Variance Analysis

11

Variance AnalysisVariance Analysis

22

Material Cost VariancesMaterial Cost Variances

Material Cost Variance (MCV) is the difference Material Cost Variance (MCV) is the difference between The Total Standard Material Costs between The Total Standard Material Costs (TSMC) and The Total Actual Material (TSMC) and The Total Actual Material Cost(TAMC).Cost(TAMC).

MCV = (SQ x SP x AO) – (AQ x AP x AO)MCV = (SQ x SP x AO) – (AQ x AP x AO)MCV = TSMC – TAMCMCV = TSMC – TAMC

SQ = Standard Quantity of Usage per unitSQ = Standard Quantity of Usage per unit

SP = Standard Price of Material per unitSP = Standard Price of Material per unitAO = Actual OutputAO = Actual OutputAQ = Actual Quantity of Usage per unitAQ = Actual Quantity of Usage per unitAP = Actual Price of Material per unitAP = Actual Price of Material per unit

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Material CostsMaterial Costs StandardsStandards ActualsActuals

Material Usage per Unit (kg)Material Usage per Unit (kg) 22 2.22.2

Price per Unit (kg) in Rs.Price per Unit (kg) in Rs. 1414 1515

Actual Units ProducedActual Units Produced 100100

MCV = (SQ x SP x AO)-(AQ x AP x AO)MCV = (SQ x SP x AO)-(AQ x AP x AO)

MCV = (2 x 14 x 100) – (2.2 x 15 x 100)MCV = (2 x 14 x 100) – (2.2 x 15 x 100)

MCV = Rs.2800 – Rs. 3300 = - Rs.500MCV = Rs.2800 – Rs. 3300 = - Rs.500

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Material Cost Variance is due to Material Price Material Cost Variance is due to Material Price Variance (MPV) & Material Usage Quantity Variance (MPV) & Material Usage Quantity Variance (MUV)Variance (MUV)

MCV = MPV + MQVMCV = MPV + MQV

MPV = (SP – AP) x AQ x AOMPV = (SP – AP) x AQ x AO

= (14 – 15) x 2.2 x 100 = - Rs.220= (14 – 15) x 2.2 x 100 = - Rs.220

MUV = (SQ – AQ) x MUV = (SQ – AQ) x SPSP x AO x AO

= (2 – 2.2) x 14 x 100 = - Rs.280 = (2 – 2.2) x 14 x 100 = - Rs.280

MCV = - 220 + ( - ) 280 = - Rs.500MCV = - 220 + ( - ) 280 = - Rs.500

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Material Usage VarianceMaterial Usage Variance

The Material Usage Variance could (only if The Material Usage Variance could (only if required) be further analyzed into Material required) be further analyzed into Material Mix Sub Variance (MMSV) & Material Mix Sub Variance (MMSV) & Material Yield Sub Variance (MYSV).Yield Sub Variance (MYSV).

MUV = MMSV + MYSVMUV = MMSV + MYSVMaterial Mix Sub Variance is useful when Material Mix Sub Variance is useful when

there is a possibility of changing the mix of there is a possibility of changing the mix of various materials used in the production of various materials used in the production of the final unit.the final unit.

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Material Mix Sub Variance v/s Material Mix Sub Variance v/s Material Yield Sub VarianceMaterial Yield Sub Variance

MMSV = MMSV = (Standard Mix of Actual Total Quantity of Materials (Standard Mix of Actual Total Quantity of Materials

Used – Actual Mix of Actual Quantity Used ) x Used – Actual Mix of Actual Quantity Used ) x Standard Price of each Material.Standard Price of each Material.

The Std mix to make 1 drum of 100 Kg sauce isThe Std mix to make 1 drum of 100 Kg sauce is50 Kg Mat. X @ 2.00 + 30 Kg Mat. Y @ 3.00 +50 Kg Mat. X @ 2.00 + 30 Kg Mat. Y @ 3.00 +20 Kg Mat. Z @ 4.0020 Kg Mat. Z @ 4.00

The Act. input used to make 1 drum of 100 Kg The Act. input used to make 1 drum of 100 Kg sauce is:sauce is:60 Kg Mat. X + 40 Kg Mat. Y + 10 Kg Mat. Z.60 Kg Mat. X + 40 Kg Mat. Y + 10 Kg Mat. Z.

