Variance Analysis

11
Variance AnalysisVariance Analysis

22
Material Cost VariancesMaterial Cost Variances
Material Cost Variance (MCV) is the differenceMaterial Cost Variance (MCV) is the difference
between The Total Standard Material Costsbetween The Total Standard Material Costs
(TSMC) and The Total Actual Material(TSMC) and The Total Actual Material
Cost(TAMC).Cost(TAMC).
MCV = (SQ x SP x AO) – (AQ x AP x AO)MCV = (SQ x SP x AO) – (AQ x AP x AO)
MCV = TSMC – TAMCMCV = TSMC – TAMC
SQ = Standard Quantity of Usage per unitSQ = Standard Quantity of Usage per unit
SP = Standard Price of Material per unitSP = Standard Price of Material per unit
AO = Actual OutputAO = Actual Output
AQ = Actual Quantity of Usage per unitAQ = Actual Quantity of Usage per unit
AP = Actual Price of Material per unitAP = Actual Price of Material per unit

33
Material CostsMaterial Costs StandardsStandards ActualsActuals
Material Usage per Unit (kg)Material Usage per Unit (kg) 22 2.22.2
Price per Unit (kg) in Rs.Price per Unit (kg) in Rs. 1414 1515
Actual Units ProducedActual Units Produced 100100
MCV = (SQ x SP x AO)-(AQ x AP x AO)MCV = (SQ x SP x AO)-(AQ x AP x AO)
MCV = (2 x 14 x 100) – (2.2 x 15 x 100)MCV = (2 x 14 x 100) – (2.2 x 15 x 100)
MCV = Rs.2800 – Rs. 3300 = - Rs.500MCV = Rs.2800 – Rs. 3300 = - Rs.500

44
Material Cost Variance is due to Material PriceMaterial Cost Variance is due to Material Price
Variance (MPV) & Material Usage QuantityVariance (MPV) & Material Usage Quantity
Variance (MUV)Variance (MUV)
MCV = MPV + MQVMCV = MPV + MQV
MPV = (SP – AP) x AQ x AOMPV = (SP – AP) x AQ x AO
= (14 – 15) x 2.2 x 100 = - Rs.220= (14 – 15) x 2.2 x 100 = - Rs.220
MUV = (SQ – AQ) xMUV = (SQ – AQ) x SPSP x AOx AO
= (2 – 2.2) x 14 x 100 = - Rs.280= (2 – 2.2) x 14 x 100 = - Rs.280
MCV = - 220 + ( - ) 280 = - Rs.500MCV = - 220 + ( - ) 280 = - Rs.500

55
Material Usage VarianceMaterial Usage Variance
The Material Usage Variance could (only ifThe Material Usage Variance could (only if
required) be further analyzed into Materialrequired) be further analyzed into Material
Mix Sub Variance (MMSV) & MaterialMix Sub Variance (MMSV) & Material
Yield Sub Variance (MYSV).Yield Sub Variance (MYSV).
MUV = MMSV + MYSVMUV = MMSV + MYSV
Material Mix Sub Variance is useful whenMaterial Mix Sub Variance is useful when
there is a possibility of changing the mix ofthere is a possibility of changing the mix of
various materials used in the production ofvarious materials used in the production of
the final unit.the final unit.

66
Material Mix Sub Variance v/sMaterial Mix Sub Variance v/s
Material Yield Sub VarianceMaterial Yield Sub Variance
MMSV =MMSV =
(Standard Mix of Actual Total Quantity of Materials(Standard Mix of Actual Total Quantity of Materials
Used – Actual Mix of Actual Quantity Used ) xUsed – Actual Mix of Actual Quantity Used ) x
Standard Price of each Material.Standard Price of each Material.
The Std mix to make 1 drum of 100 Kg sauce isThe Std mix to make 1 drum of 100 Kg sauce is
50 Kg Mat. X @ 2.00 + 30 Kg Mat. Y @ 3.00 +50 Kg Mat. X @ 2.00 + 30 Kg Mat. Y @ 3.00 +
20 Kg Mat. Z @ 4.0020 Kg Mat. Z @ 4.00
The Act. input used to make 1 drum of 100 KgThe Act. input used to make 1 drum of 100 Kg
sauce is:sauce is:
60 Kg Mat. X + 40 Kg Mat. Y + 10 Kg Mat. Z.60 Kg Mat. X + 40 Kg Mat. Y + 10 Kg Mat. Z.

