should have cost and what it did cost, in terms of variable production overhead.
| $ | |
| 1,000 units should have cost (x $8) | 8,000 |
| But did cost | 9,450 |
| Variable production o/hd expenditure variance | 1,450 (A) |
The variable production overhead expenditure variance
This is the difference between what the variable production overhead did cost and what it should have cost
| $ | |
| 4,200 hrs should have cost (x $2) | 8,400 |
| But did cost | 9,450 |
| Variable production o/hd expenditure variance | 1,050 (A) |
The variable production overhead efficiency variance
This is the same as the direct labour efficiency variance in hours, valued at the variable production overhead rate per hour.
| Labour efficiency variance in hours | 200 hrs (A) |
| Valued @ standard rate per hour | x $2 |
| Variable production o/hd efficiency variance | $400 (A) |
3. Fixed production overhead variances
The total fixed production variance is an attempt to explain the under- or over-absorbed fixed production overhead.
| Remember that overhead absorption rate = | Budgeted fixed production overhead |
| Budgeted level of activity |
If either the numerator or the denominator or both are incorrect then we will have under- or over-absorbed production overhead.
4. The fixed production overhead variances are calculated as follows:
Fixed production overhead variance
This is the difference between fixed production overhead incurred and fixed production overhead absorbed (= the under- or over-absorbed fixed production overhead)
| $ | |
| Overhead incurred | 25,000 |
| Overhead absorbed (1,000 units x $24) | 24,000 |
| Overhead variance | 1,000 (A) |
Fixed production overhead expenditure variance
This is the difference between the budgeted fixed production overhead expenditure and actual fixed production overhead expenditure
| $ | |
| Budgeted overhead (1,200 x $24) | 28,800 |
| Actual overhead | 25,000 |
| Expenditure variance | 3,800 (F) |
Fixed production overhead volume variance
This is the difference between actual and budgeted production volume multiplied by the standard absorption rate per unit.
| $ | |
| Actual production at std rate (1,000 x $24) | 24,000 |
| Budgeted production at std rate (1,200 x $24) | 28,800 |
| 4,800 (A) |
Fixed production overhead volume efficiency variance
This is the difference between the number of hours that actual production should have taken, and the number of hours actually worked (usually the labour efficiency variance), multiplied by the standard absorption rate per hour.
| Labour efficiency variance in hours | 200 hrs (A) |
| Valued @ standard rate per hour | x $6 |
| Volume efficiency variance | $1,200 (A) |
Fixed production overhead volume capacity variance
This is the difference between budgeted hours of work and the actual hours worked, multiplied by the standard absorption rate per hour
| Budgeted hours (1,200 x 4) | 4,800 hrs |
| Actual hours | 4,200 hrs |
| Variance in hrs | 600 hrs (A) |
| x standard rate per hour | x $6 |
| $3,600 (A) |
| KEY.
The fixed overhead volume capacity variance is unlike the other variances in that an excess of actual hours over budgeted hours results in a favourable variance and not an adverse variance as it does when considering labour efficiency, variable overhead efficiency and fixed overhead volume efficiency. Working more hours than budgeted produces an over absorption of fixed overheads, which is a favourable variance.
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| Sales variances |
The selling price variance is a measure of the effect on expected profit of a different selling price to standard selling price. It is calculated as the difference between what the sales revenue should have been for the actual quantity sold, and what it was.
| $ | |
| Revenue from 900 units should have been (x $150) | 135,000 |
| But was (x $140) | 126,000 |
| Selling price variance | 9,000 (A) |
The sales volume variance is the difference between the actual units sold and the budgeted quantity, valued at the standard profit per unit. In other words it measures the increase or decrease in standard profit as a result of the sales volume being higher or lower than budgeted.
| Budgeted sales volume | 1,000 units |
| Actual sales volume | 900 units |
| Variance in units | 100 units (A) |
| x standard margin per unit (x $ (150 – 102) ) | x $48 |
| Sales volume variance | $4,800 (A) |
| KEY.
Don’t forget to value the sales volume variance at standard contribution marginal costing is in use.
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| Operating statements |
The most common presentation of the reconciliation between budgeted and actual profit is as follows.
$ $
Budgeted profit before sales and admin costs X
Sales variances - price X
- volume X
X
Actual sales minus standard cost of sales X
Cost variances $ $
(F) (A)
Material price X
Material usage etc __ X
X X X
Sales and administration costs X
Actual profit X
Variances in a standard marginal costing system
Material price
The cause of one (adverse) variance may be wholly or partly explained by the cause of another (favourable) variance.
The decision as to whether or not a variance is so significant that it should be investigated should take a number of factors into account.
The materials usage variance can be subdivided into a materials mix variance and a materials yield variance if the proportion of materials in a mix is changeable and controllable.
The mix variance indicates the effect on costs of changing the mix of material inputs.
The yield variance indicates the effect on costs of material inputs yielding more or less than expected.
