Variance Analysis

Question 1

Variance Analysis

Answer 1

• Part of an organization’s performance measurement system, variance analysis and interpretation of variances allow management to identify issues and recommend corrective or other actions
• Actual performance is compared against a static or flexible budget or other relevant benchmark
• Variances are used to assess both effectiveness and efficiency
• Sales revenue variances:
  Sales Price Variance = (Actual price – Standard price) x Actual quantity

Sales Volume Variance = (Actual quantity - Standard quantity) x Standard price

• Direct and variable cost variances:
  Price/Rate Variance = (Actual Price-Standard Price) x Actual quantity

Quantity/Efficiency Variance = (Actual Quantity-Standard Quantity) x Standard price

Question 2

Flexible budget
variance

Answer 2

• A flexible budget variance is the difference between the actual costs and standard costs based on the actual production levels.
• Flexible budget variance = actual costs − flexible budget costs (that is, standard quantity of an item for actual units produced × standard price)
• Using the above formula, positive result is unfavourable; negative result is favourable.

Question 3

Price variance

Answer 3

• Price variance is the difference between the actual cost and standard cost of materials or labour.
• Price variance = actual quantity × (actual price − standard price)
• Using the above formula, positive result is unfavourable; negative result is favourable.

Question 4

Efficiency variance

Answer 4

• Efficiency variance is the difference between the actual unit usage of something and the expected amount of usage. The expected amount is usually the standard quantity of direct materials, direct labour, machine usage time, and so forth that is assigned to a product.
• Efficiency variance = standard price × (actual quantity − standard quantity)
• Using the above formula, positive result is unfavourable; negative result is favourable.