77
Material Mix Sub VarianceMaterial Mix Sub Variance
1.1. Std Mix is 50 : 30 : 20 for 1 drum of 100 KgsStd Mix is 50 : 30 : 20 for 1 drum of 100 Kgs
I.e. 5:3:2I.e. 5:3:2
1.1. Actual Input Quantity is 110 Kgs. So StandardActual Input Quantity is 110 Kgs. So Standard
Mix for Actual Input Quantity should have beenMix for Actual Input Quantity should have been
55:33:2255:33:22
1.1. MMSV =MMSV =
1.1. Mat.X = (55 – 60) x 2 = - Rs.10Mat.X = (55 – 60) x 2 = - Rs.10
2.2. Mat.Y = (33 – 40) x 3 = - Rs.21Mat.Y = (33 – 40) x 3 = - Rs.21
3.3. Mat.Z = (22 – 10) x 4 = + Rs.48Mat.Z = (22 – 10) x 4 = + Rs.48
Net MMSV = - Rs.10 – Rs.21 + Rs.48 = + Rs.17Net MMSV = - Rs.10 – Rs.21 + Rs.48 = + Rs.17

88
The MUV in this Case isThe MUV in this Case is
MUV = (SQ – AQ) x SP x AOMUV = (SQ – AQ) x SP x AO
Here AO = 1 as we are considering only OneHere AO = 1 as we are considering only One
drum of saucedrum of sauce
MUV = for Mat.X (50 – 60) x 2 x 1 = - Rs.20MUV = for Mat.X (50 – 60) x 2 x 1 = - Rs.20
+ for Mat.Y (30 – 40) x 3 x 1 = - Rs.30+ for Mat.Y (30 – 40) x 3 x 1 = - Rs.30
+ for Mat.Z (20 – 10) x 4 x 1 = + Rs.40+ for Mat.Z (20 – 10) x 4 x 1 = + Rs.40
MUV = - Rs.10MUV = - Rs.10
MUV = MMSV + MYSV.MUV = MMSV + MYSV.
- 10 = + 17 + MYSV i.e. MYSV = - Rs.27- 10 = + 17 + MYSV i.e. MYSV = - Rs.27

99
MaterialsMaterials Std.Std.
QuantityQuantity
(A)(A)
ActualActual
QuantityQuantity
(B)(B)
StandardStandard
PricePrice
( C)( C)
TotalTotal
Std. CostStd. Cost
(AxC)(AxC)
Mat.XMat.X 5050 6060 22 100100
Mat.YMat.Y 3030 4040 33 9090
Mat.ZMat.Z 2020 1010 44 8080
TotalTotal 100100 110110 2.702.70 270270

1010
The Weighted Average Standard Price ofThe Weighted Average Standard Price of
Material is Rs 2.70 & Standard Quantity isMaterial is Rs 2.70 & Standard Quantity is
100 Kgs.100 Kgs.
MYSV = (SQ – AQ) x SP (wtd Avg.)MYSV = (SQ – AQ) x SP (wtd Avg.)
= (100 – 110) x 2.70= (100 – 110) x 2.70
= - Rs.27= - Rs.27
MUV = MMSV + MYSVMUV = MMSV + MYSV
- 10 = +17 + ( -) 27- 10 = +17 + ( -) 27

1111
Labor Cost VarianceLabor Cost Variance
Labor Cost Variance (LCV) is the differenceLabor Cost Variance (LCV) is the difference
between The Total Standard Labor Costsbetween The Total Standard Labor Costs
(TSLC) and The Total Actual Labor Cost(TSLC) and The Total Actual Labor Cost
(TALC).(TALC).
LCV = (SH x SR x AO) – (AH x AR x AO)LCV = (SH x SR x AO) – (AH x AR x AO)
LCV = TSLC – TALCLCV = TSLC – TALC
SH = Standard Labor hours per unitSH = Standard Labor hours per unit
SR = Standard Rate of Labor per hourSR = Standard Rate of Labor per hour
AO = Actual OutputAO = Actual Output
AH = Actual Labor hours per unitAH = Actual Labor hours per unit
AR = Actual Rate of Labor per hourAR = Actual Rate of Labor per hour