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Material Mix Sub VarianceMaterial Mix Sub Variance

1.1. Std Mix is 50 : 30 : 20 for 1 drum of 100 Kgs Std Mix is 50 : 30 : 20 for 1 drum of 100 Kgs I.e. 5:3:2I.e. 5:3:2

2.2. Actual Input Quantity is 110 Kgs. So Standard Actual Input Quantity is 110 Kgs. So Standard Mix for Actual Input Quantity should have beenMix for Actual Input Quantity should have been

55:33:2255:33:22

3.3. MMSV =MMSV =1.1. Mat.X = (55 – 60) x 2 = - Rs.10Mat.X = (55 – 60) x 2 = - Rs.102.2. Mat.Y = (33 – 40) x 3 = - Rs.21Mat.Y = (33 – 40) x 3 = - Rs.213.3. Mat.Z = (22 – 10) x 4 = + Rs.48 Mat.Z = (22 – 10) x 4 = + Rs.48 Net MMSV = - Rs.10 – Rs.21 + Rs.48 = + Rs.17Net MMSV = - Rs.10 – Rs.21 + Rs.48 = + Rs.17

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Material Yield Sub VarianceMaterial Yield Sub Variance

The MUV in this Case isThe MUV in this Case isMUV = (SQ – AQ) x SP x AOMUV = (SQ – AQ) x SP x AO

Here AO = 1 as we are considering only One drum of Here AO = 1 as we are considering only One drum of saucesauce

MUV = for Mat.X (50 – 60) x 2 x 1 = - Rs.20MUV = for Mat.X (50 – 60) x 2 x 1 = - Rs.20+ for Mat.Y (30 – 40) x 3 x 1 = - Rs.30+ for Mat.Y (30 – 40) x 3 x 1 = - Rs.30+ for Mat.Z (20 – 10) x 4 x 1 = + Rs.40+ for Mat.Z (20 – 10) x 4 x 1 = + Rs.40

MUV = - Rs.10MUV = - Rs.10MUV = MMSV + MYSV.MUV = MMSV + MYSV. - 10 = + 17 + MYSV i.e. MYSV = - Rs.27- 10 = + 17 + MYSV i.e. MYSV = - Rs.27

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MaterialsMaterials Std. Std. QuantityQuantity

(A)(A)

Actual Actual QuantityQuantity

(B)(B)

Standard Standard PricePrice

( C)( C)

Total Total Std. Cost Std. Cost (AxC)(AxC)

Mat.XMat.X 5050 6060 22 100100

Mat.YMat.Y 3030 4040 33 9090

Mat.ZMat.Z 2020 1010 44 8080

TotalTotal 100100 110110 2.702.70 270270

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The Weighted Average Standard Price of The Weighted Average Standard Price of Material is Rs 2.70 & Standard Quantity is Material is Rs 2.70 & Standard Quantity is 100 Kgs.100 Kgs.

MYSV = (SQ – AQ) x SP (wtd Avg.)MYSV = (SQ – AQ) x SP (wtd Avg.)

= (100 – 110) x 2.70= (100 – 110) x 2.70

= - Rs.27= - Rs.27

MUV = MMSV + MYSVMUV = MMSV + MYSV

- 10 = +17 + ( -) 27- 10 = +17 + ( -) 27

1111

Labor Cost VarianceLabor Cost Variance

Labor Cost Variance (LCV) is the difference Labor Cost Variance (LCV) is the difference between The Total Standard Labor Costs between The Total Standard Labor Costs (TSLC) and The Total Actual Labor Cost (TSLC) and The Total Actual Labor Cost (TALC).(TALC).

LCV = (SH x SR x AO) – (AH x AR x AO)LCV = (SH x SR x AO) – (AH x AR x AO)LCV = TSLC – TALCLCV = TSLC – TALC

SH = Standard Labor hours per unitSH = Standard Labor hours per unit

SR = Standard Rate of Labor per hourSR = Standard Rate of Labor per hourAO = Actual OutputAO = Actual OutputAH = Actual Labor hours per unitAH = Actual Labor hours per unitAR = Actual Rate of Labor per hourAR = Actual Rate of Labor per hour

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Labor Cost VarianceLabor Cost Variance

Labor CostsLabor Costs StandardsStandards ActualActual

Labor Hours Usage per UnitLabor Hours Usage per Unit 22 2.22.2

Labor Rate per HourLabor Rate per Hour 1414 1515

Actual Units ProducedActual Units Produced 100100

LCV = (SH x SR x AO)-(AH x AR x AO)LCV = (SH x SR x AO)-(AH x AR x AO)

LCV = (2 x 14 x 100) – (2.2 x 15 x 100)LCV = (2 x 14 x 100) – (2.2 x 15 x 100)

