Variance Analysis Flashcards
literally means difference. It means the difference between the actual cost and standard costs.
Variance
Variance Formula
Variance = Actual Costs — Standard Costs
Why are variances need to be analyzed?
Variances are analyzed to provide managers with useful information for measuring efficiency and improving performance.
The reason why variance analysis is performed:
1. To know the difference between actual and standard costs
2. The reason for such difference.
when the actual costs incurred are less than the standard (the company incurred less than what it is allowed to spend.
Favorable Variance
when the actual costs are greater than the standard (there was an overspending during the period).
Unfavorable Variance
refers to the amount that should have been incurred by the company for the actual production
Standard Cost
the number of units that should have been used for actual production.
Standard Quantity
the portion of total materials cost variance caused by the difference between the price actually paid and the standard price that should have been paid for the quantity of materials actually used or purchased.
Price Variance
Price Variance Formula
Price Variance = (Actual Quantity x Actual Price) — Actual Quantity x Standard Price
Price Variance = (Actual Price - Standard Price) x Actual Quantity
Price Variance = Difference in Price x Actual Quantity
also called usage variance.
It results from actually using more or less units of materials than the standard quantity allowed for actual production.
Quantity Variance
Quantity Variance Formula
Quantity Variance = (Actual Quantity x Standard Price) - (Standard Quantity x Standard Price)
QV = (AQ - SQ) x SP
QV = Difference in Quantity x Standard Price
What are the possible causes of unfavorable price variance?
- An unexpected increase in prices of gasoline which caused an increase in prices of other commodities.
- A shortage in the supply of materials experienced during the period, which forced the purchasing department to buy the needed supply even at a higher price to meet the production requirements.
- The requisitions were all ‘rush’ and the purchasing department did not have ample time to do the usual canvassing from different suppliers.
- The materials purchased for the period’s production were of better quality than those being used previously, although such materials commanded a higher price.
- The company’s regular supplier announced an increase in prices.
What are the possible causes of unfavorable quantity variance?
- The materials were of inferior quality, which resulted into a lot of wastages.
- Workers lacked the required skill in doing the job which caused rejects or wastages.
- A pilferage case involving some workers who brought home some materials for their personal consumption.
- Lack of necessary equipments for systematic and efficient job processing.
- Lack of warehouse facilities for proper storage of materials.
when price variance is computed based on actual quantity purchased.
This variance is likewise computed when the company records the price variance at the time of purchase instead of usage of materials.
Purchase Price Variance
Purchase Price Variance Formula
Purchase Price Variance = Difference in Price x Actual Quantity Purchased
Sources of information on actual labor hours:
- labor time tickets
- the cost of production reports
- job orders or time cards
Sources of data on actual labor rates paid:
- payroll
- payment vouchers
- labor contracts
- appointment letters
- any other pertinent source documents
Actual Labor Cost Formula
ALC = AT x AR
results from actually paying more or less than the standard rate for labor. It is computed by multiplying the difference in rate by the actual time used for production.
Labor Rate Variance
Rate Variance Formula
Rate Variance = (AT x AR) - (AT x SR)
RV = (AR - SR) x AT
RV = Difference in Rate x Actual Time
also called efficiency variance or labor usage variance, results from using more or less labor time than the standard time allowed for actual production. It is computed by multiplying the difference in time by the standard rate per time.
Time Variance
Time Variance Formula
Time Variance = (AT x SR) - (ST x SR)
TV = (AT - ST) x SR
TV = Difference in Time x Standard Rate
Possible Causes/Explanations for Rate Variance:
- Change in wage rates due change in corporate policy on wages, collective bargaining agreement between the employees’ labor union and the company, or new rules on wages as imposed by the government’s regulatory agency concerned.
- Hiring of high-caliber or highly skilled workers who demand higher wage rates
Possible Explanations for Time or Efficiency Variance
- Improvement in workers’ efficiency, thereby enabling them to use less time in producing the product.
- Hiring of skilled workers.
- Imposition of more strict control measures in the production process, etc.