1212
Labor Cost VarianceLabor Cost Variance
Labor CostsLabor Costs StandardsStandards ActualActual
Labor Hours Usage per UnitLabor Hours Usage per Unit 22 2.22.2
Labor Rate per HourLabor Rate per Hour 1414 1515
Actual Units ProducedActual Units Produced 100100
LCV = (SH x SR x AO)-(AH x AR x AO)LCV = (SH x SR x AO)-(AH x AR x AO)
LCV = (2 x 14 x 100) – (2.2 x 15 x 100)LCV = (2 x 14 x 100) – (2.2 x 15 x 100)
LCV = Rs.2800 – Rs. 3300 = - Rs.500LCV = Rs.2800 – Rs. 3300 = - Rs.500
Same Example
as for MCV to
show
that the
treatment is
similar

1313
Labor Cost VariancesLabor Cost Variances
Labor Cost Variance is due to Labor RateLabor Cost Variance is due to Labor Rate
Variance (LRV) & Labor Efficiency VarianceVariance (LRV) & Labor Efficiency Variance
(LEV)(LEV)
LCV = LRV + LEVLCV = LRV + LEV
LRV = (SR – AR) x AH x AOLRV = (SR – AR) x AH x AO
= (14 – 15) x 2.2 x 100 = - Rs.220= (14 – 15) x 2.2 x 100 = - Rs.220
LEV = (SH – AH) xLEV = (SH – AH) x SRSR x AOx AO
= (2 – 2.2) x 14 x 100 = - Rs.280= (2 – 2.2) x 14 x 100 = - Rs.280
LCV = - 220 + ( - ) 280 = - Rs.500LCV = - 220 + ( - ) 280 = - Rs.500

1414
Labor Efficiency VarianceLabor Efficiency Variance
The Labor Efficiency Variance could (only ifThe Labor Efficiency Variance could (only if
required) be further analyzed into Laborrequired) be further analyzed into Labor
Mix Sub Variance (LMSV) & Labor YieldMix Sub Variance (LMSV) & Labor Yield
Sub Variance (LYSV).Sub Variance (LYSV).
LEV = LMSV + LYSVLEV = LMSV + LYSV
Labor Mix Sub Variance is useful whenLabor Mix Sub Variance is useful when
there is a possibility of changing the mix ofthere is a possibility of changing the mix of
various class of laborers used in thevarious class of laborers used in the
production of the final unit.production of the final unit.

1515
Labor Mix Sub Variance v/sLabor Mix Sub Variance v/s
Labor Yield Sub VarianceLabor Yield Sub Variance
LMSV =LMSV =
(Standard Mix of Actual Labor Hours Worked –(Standard Mix of Actual Labor Hours Worked –
Actual Mix of Actual Labor hours worked) xActual Mix of Actual Labor hours worked) x
Standard Rate of each Class of Laborers.Standard Rate of each Class of Laborers.
The Std Labor mix to make 1 drum of 100 KgThe Std Labor mix to make 1 drum of 100 Kg
sauce issauce is
50 Hrs Lbr X @ 2.00 + 30 Hrs Lbr Y @ 3.00 +50 Hrs Lbr X @ 2.00 + 30 Hrs Lbr Y @ 3.00 +
20 Hrs Lbr Z @ 4.0020 Hrs Lbr Z @ 4.00
The Act. Labor used to make 1 drum of 100 KgThe Act. Labor used to make 1 drum of 100 Kg
sauce is:sauce is:
60 Hr of Lbr X + 40 Hrs of Lbr Y + 10 Hrs of Lbr Z.60 Hr of Lbr X + 40 Hrs of Lbr Y + 10 Hrs of Lbr Z.

1616
Labor Mix Sub VarianceLabor Mix Sub Variance
1.1. Std Lbr Mix is 50 : 30 : 20 for 1 drum of 100Std Lbr Mix is 50 : 30 : 20 for 1 drum of 100
KgsKgs i.e. 5:3:2i.e. 5:3:2
2.2. Actual Labor hours worked is 110 hours. SoActual Labor hours worked is 110 hours. So
Standard Lbr Mix for Actual Labor hoursStandard Lbr Mix for Actual Labor hours
worked should have beenworked should have been
55:33:2255:33:22
1.1. LMSV =LMSV =
1.1. Lbr X = (55 – 60) x 2 = - Rs.10Lbr X = (55 – 60) x 2 = - Rs.10
2.2. Lbr Y = (33 – 40) x 3 = - Rs.21Lbr Y = (33 – 40) x 3 = - Rs.21
3.3. Lbr Z = (22 – 10) x 4 = + Rs.48Lbr Z = (22 – 10) x 4 = + Rs.48
Net LMSV = - Rs.10 – Rs.21 + Rs.48 = + Rs.17Net LMSV = - Rs.10 – Rs.21 + Rs.48 = + Rs.17