LCV = Rs.2800 – Rs. 3300 = - Rs.500LCV = Rs.2800 – Rs. 3300 = - Rs.500

Same Example

as for MCV to

show that the

treatment is

similar

1313

Labor Cost VariancesLabor Cost Variances

Labor Cost Variance is due to Labor Rate Labor Cost Variance is due to Labor Rate Variance (LRV) & Labor Efficiency Variance Variance (LRV) & Labor Efficiency Variance (LEV)(LEV)

LCV = LRV + LEVLCV = LRV + LEV

LRV = (SR – AR) x AH x AOLRV = (SR – AR) x AH x AO

= (14 – 15) x 2.2 x 100 = - Rs.220= (14 – 15) x 2.2 x 100 = - Rs.220

LEV = (SH – AH) x LEV = (SH – AH) x SRSR x AO x AO

= (2 – 2.2) x 14 x 100 = - Rs.280 = (2 – 2.2) x 14 x 100 = - Rs.280

LCV = - 220 + ( - ) 280 = - Rs.500LCV = - 220 + ( - ) 280 = - Rs.500

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Labor Efficiency VarianceLabor Efficiency Variance

The Labor Efficiency Variance could (only if The Labor Efficiency Variance could (only if required) be further analyzed into Labor required) be further analyzed into Labor Mix Sub Variance (LMSV) & Labor Yield Mix Sub Variance (LMSV) & Labor Yield Sub Variance (LYSV).Sub Variance (LYSV).

LEV = LMSV + LYSVLEV = LMSV + LYSVLabor Mix Sub Variance is useful when Labor Mix Sub Variance is useful when

there is a possibility of changing the mix of there is a possibility of changing the mix of various class of laborers used in the various class of laborers used in the production of the final unit.production of the final unit.

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Labor Mix Sub Variance v/s Labor Mix Sub Variance v/s Labor Yield Sub VarianceLabor Yield Sub Variance

LMSV = LMSV = (Standard Mix of Actual Labor Hours Worked – (Standard Mix of Actual Labor Hours Worked –

Actual Mix of Actual Labor hours worked) x Actual Mix of Actual Labor hours worked) x Standard Rate of each Class of Laborers.Standard Rate of each Class of Laborers.

The Std Labor mix to make 1 drum of 100 Kg sauce The Std Labor mix to make 1 drum of 100 Kg sauce isis50 Hrs Lbr X @ 2.00 + 30 Hrs Lbr Y @ 3.00 +50 Hrs Lbr X @ 2.00 + 30 Hrs Lbr Y @ 3.00 +20 Hrs Lbr Z @ 4.0020 Hrs Lbr Z @ 4.00

The Act. Labor used to make 1 drum of 100 Kg The Act. Labor used to make 1 drum of 100 Kg sauce is:sauce is:

60 Hr of Lbr X + 40 Hrs of Lbr Y + 10 Hrs of Lbr Z.60 Hr of Lbr X + 40 Hrs of Lbr Y + 10 Hrs of Lbr Z.

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Labor Mix Sub VarianceLabor Mix Sub Variance

1.1. Std Lbr Mix is 50 : 30 : 20 for 1 drum of 100 Std Lbr Mix is 50 : 30 : 20 for 1 drum of 100 Kgs Kgs i.e. 5:3:2i.e. 5:3:2

2.2. Actual Labor hours worked is 110 hours. So Actual Labor hours worked is 110 hours. So Standard Lbr Mix for Actual Labor hours Standard Lbr Mix for Actual Labor hours worked should have beenworked should have been

55:33:2255:33:22

3.3. LMSV =LMSV =1.1. Lbr X = (55 – 60) x 2 = - Rs.10Lbr X = (55 – 60) x 2 = - Rs.102.2. Lbr Y = (33 – 40) x 3 = - Rs.21Lbr Y = (33 – 40) x 3 = - Rs.213.3. Lbr Z = (22 – 10) x 4 = + Rs.48 Lbr Z = (22 – 10) x 4 = + Rs.48 Net LMSV = - Rs.10 – Rs.21 + Rs.48 = + Rs.17Net LMSV = - Rs.10 – Rs.21 + Rs.48 = + Rs.17

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Labor Yield Sub VarianceLabor Yield Sub Variance

The LEV in this Case isThe LEV in this Case isLEV = (SH – AH) x LEV = (SH – AH) x SRSR x AO x AO

Here AO = 1 as we are considering only One drum of Here AO = 1 as we are considering only One drum of saucesauce