Standard input to produce 1 unit of product X:
| $ | ||
| Material A | 20 kgs x $10 | 200 |
| Material B | 30 kgs x $5 | 150 |
| 350 |
In period 3, 13 units of product X were produced from 250 kgs of material A and 350 kgs of material B.
Solution 1: individual prices per kg as variance valuation cases
Mix Variance
Kgs
Standard mix of actual use: A: 2/5 x (250+350) 240
B: 3/5 x (250+350) 360
600
===
A B
Mix should have been 240 kgs 360 kgs
But was 250 kgs 350 kgs
Mix variance in kgs 10 kgs (A) 10 kgs (F)
x standard cost per kg x $10 x $5
Mix variance in $ $100 (A) $50 (F)
===== ===
50 (A)
Total mix variance in quantity is always zero.
Yield variance
A B 13 units of product X should have used 260 kgs 390 kgs but actual input in standard mix was 240 kgs 360 kgs Yield variance in kgs 20 kgs (F) 30 kgs (F) x standard cost per kg x $10 x $5 $200 (F) $150 (F) ===== ===== $350 (F) ====
Solution 2: budgeted weighted average price per unit of input as variance valuation base.
Therefore, Budgeted weighted average price =$350/50 = $7 per kg
• Mix variance A B 13 units of product X should have used 260 kgs 390 kgs but did use 250 kgs 350 kgs Usage variance in kgs 10 kgs (F) 40 kgs (F) x individual price per kg – budgeted weighted average price per kg $ (10 – 7) x $3 $ (5 – 7) ____ x ($2) $30 (F) $80 (A) === === $50 (A) === • Yield variance A B Usage variance in kgs 10 kg (F) 40 kg (F) x budgeted weighted average Price per kg x $7 x $7 $70 (F) $ 280 (F) === ==== $350 (F) ====
10. Sales mix and quantity variances
The sales volume variance can be subdivided into a mix variance if the proportions of products sold are controllable.
This variance indicates the effect on profit of changing the mix of actual sales from the standard mix.
It can be calculated in one of two ways.
This variance indicates the effect on profit of selling a different total quantity from the budgeted total quantity.
It can be calculated in one of two ways.
| KEY.
With all variance calculations, from the most basic (such as variable cost variances) to the more complex (such as mix and yield / mix and quantity variances), it is vital that you do not simply learn formulae. You must understand what your calculations are supposed are supposed to show.
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VARIANCES ANALYSIS PRACTICE QUESTIONS
Question 1
Standard Cost for Product RBT
| £ | |
| Materials (10kg x £8 per kg) | 80 |
| Labour (5hrs x £6 per hr) ¬ | 30 |
| Variable O/Hds (5hrs x £8 per hr) | 40 |
| Fixed O/Hds (5hrs x £9 per hr) | 45 |
| 195 |
| Budgeted Results | |
| Production | 10000 units |
| Sales | 7500 units |
| Selling Price | £300 per unit |
| Actual Results | |
| Production | 8000 units |
| Sales | 6000 units |
| Materials | 85000 kg Cost £700000 |
| Labour | 36000 hrs Cost £330900 |
| Variable O/Hds | £400000 |
| Fixed O/Hds | £500000 |
| Selling Price | £260 per unit |
Calculate
| Standard Cost for Product TUH | |
| £ | |
| Materials (10kg x £8 per kg) | 80 |
| Labour (5hrs x £6 per hr) ¬ | 30 |
| Variable O/Hds (5hrs x £8 per hr) | 40 |
| Fixed O/Hds (5hrs x £9 per hr) | 45 |
| 195 |
| Budgeted Results | |
| Production | 11000 units |
| Sales | 7500 units |
| Selling Price | £300 per unit |
| Actual Results | |
| Production | 9000 units |
| Sales | 7000 units |
| Materials | 85000 kg Cost £700000 |
| Labour | 36000 hrs Cost £330900 |
| Variable O/Hds | £410000 |
| Fixed O/Hds | £520000 |
| Selling Price | £260 per unit |
Calculate
| Standard Cost for Product TD | |
| £ | |
| Materials (10kg x £5 per kg) | 50 |
| Labour (5hrs x £6 per hr) ¬ | 30 |
| Variable O/Hds (5hrs x £8 per hr) | 40 |
| Fixed O/Hds (5hrs x £9 per hr) | 45 |
| 165 |
| Budgeted Results | |
| Production | 8000 units |
| Sales | 7500 units |
| Selling Price | £300 per unit |
| Actual Results | |
| Production | 11000 units |
| Sales | 10000 units |
| Materials | 85000 kg Cost £700000 |
| Labour | 36000 hrs Cost £330900 |
| Variable O/Hds | £400000 |
| Fixed O/Hds | £500000 |
| Selling Price | £320 per unit |
