Varience

VARIANCE ANALYSIS

Variances are to be calculated for each department separately.

The standard/Budgeted values means the Budgeted Values for actual Output.

This Budget is called Flexible Budget ( How to Prepare?)

Variances are always the difference between values actually used and Budgeted

values for actual output.

All variances are in Dollars/Rupees.

Any Variance = Some Quantity * Some Price - Another quantity*another price.

For any Case, follow the following steps:

1) identify causes for the variance

2) Hold some Department to be responsible for it.

3) Suggest remedial, if possible

2 Golden Rules:

Cost Control is always done on Actual Output

Inefficiency of one department should never be attributed/overlapped to

another department.

VARIANCE OUTPUT

INPUT

SALES

Variance

MATERIAL

Variance LABOUR

Variance

OVERHEAD

Variance

USE AT YOUR OWN RISK

USE AT YOUR OWN RISK 2

MATERIAL VARIANCE:

AQ - ACTUAL Quantity

SQ - Standard Quantity

AP - ACTUAL Price

SP - Standard Price

SM - Standard Mix

AM - ACTUAL Mix

AO AQ AM AP

AO AQ AM SP Price Variance

AO AQ SM SP Mix Variance

AO SQ SM SP Yield Variance

Yield + Mix = Usage/Quantity Variance

MATERIAL VARIANCE

PRICE VARIANCE

AQ@AM*(AP - SP)

QUANTITY/USAGE

VARIANCE

SP*(AQ@AM-SQ@SM)

MIX VARIANCE

SP*(AQ@AM-AQ@SM)

YIELD VARIANCE

SP*(AQ@SM-SQ@SM)

USE AT YOUR OWN RISK

USE AT YOUR OWN RISK 3

LABOUR VARIANCE:

AH - ACTUAL Hours

SH - STANDARD Hours

AM - ACTUAL Mix

SM - STANDARD Mix

AR - ACTUAL Rate

SR - STANDARD Rate

AO AH AM AR

AO AH AM SR Rate Variance

AO AH SM SR Mix Variance

AO SH SM SR Efficiency Variance

Efficiency + Mix = Hours Variance

LABOUR VARIANCE

RATE VARIANCE

AH@AM*(AR - SR)

HOURS VARIANCE

SR*(AH@AM-SH@SM)

MIX VARIANCE

SR*(AH@AM-AH@SM)

EFFICIENCY VARIANCE

SR*(AH@SM-SH@SM)

USE AT YOUR OWN RISK

USE AT YOUR OWN RISK 4

Over Head Variance

1) 2 way method - If only Units produces is given

2) 3 way method - If Units as well as hours( Labour/Machine) are

given

Following are the variables involved

Budgeted Fixed Over Head - BFOH

Budgeted Variable Over Head Rate per Hour- $/Hour - BVOHR-H

Budget Variable OverHead Rate per unit - $/Unit - BVOHR-U

Budgeted Volume to be produced- BV

Actual Fixed Over Head - AFOH

Actual Variable Over Head - AVOH

Actual Volume produced-AV

Actual Labour Hours - ALH

Fixed Absorption Rate - FAR = (BFOH / BV)

Budget Equation BFOH + BVOHR-U * Units

2 Way Analysis

Fixed Variable

Actual AFOH AVOH

Fixed Spending Variance Variable Spending variance

Budgeted over head

for actual output

BFOH AV * BVOHR-U

Fixed Volume Variance Variable Volume variance =

ZERO

Absorbed FAR * AV AV * BVOHR-U

USE AT YOUR OWN RISK

USE AT YOUR OWN RISK 5

OVERHEAD VARIANCE - 3 Way Analysis

Budgeted Fixed Over Head - BFOH

Budgeted Variable Over Head Rate per Hour- $/Hour - BVOHR-H

Budget Variable Over Head Rate per unit - $/Unit - BVOHR-U

Budgeted Volume to be produced- BV

Actual Fixed Over Head - AFOH

Actual Variable Over Head - AVOH

Actual Volume produced-AV

Actual