1717
The LEV in this Case isThe LEV in this Case is
LEV = (SH – AH) xLEV = (SH – AH) x SRSR x AOx AO
Here AO = 1 as we are considering only OneHere AO = 1 as we are considering only One
drum of saucedrum of sauce
LEV = for Lbr X (50 – 60) x 2 x 1 = - Rs.20LEV = for Lbr X (50 – 60) x 2 x 1 = - Rs.20
+ for Lbr.Y (30 – 40) x 3 x 1 = - Rs.30+ for Lbr.Y (30 – 40) x 3 x 1 = - Rs.30
+ for Lbr.Z (20 – 10) x 4 x 1 = + Rs.40+ for Lbr.Z (20 – 10) x 4 x 1 = + Rs.40
LEV = - Rs.10LEV = - Rs.10
LEV = LMSV + LYSV.LEV = LMSV + LYSV.
- 10 = + 17 + LYSV i.e. LYSV = - Rs.27- 10 = + 17 + LYSV i.e. LYSV = - Rs.27

1818
LaborersLaborers Std.Std.
Hours toHours to
bebe
WorkedWorked
(A)(A)
ActualActual
HoursHours
WorkedWorked
(B)(B)
StandardStandard
Rate perRate per
LaborLabor
HourHour
( C)( C)
TotalTotal
Std.Std.
LaborLabor
CostCost
(AxC)(AxC)
Lbr XLbr X 5050 6060 22 100100
Lbr YLbr Y 3030 4040 33 9090
Lbr ZLbr Z 2020 1010 44 8080
TotalTotal 100100 110110 2.702.70 270270

1919
The Weighted Average Standard Rate ofThe Weighted Average Standard Rate of
Laborers is Rs 2.70 per hour & StandardLaborers is Rs 2.70 per hour & Standard
Labor Hours to be worked is 100 Kgs.Labor Hours to be worked is 100 Kgs.
LYSV = (SH – AH) x SR (wtd Avg.)LYSV = (SH – AH) x SR (wtd Avg.)
= (100 – 110) x 2.70= (100 – 110) x 2.70
= - Rs.27= - Rs.27
LEV = LMSV + LYSVLEV = LMSV + LYSV
- 10 = +17 + ( -) 27- 10 = +17 + ( -) 27

2020
Variable OverheadVariable Overhead
Cost VariancesCost Variances
 The Variable Overhead Cost VariancesThe Variable Overhead Cost Variances
(VOCV) is similar in treatment to the(VOCV) is similar in treatment to the
Material & Labor Cost Variances.Material & Labor Cost Variances.
 It is the difference between the StandardIt is the difference between the Standard
Variable Overhead Costs from the ActualVariable Overhead Costs from the Actual
Variable Overhead Costs.Variable Overhead Costs.

2121
VOCV = (SVOC – AVOC ) x AOVOCV = (SVOC – AVOC ) x AO
VOCV = TSVOC – TAVOCVOCV = TSVOC – TAVOC
VOCV = VOEV + VOSVVOCV = VOEV + VOSV

2222
 WhereWhere
SVOC = Standard Variable Overhead Costs per UnitSVOC = Standard Variable Overhead Costs per Unit
AVOC = Actual Variable Overhead Costs per UnitAVOC = Actual Variable Overhead Costs per Unit
TSVOC = Total Standard Variable Overhead CostsTSVOC = Total Standard Variable Overhead Costs
TAVOC = Total Actual Variable Overhead CostsTAVOC = Total Actual Variable Overhead Costs
VOEV = Variable Overhead Efficiency VarianceVOEV = Variable Overhead Efficiency Variance
VOSV = Variable Overhead Spending VarianceVOSV = Variable Overhead Spending Variance