Calculate
| Standard Cost for Product WXYZ | |
| £ | |
| Materials (4kg x £8 per kg) | 32 |
| Labour (5hrs x £10 per hr) ¬ | 50 |
| Variable O/Hds (5hrs x £8 per hr) | 40 |
| Fixed O/Hds (5hrs x £6 per hr) | 30 |
| 152 |
| Budgeted Results | |
| Production | 10000 units |
| Sales | 7500 units |
| Selling Price | £300 per unit |
| Actual Results | |
| Production | 8000 units |
| Sales | 6000 units |
| Materials | 85000 kg Cost £700000 |
| Labour | 36000 hrs Cost £330900 |
| Variable O/Hds | £400000 |
| Fixed O/Hds | £500000 |
| Selling Price | £260 per unit |
Calculate
| Standard Cost for Product RTY | |
| £ | |
| Materials (10kg x £8 per kg) | 80 |
| Labour (5hrs x £6 per hr) ¬ | 30 |
| Variable O/Hds (5hrs x £8 per hr) | 40 |
| Fixed O/Hds (5hrs x £9 per hr) | 45 |
| 195 |
| Budgeted Results | |
| Production | 13000 units |
| Sales | 10000 units |
| Selling Price | £300 per unit |
| Actual Results | |
| Production | 12000 units |
| Sales | 9000 units |
| Materials | 90000 kg Cost £750000 |
| Labour | 40000 hrs Cost £350000 |
| Variable O/Hds | £500000 |
| Fixed O/Hds | £600000 |
| Selling Price | £350 per unit |
Calculate
| Standard Cost for Product RED | |
| £ | |
| Materials (10kg x £7 per kg) | 70 |
| Labour (5hrs x £6 per hr) ¬ | 30 |
| Variable O/Hds (5hrs x £8 per hr) | 40 |
| Fixed O/Hds (5hrs x £9 per hr) | 45 |
| 185 |
| Budgeted Results | |
| Production | 10500 units |
| Sales | 7800 units |
| Selling Price | £310 per unit |
| Actual Results | |
| Production | 8500 units |
| Sales | 6200 units |
| Materials | 87000 kg Cost £700000 |
| Labour | 36000 hrs Cost £330900 |
| Variable O/Hds | £400000 |
| Fixed O/Hds | £550000 |
| Selling Price | £270 per unit |
Calculate
| Standard Cost for Product BUZZ | |
| £ | |
| Materials (3kg x £8 per kg) | 24 |
| Labour (5hrs x £10 per hr) ¬ | 50 |
| Variable O/Hds (5hrs x £9 per hr) | 45 |
| Fixed O/Hds (5hrs x £10 per hr) | 50 |
| 169 |
| Budgeted Results | |
| Production | 10000 units |
| Sales | 7500 units |
| Selling Price | £300 per unit |
| Actual Results | |
| Production | 8000 units |
| Sales | 6000 units |
| Materials | 85000 kg Cost £700000 |
| Labour | 36000 hrs Cost £330900 |
| Variable O/Hds | £400000 |
| Fixed O/Hds | £500000 |
| Selling Price | £260 per unit |
Calculate
| Standard Cost for Product RST | |
| £ | |
| Materials (10kg x £20per kg) | 200 |
| Labour (5hrs x £16 per hr) ¬ | 80 |
| Variable O/Hds (5hrs x £8 per hr) | 40 |
| Fixed O/Hds (5hrs x £9 per hr) | 45 |
| 365 |
| Budgeted Results | |
| Production | 1000 units |
| Sales | 7500 units |
| Selling Price | £800 per unit |
| Actual Results | |
| Production | 8000 units |
| Sales | 6000 units |
| Materials | 85000 kg Cost £700000 |
| Labour | 36000 hrs Cost £330900 |
| Variable O/Hds | £400000 |
| Fixed O/Hds | £500000 |
| Selling Price | £260 per unit |
Calculate
| Standard Cost for Product FGT | |
| £ | |
| Materials (10kg x £8 per kg) | 80 |
| Labour (5hrs x £6 per hr) ¬ | 30 |
| Variable O/Hds (5hrs x £8 per hr) | 40 |
| Fixed O/Hds (5hrs x £9 per hr) | 45 |
| 195 |
| Budgeted Results | |
| Production | 10000 units |
| Sales | 7500 units |
| Selling Price | £300 per unit |
| Actual Results | |
| Production | 13000 units |
| Sales | 6000 units |
| Materials | 85000 kg Cost £700000 |
| Labour | 36000 hrs Cost £330900 |
| Variable O/Hds | £400000 |
| Fixed O/Hds | £500000 |
| Selling Price | £260 per unit |
Calculate
| Standard Cost for Product White Diamond | |
| £ | |
| Materials (7kg x £9 per kg) | 63 |
| Labour (6hrs x £9 per hr) ¬ | 54 |
| Variable O/Hds (6hrs x £6 per hr) | 36 |
| Fixed O/Hds (6hrs x £7 per hr) | 42 |
| 195 |
| Budgeted Results | |
| Production | 12500 units |
| Sales | 8500 units |
| Selling Price | £500 per unit |
| Actual Results | |
| Production | 15000 units |
| Sales | 8000 units |
| Materials | 8750 kg Cost £85000 |
| Labour | 5200hrs Cost £52900 |
| Variable O/Hds | £25500 |
| Fixed O/Hds | £84000 |
| Selling Price | £600 per unit |
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