LEV = for Lbr X (50 – 60) x 2 x 1 = - Rs.20LEV = for Lbr X (50 – 60) x 2 x 1 = - Rs.20+ for Lbr.Y (30 – 40) x 3 x 1 = - Rs.30+ for Lbr.Y (30 – 40) x 3 x 1 = - Rs.30+ for Lbr.Z (20 – 10) x 4 x 1 = + Rs.40+ for Lbr.Z (20 – 10) x 4 x 1 = + Rs.40

LEV = - Rs.10LEV = - Rs.10LEV = LMSV + LYSV.LEV = LMSV + LYSV. - 10 = + 17 + LYSV i.e. LYSV = - Rs.27- 10 = + 17 + LYSV i.e. LYSV = - Rs.27

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LaborersLaborers Std. Std. Hours to Hours to be be WorkedWorked

(A)(A)

Actual Actual Hours Hours WorkedWorked

(B)(B)

Standard Standard Rate per Rate per Labor Labor HourHour

( C)( C)

Total Total Std. Std. Labor Labor Cost Cost (AxC)(AxC)

Lbr XLbr X 5050 6060 22 100100

Lbr YLbr Y 3030 4040 33 9090

Lbr ZLbr Z 2020 1010 44 8080

TotalTotal 100100 110110 2.702.70 270270

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The Weighted Average Standard Rate of The Weighted Average Standard Rate of Laborers is Rs 2.70 per hour & Standard Laborers is Rs 2.70 per hour & Standard Labor Hours to be worked is 100 Kgs.Labor Hours to be worked is 100 Kgs.

LYSV = (SH – AH) x SR (wtd Avg.)LYSV = (SH – AH) x SR (wtd Avg.)

= (100 – 110) x 2.70= (100 – 110) x 2.70

= - Rs.27= - Rs.27

LEV = LMSV + LYSVLEV = LMSV + LYSV

- 10 = +17 + ( -) 27- 10 = +17 + ( -) 27

2020

Variable Overhead Variable Overhead Cost VariancesCost Variances

The Variable Overhead Cost Variances The Variable Overhead Cost Variances (VOCV) is similar in treatment to the (VOCV) is similar in treatment to the Material & Labor Cost Variances.Material & Labor Cost Variances.

It is the difference between the Standard It is the difference between the Standard Variable Overhead Costs from the Actual Variable Overhead Costs from the Actual Variable Overhead Costs.Variable Overhead Costs.

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VOCV = (SVOC – AVOC ) x AOVOCV = (SVOC – AVOC ) x AO

VOCV = TSVOC – TAVOCVOCV = TSVOC – TAVOC

VOCV = VOEV + VOSVVOCV = VOEV + VOSV

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WhereWhere

SVOC = Standard Variable Overhead Costs per UnitSVOC = Standard Variable Overhead Costs per Unit

AVOC = Actual Variable Overhead Costs per UnitAVOC = Actual Variable Overhead Costs per Unit

TSVOC = Total Standard Variable Overhead Costs TSVOC = Total Standard Variable Overhead Costs

TAVOC = Total Actual Variable Overhead CostsTAVOC = Total Actual Variable Overhead Costs

VOEV = Variable Overhead Efficiency VarianceVOEV = Variable Overhead Efficiency Variance

VOSV = Variable Overhead Spending VarianceVOSV = Variable Overhead Spending Variance

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Std Labor Hours allowed: Rs.2 per unitStd Labor Hours allowed: Rs.2 per unit Std Variable Costs allowed: Rs.3 per Std Variable Costs allowed: Rs.3 per

direct labor hourdirect labor hour Actual Production: 80 unitsActual Production: 80 units Actual Direct Labor Hours: 165 unitsActual Direct Labor Hours: 165 units Actual Overheads incurred: Rs.518Actual Overheads incurred: Rs.518

Determine the VOCV ; VOEV & VOSVDetermine the VOCV ; VOEV & VOSV

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VOCV = (Standard Variable Overhead Costs– VOCV = (Standard Variable Overhead Costs– Actual Variable Overhead Costs incurred.Actual Variable Overhead Costs incurred.

Standard Variable Overhead Costs = (Standard Standard Variable Overhead Costs = (Standard Labor Hours per Unit x Standard Variable Costs Labor Hours per Unit x Standard Variable Costs allowed per labor hour x Actual Output) allowed per labor hour x Actual Output)

Please note that here we have taken labor hours Please note that here we have taken labor hours only because the cost factor used to allocate the only because the cost factor used to allocate the variable overheads is labor hours !! Please use variable overheads is labor hours !! Please use the relevant cost factor for each type of variable the relevant cost factor for each type of variable overheadoverhead

VOCV = (2 x 3 x 80) – 518 = - Rs.38VOCV = (2 x 3 x 80) – 518 = - Rs.38

2525


The Variable Overhead Cost Variance could The Variable Overhead Cost Variance could be due to Efficiency or Spending be due to Efficiency or Spending Variances ( Similar to Material / Labor Variances ( Similar to Material / Labor Variances.)Variances.)

