Variance AnalysisGavin Crosthwaite

Mindarie Senior College

VARIANCE ANALYSIS

The difference between the actual and standard performance is known as a variance and can be either favourable, unfavourable or no change.

The variances we will be looking at will affect Direct Material, Direct Labour, Fixed Overhead and Variable Overheads.

You will be given the formulas in the exam.

Variance ExampleMindarie Gardens produces garden pavers. The business has developed the standard cost based on 2,400 direct labour hours per month.

Stone 2 kilos * 3.40 per kilo $6.80

Direct Labour 0.2 hour * $24 per hour $4.80

Fixed Factory Overhead 0.2 hour * $4 per DL hour $0.80

Variable Factory Overhead 0.2 hour * $3 per DL hour $0.60

Standard Cost per unit $13

Actual results for the monthStones Produced: 13 000Direct Material: 28,000 kilos of stone were bought for a cost of $89,600. A total of 27,300 kilos were used to produce the pavers.

Fixed Factory Overhead: 10 000

Variable Factory Overhead: 7 000

Direct Labour: 2 500 hours * $24.50 per hour

Direct Material Variance (Price)

(Actual Price of Input - Standard Price of Input) x Actual Quantity of Input Purchased

(AP-SP) x AQP

What does it mean?It compares the price of what we budgeted for materials

to what we actually paid for the materials

Direct Material Variance (Price)

(Actual Price of Input - Standard Price of Input) x Actual Quantity of Input Purchased

(AP-SP) x AQP

89,600/28,000 = $3.20 per kilo

$3.20 - $3.40 = -0.20 * 28,000 = $5,600 (F)

Direct Material Variance (Price)

(Actual Price of Input - Standard Price of Input) x Actual Quantity of Input Purchased

(AP-SP) x AQP

What does it mean?It means we paid $5,600 less than we expected to pay

for the materials to produce the pavers.

Direct Material Variance (Price)

FAVOURABLE Reasons

A cheaper supplier of materials has been found

UNFAVOURABLE Reasons

An unexpected increase in the cost of materials

Direct Material Variance (Usage)

(Actual Quantity of Input Issued - Standard Quantity of Input Allowed) x Standard Price of Input

(AQI - SQA) X SP

What does it mean?It compares the price of what we budgeted for materials

to be used in the production of goods to what we actually used in the production

Direct Material Variance (Usage)

(Actual Quantity of Input Issued - Standard Quantity of Input Allowed) x Standard Price of Input

(AQI - SQA) X SP

2 kilos x 13,000 = 26,000 kilos = Standard

Actual = 27,300 - Standard 26,000 = 1,300 x $3.40 =

$4,420 (U)

Direct Material Variance (Usage)

(Actual Quantity of Input Issued - Standard Quantity of Input Allowed) x Standard Price of Input

(AQI - SQA) X SP

What does it mean?

It means we spent $4,420 more on materials than we expected to to produce the pavers.

Direct Material Variance (Usage)

FAVOURABLE Reasons

We have may used better grade materials which results in less material being required

UNFAVOURABLE Reasons

An unexpected increase in the cost of materials

Direct Labour Variance (Rate)

(Actual Rate per Direct Labour Hour worked – Standard Rate per Direct Labour Hour worked) x Actual Direct Labour Hours worked

(AR - SR) X ADLH

What does it mean?

It compares the actual cost of labour vs what we planned to pay over the given period.

Direct Labour Variance (Rate)

(Actual Rate per Direct Labour Hour worked – Standard Rate per Direct Labour Hour worked) x Actual Direct Labour Hours worked

(AR - SR) X ADLH

$24.50 - $24.00 = 0.50 * 2,500 = $1,250 (U)

Direct Labour Variance (Rate)

(Actual Rate per Direct Labour Hour worked – Standard Rate per Direct Labour Hour worked) x Actual Direct Labour Hours worked

(AR - SR) X ADLH

What does it mean?

It means that we have spent $1,250 more on labour than we expected to for the given period

Direct Labour Variance (Price)

FAVOURABLE Reasons

More than expected use of cheaper workers

UNFAVOURABLE Reasons

Using higher paid workers to complete work normally carried out by lower paid workers

Direct Labour Variance (Efficiency)

(Actual Direct Labour Hours worked – Standard Direct Labour Hour allowed) x Standard Rate per Direct Labour Hour

(ADLH - SDLHA) X SRDLH

What does it mean?

It compares the actual cost of labour vs what we planned to pay over the given period.

Direct Labour Variance (Efficiency)

(Actual Direct Labour Hours worked – Standard Direct Labour Hour allowed) x Standard Rate per Direct Labour Hour

(ADLH - SDLHA) X SRDLH

13,000 pavers * .2 = 2,600

2,500 - 2,600 = -100 * $24 = $2,400 (F)

Direct Labour Variance (Efficiency)

(Actual Direct Labour Hours worked – Standard Direct Labour Hour allowed) x Standard Rate per Direct Labour Hour

(ADLH - SDLHA) X SRDLH

What does it mean?

It means that we were actually efficient and spent $2,400 less than we expected to to complete the task.

Direct Labour Variance (Efficiency)

FAVOURABLE Reasons

UNFAVOURABLE Reasons

Improved productivity and/or better and more efficient machinery

Poorly trained workers and/or breakdown of plant and machinery.

Fixed Factory Overhead Spending

Actual Fixed Factory Overhead - Budgeted Fixed Factory Overhead

What does it mean?

It compares the difference in the budgeted amount of FFO to the actual amount of FFO.

Fixed Factory Overhead Spending

Actual Fixed Factory Overhead - Budgeted Fixed Factory Overhead

$10,000 - $9,600 = $400 (U)

2,400 * 4 = $9,600

Fixed Factory Overhead Variance (Spending)

FAVOURABLE Reasons

UNFAVOURABLE Reasons

A lower than expected increase in supervisors salaries or for indirect materials

An unexpected increase in supervisors salaries or unexpected rise in indirect materials

Fixed Factory Overhead (Capacity)

Budgeted Fixed Overhead x (Standard Fixed Overhead per unit - Standard Activity Allowed)

BFO x (SFO - SAA)

What does it mean?It compares the difference between the amount of FFO

spending that was added to each product to the amount that was budgeted for each product.

Fixed Factory Overhead (Capacity)

Budgeted Fixed Overhead - (Standard Fixed Overhead per unit x Standard Activity Allowed)

BFO - (SFO x SAA)

0.2 DLH x 13,000 = 2,600 DLH

2,400 * 4 = $9,600 - (4 * 2,600) = $10,400 = $800 (F)

Variable Overhead (Spending)

Actual Variable Overhead Cost - (Actual Hours x Standard Variable Overhead Rate)

What does it mean?

It compares the difference in the budgeted amount of VFO to the actual amount of VFO.

Variable Overhead (Spending)

Actual Variable Overhead Cost - (Actual Hours x Standard Variable Overhead Rate)

7,000 - (2,500 * 3) = 500 (F)

Variable Overhead (Efficiency)

(Actual Number of Hours - Standard Number of Hours) x Standard Variable Overhead Rate

What does it mean?

It compares the difference in the budgeted amount of hours to the actual amount of hours set to allocate the

VFO.

Variable Overhead (Efficiency)

(Actual Number of Hours - Standard Number of Hours) x Standard Variable Overhead Rate)

2,500 - 2,600 = 100 * 3 = 300 (F)