Computation and analysis of overhead variances involve two approaches:
- Fixed Budget Approach
- Flexible Budget Approach
sometimes called static budget, is based on only one level of activity which usually is a close approximation of the expected activity level
Fixed Budget
the difference between actual overhead costs incurred and the expected or budgeted costs for the planned production.
Budget Variance
indicates whether or not the company was able to attain the planned or budgeted CAPACITY level.
Capacity Variance
indicates how fast the company was able to produce its actual production during the period.
Efficiency Variance
(also called dynamic budgeting) under this approach, possible changes in activity levels within the relevant range are considered.
Flexible Budget Approach
3 Different Types of Capacity Levels
Theoretical Capacity
Practical Capacity
Normal Capacity
refers to the fixed amount of the company’s human and nonhuman resources for which management has committed itself and with which it expects to conduct the business and maintain the firm as as a going concern.
Capacity
the plant’s or department’s capability to produce at full tilt, without interruptions. Though it is highly impossible to attain, it is as well calculated to serve as a basis for establishing other capacity levels.
Theoretical Capacity
is theoretical capacity less internal factors such as ordinary and expected interruptions due to delays, breakdowns, inefficiencies, non-working days, and changes in production processes.
Practical Capacity
the most commonly used type of capacity level. In calculating normal capacity, not only internal but also external factors, particularly the market or the demand for the product are considered. It is used in calculating the predetermined or standard factory overhead rate.
Normal Capacity
under this method, the total overhead variance is broken down into two variances — the controllable variance and volume variance.
TWO-VARIANCE METHOD
the difference between the total actual overhead incurred and the budget allowance based on standard hours for actual production. This variance is the responsibility of the producing department managers concerned, covering only the costs over which they CAN EXERCISE CONTROL. It consists partly of the difference between actual and standard variable overhead costs and partly of the difference between actual and budgeted fixed overhead.
Controllable Variance
the difference between the budget allowance based on standard hours and the total standard factory overhead (also called applied or charged overhead). This variance is considered the responsibility of the executive and departmental management, and it indicates the cost of available capacity not utilized/not efficiently utilized during the period under consideration.
Volume Variance
the total overhead variance is analyzed into spending or budget variance, the idle capacity variance (aka capacity or volume variance) and efficiency variance.
THREE VARIANCE METHOD
the difference between the actual factory overhead incurred and the budget allowance based on actual hours used for actual production. Like the controllable variance, this variance is considered as the responsibility of the producing department concerned, and is composed partly of the variable overhead cost variance and partly of the difference between actual and budgeted fixed overhead.
Spending or Budget Variance
this variance represents the difference between the budget allowance based on actual hours and actual hours times the standard overhead rate. This is considered as the responsibility of the EXECUTIVE MANAGEMENT, and indicates the amount of overhead that is either over-absorbed or under-absorbed because the actual hours is more or less than the normal capacity in terms of hours.
Idle Capacity Variance
this variance indicates the difference between the actual hours worked and the standard hours allowed for actual production. This is caused by efficiencies or inefficiencies in production.
Efficiency Variance
it is merely an expansion of the three-variance method. The four variances are spending, capacity, variable efficiency and fixed efficiency. The spending and capacity variances are the same with the three-variance method. The efficiency variance of the three-variance method is broken down into variable efficiency and fixed efficiency, and computed by multiplying the difference between the actual and standard hours by the variable and fixed overhead rates.
Four Variance Method
determined by multiplying the difference between the actual and standard prices by the actual quantity used.
Price Variance
is the result of combining or mixing the basic materials in a proportion different from the formula or standard mix specifications.
To compute the amount of this variance, the difference in mixture of each type is multiplied by the corresponding standard price.
Mix/Blend Variance
the quantity of good PRODUCT or OUTPUT manufactured from an input quantity of materials.
Yield
results from the difference between actual output derived from the actual input of materials and the standard output expected from such input.
Yield Variance
DISPOSITION OF VARIANCES
may be done through:
- Closed to income summary
- Closed to cost of goods sold
- Treated as adjustments to cost of goods sold and inventories.