VOEV = VOEV = {(Std. Labor Hours per Unit x Actual Output) {(Std. Labor Hours per Unit x Actual Output)

– Actual Hours } x Std. Variable Overhead – Actual Hours } x Std. Variable Overhead Rate.Rate.

{ ( 2 x 80) – 165 } x 3 = - Rs.15{ ( 2 x 80) – 165 } x 3 = - Rs.15

2626


VOSV = (Actual Labor Hours Worked x VOSV = (Actual Labor Hours Worked x Std. Variable Overhead Rate per hour) –Std. Variable Overhead Rate per hour) –

Actual Variable Overhead costsActual Variable Overhead costs

VOSV = ( 165 x 3 ) – Rs.518/- = Rs 23VOSV = ( 165 x 3 ) – Rs.518/- = Rs 23

Thus VOCV = VOEV + VOSVThus VOCV = VOEV + VOSV

Rs.38 = Rs.15 + Rs.23Rs.38 = Rs.15 + Rs.23

2727

Fixed Overhead Fixed Overhead Cost VariancesCost Variances

Fixed Overheads do not vary with volume of production.Fixed Overheads do not vary with volume of production. They are allocated at a predetermined standard fixed They are allocated at a predetermined standard fixed

overhead rate. (SFOR)overhead rate. (SFOR) SFOR = SFOR = Budgeted Fixed OverheadBudgeted Fixed Overhead

Budgeted Volume of ActivityBudgeted Volume of Activity Fixed Overhead Cost Variance (FOCV)Fixed Overhead Cost Variance (FOCV)

= Total Actual Fixed Overhead Costs (TAFOC) – (SFOR = Total Actual Fixed Overhead Costs (TAFOC) – (SFOR per hour x Std Hours per Unit (SH) x Actual Output (AO))per hour x Std Hours per Unit (SH) x Actual Output (AO))

FOCV = FOSV + FOEV + Volume VarianceFOCV = FOSV + FOEV + Volume VarianceFOSV = Fixed Overhead Spending Variance FOSV = Fixed Overhead Spending Variance FOEV = Fixed Overhead Efficiency VarianceFOEV = Fixed Overhead Efficiency Variance

2828


Actual Fixed O/heads = Rs.530/-Actual Fixed O/heads = Rs.530/- Budgeted Fixed O/heads = Rs.500/-Budgeted Fixed O/heads = Rs.500/- Budgeted Level of Activity = 100 units or Budgeted Level of Activity = 100 units or

200 Labor Hours200 Labor Hours Std. Labour Hours allowed per unit = 2 Std. Labour Hours allowed per unit = 2

hours per unithours per unit Actual Production = 90 unitsActual Production = 90 units Actual Labor Hours = 190 hours.Actual Labor Hours = 190 hours.

2929


FOCV = FOCV = Rs.530 – (Rs.500 /(2 x 100)units x 2x 90 units) = Rs.530 Rs.530 – (Rs.500 /(2 x 100)units x 2x 90 units) = Rs.530

– (500/200) x 2x90 = Rs.80 (unfavorable)– (500/200) x 2x90 = Rs.80 (unfavorable) FOSV = Total Actual Overheads – Total Budgeted FOSV = Total Actual Overheads – Total Budgeted

Overheads = Rs.530 – Rs.500 = Rs.30Overheads = Rs.530 – Rs.500 = Rs.30 FOEV = FOEV =

[(Std. Hrs per Unit x AO) – Actual Hrs Wrkd] x SFOR[(Std. Hrs per Unit x AO) – Actual Hrs Wrkd] x SFOR= [(2 x 90) – 190] x 500 / (2x100) = - Rs.25= [(2 x 90) – 190] x 500 / (2x100) = - Rs.25

Volume Variance = (Bud.Volume - Actual Volume) x Volume Variance = (Bud.Volume - Actual Volume) x SFORSFOR= 100 units – 90 units x (500/(2x100)) =10x2.5=Rs.25.= 100 units – 90 units x (500/(2x100)) =10x2.5=Rs.25.

FOCV (Rs.80) = FOSV (Rs.30) + FOEV (Rs.25) + Vol. FOCV (Rs.80) = FOSV (Rs.30) + FOEV (Rs.25) + Vol. Variance (Rs.25)Variance (Rs.25)

Business

Variance Analysis