5) Variance analysis

Question 1

Fixed overhead efficiency variance - Calculate

Answer 1

= Actual overhead absorbed - Overhead absorbed if actual production had taken standard hours

Question 2

Fixed overhead capacity variance - Calculate

Answer 2

= Actual overhead absorbed - Budgeted fixed overheads

Note: Variance is favourable if actual is greater than budget

Question 3

Labour rate variance (Did/Should proforma)

Answer 3

• Number of hours paid DID cost (actual)
• (Difference)
• Number of hours paid SHOULD cost (standard)

Question 4

Labour efficiency variance (Did/Should proforma)

Answer 4

• Actual output produced DID take (actual hours)
• (Less)
• SHOULD take (standard hours)
• = Labour efficiency variance (in hours)
• x standard rate per hour
• = Labour efficiency variance

Question 5

Idle time variance - what is the purpose of it?

Answer 5

It increases the accuracy and usefulness of the labour efficiency variance as it shows the extra cost caused by the hours paid that exceed hours worked

Question 6

Idle time variance (Proforma)

Answer 6

= (Actual hours paid - Actual hours worked) x Standard hourly rate

=(AHp - AHw) x SR

Question 7

Material price variance (Did/Should proforma) *and explain the effect on this caused by the method used for valuation of raw materials inventory

Answer 7

• Actual quantity of materials purchased* DID cost (actual)
• (Less)
• SHOULD cost (standard)

*materials quantity is considered materials purchased in the period as long as raw material inventory is valued a standard cost - this is the most common method. Otherwise if raw material inventory is valued at actual cost, the quantity for the variance calculation is material used.

Question 8

Materials usage variance (Did/Should proforma)

Answer 8

• Actual output produced DID use (actual quantity)
• (Less)
• SHOULD use (standard quantity)
• = Materials usage variance (in material quantity)
• x standard price (per unit of material)
• = Materials usage variance

Question 9

Variable overhead expenditure variance (Did/Should proforma)

Answer 9

• Number of hours worked DID cost (actual)
• (Less)
• Number of hours worked SHOULD cost (standard cost/hr)

Question 10

Variable overhead efficiency variance (Did/Should proforma)

Answer 10

• Actual output produced DID take (actual hours)
• (Less)
• SHOULD take (standard hours)
• = Efficiency variance (in hours)
• x standard variable overhead rate per hour
• = Variable production overhead efficiency variance