Variance Analysis
Variance is the difference between the standard cost and the actual cost. It is expressed by the following formula:
Variance = Standard cost – Actual cost
When Standard cost > Actual cost ->Favorable variance
When Standard cost < Actual cost -> Unfavorable variance.
Variance analysis is the process of analyzing variances by dividing the total variance in such a way that management can assign responsibility for off standard performance.
Types of variances
1. Material cost variance = (SQ x SP) – (AQ x AP)
2. Material usage variance = SP x (SQ – AQ)
3. Material Price Variance = AQ x (SP-AP)
4. Labor cost variance = SLC – ALC
5. Labor rate of pay variance = AT (SR-AR)
6. Labor Efficiency Variance = SR (ST-AT)
7. Labor Idle time variance = IH x SR
8. Fixed overhead cost variance = (AO x SFOR) – AOH
9. Fixed overhead expenditure variance = BFOH – AFO
10. Fixed overhead volume variance = SFOR x (AQ-BQ)
11. Fixed overhead efficiency variance = SFOR per unit x (AQ-SQ)
12. Variable overhead variance = (AO – SVOR) x AOH
13. Variable overhead expenditure variance = AT x (SVOR-AVOHR)
14. Variable overhead efficiency variance = SVOR x(AT – ST)
Where:
SQ = STANDARD QUANTITY
SP = STANDARD PRICE
AQ = ACTUAL QUANTITY
AP = ACTUAL PRICE
SLC = STANDARD LABOR COST
ALC = ACTUAL LABOR COST
AT = ACTUAL TIME
SR = STANDARD RATE
AR = ACTUAL RATE
ST = STANDARD TIME
AT = ACTUAL TIME
IH = IDLE HOURS
AO = ACTUAL OUTPUT
SFOR = STANDARD FIXED OVERHEAD RATE
AOH = ACTUAL OVERHEAD
BFOH = BUDGETED FIXED OVERHEAD
AFO = ACTUAL FIXED OVERHEAD
BQ = BUDGETED QUANTITY
AO = ACTUAL OUTPUT
SVOR = STANDARD VARIABLE OVERHEAD RATE
AVOHR = ACTUAL VARIABLE OVERHEAD RATE
The above are some of the variances commonly used. Apart from the above there are sales variances, material mix variances, yield variances etc.
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