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Prepared byDiane TannerUniversity of North Florida
Variance Analysis
Chapter 7
Variance Analysis Often performed separately for each of
the four manufacturing costs Direct labor variances Direct materials variances Variable manufacturing overhead variances Fixed manufacturing overhead variances
actual cost > standardUnfavorable Variance
actual cost < standardFavorable Variance
Are all favorable variances good?
Causes of Labor Variances
• Two causes–Price (P)
• Paid too much per hour or paid less than expected per hour
–Quantity (Q)• Used too many DL hours
or used fewer DL hours than expected
Labor Variances
P
Q
A S S
A A S
Labor Price (Rate) Variance
Labor Quantity (Efficiency) Variance
Rate per hour is more or less than
allowed.
Incurred too many or less than allowed
hours.
Total Labor Variance
Labor Price Variance +
Labor Quantity Variance
Responsibility for Labor VariancesProduction supervisors
make work assignments, monitor the efficiency of
employees, authorize pay raises, and
terminate employees.
I am responsible for the labor rate and labor
efficiency variances.
Causes of Material Variances
• Two causes–Price (P)
• Paid too much or paid less than expected for material per unit
–Quantity (Q)• Used too much or used
less than expected
Isolation of Material Variances
I need to know as early as possible to make
product pricing or quantity changes
The material price variance is isolated at
the purchase date. Why?
As a purchasing manager,I need the price variance
sooner so that I can better identify purchasing problems.
Price Variance
Computed on the entire quantity purchased
Quantity Variance Computed only on the
quantity used
Material Variances
PQ
A S S SA A A Sp up
Material Price Variance
Material Quantity Variance
Indicates if materials cost more or less per material
unit than allowed.
Indicates if more or less materials were
used.
Material Price Variance +
Material Quantity Variance
Total Material Variance
Responsibility for Material Variances
I am not responsible for this unfavorable material
quantity variance. You purchased cheapmaterial, so my peoplehad to use more of it.
You used too much material because of poorly trained
workers and shoddy equipment maintenance,
and you are a lousy scheduler! You make me overnight the material
making it cost more, causing unfavorable price variances.
Variable Overhead Variances
VOH Spending Variance
VOH Efficiency Variance
Actual VOH Cost
Actual DLH x
Std Rate
VOH Flexible Budget
Applied VOH
VOH Production Volume Variance
VOH Flexible Budget Variance
Total VOH Variance
VOH Production Volume Variance
This is the underapplied or overapplied variable overhead amount.
Fixed Overhead Variances
FOH Spending Variance
FOH Efficiency Variance
Actual FOH Cost
FOH Static
Budget
FOH Flexible Budget
Applied FOH
FOH Production Volume Variance
FOH Flexible Budget Variance
Total FOH Variance
FOH Production Volume Variance
This is the underapplied or overapplied fixed overhead amount.
Applied OverheadOverhead costs are applied to products and services
using a predetermined overhead rate (POHR).
Applied VOH = [VOHR × Actual Activity]
Applied FOH = [FOHR × Actual Activity]
Estimated VOHVariable OH rate =Estimated Activity
Estimated FOHFixed OH rate =Estimated Activity
Overhead Variance Responsibility
• Spending variances– Production supervisor – if he selects specific OH items– Purchasing manager – if he works with supplier on cost
• Efficiency variances– Production supervisor – controls use of overhead items
• Production volume variance– No one is responsible We know why it exists.– Exists because the volume of production/sales is
less/more than budgeted
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Predictable Variances
Variances that always have zero balances VOH production volume variance
Amount allowed per activity on the flexible budget is the same as the VOH applied
FOH efficiency variance It is not possible to reduce a FOH cost simply by
being more efficient.
Behavioral Considerations
Standard costs and variance analysis can1) Provide very useful control
measures 2) Aid in performance
evaluations3) Cause dysfunctional
behavior among employees and managers
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The End