2323
 Std Labor Hours allowed: Rs.2 per unitStd Labor Hours allowed: Rs.2 per unit
 Std Variable Costs allowed: Rs.3 perStd Variable Costs allowed: Rs.3 per
direct labor hourdirect labor hour
 Actual Production: 80 unitsActual Production: 80 units
 Actual Direct Labor Hours: 165 unitsActual Direct Labor Hours: 165 units
 Actual Overheads incurred: Rs.518Actual Overheads incurred: Rs.518
Determine the VOCV ; VOEV & VOSVDetermine the VOCV ; VOEV & VOSV

2424
VOCV = (Standard Variable Overhead Costs–VOCV = (Standard Variable Overhead Costs–
Actual Variable Overhead Costs incurred.Actual Variable Overhead Costs incurred.
Standard Variable Overhead Costs = (StandardStandard Variable Overhead Costs = (Standard
Labor Hours per Unit x Standard Variable CostsLabor Hours per Unit x Standard Variable Costs
allowed per labor hour x Actual Output)allowed per labor hour x Actual Output)
Please note that here we have taken labor hoursPlease note that here we have taken labor hours
only because the cost factor used to allocate theonly because the cost factor used to allocate the
variable overheads is labor hours !! Please usevariable overheads is labor hours !! Please use
the relevant cost factor for each type of variablethe relevant cost factor for each type of variable
overheadoverhead
VOCV = (2 x 3 x 80) – 518 = - Rs.38VOCV = (2 x 3 x 80) – 518 = - Rs.38

2525
The Variable Overhead Cost Variance couldThe Variable Overhead Cost Variance could
be due to Efficiency or Spendingbe due to Efficiency or Spending
Variances ( Similar to Material / LaborVariances ( Similar to Material / Labor
Variances.)Variances.)
VOEV =VOEV =
{(Std. Labor Hours per Unit x Actual Output){(Std. Labor Hours per Unit x Actual Output)
– Actual Hours } x Std. Variable Overhead– Actual Hours } x Std. Variable Overhead
Rate.Rate.
{ ( 2 x 80) – 165 } x 3 = - Rs.15{ ( 2 x 80) – 165 } x 3 = - Rs.15

2626
 VOSV = (Actual Labor Hours Worked xVOSV = (Actual Labor Hours Worked x
Std. Variable Overhead Rate per hour) –Std. Variable Overhead Rate per hour) –
Actual Variable Overhead costsActual Variable Overhead costs
VOSV = ( 165 x 3 ) – Rs.518/- = Rs 23VOSV = ( 165 x 3 ) – Rs.518/- = Rs 23
Thus VOCV = VOEV + VOSVThus VOCV = VOEV + VOSV
Rs.38 = Rs.15 + Rs.23Rs.38 = Rs.15 + Rs.23

2727
Fixed OverheadFixed Overhead
 Fixed Overheads do not vary with volume of production.Fixed Overheads do not vary with volume of production.
 They are allocated at a predetermined standard fixedThey are allocated at a predetermined standard fixed
overhead rate. (SFOR)overhead rate. (SFOR)
 SFOR =SFOR = Budgeted Fixed OverheadBudgeted Fixed Overhead
Budgeted Volume of ActivityBudgeted Volume of Activity
 Fixed Overhead Cost Variance (FOCV)Fixed Overhead Cost Variance (FOCV)
= Total Actual Fixed Overhead Costs (TAFOC) – (SFOR= Total Actual Fixed Overhead Costs (TAFOC) – (SFOR
per hour x Std Hours per Unit (SH) x Actual Output (AO))per hour x Std Hours per Unit (SH) x Actual Output (AO))
 FOCV = FOSV + FOEV + Volume VarianceFOCV = FOSV + FOEV + Volume Variance
FOSV = Fixed Overhead Spending VarianceFOSV = Fixed Overhead Spending Variance
FOEV = Fixed Overhead Efficiency VarianceFOEV = Fixed Overhead Efficiency Variance

2828
 Actual Fixed O/heads = Rs.530/-Actual Fixed O/heads = Rs.530/-
 Budgeted Fixed O/heads = Rs.500/-Budgeted Fixed O/heads = Rs.500/-
 Budgeted Level of Activity = 100 units orBudgeted Level of Activity = 100 units or
200 Labor Hours200 Labor Hours
 Std. Labour Hours allowed per unit = 2Std. Labour Hours allowed per unit = 2
hours per unithours per unit
 Actual Production = 90 unitsActual Production = 90 units
 Actual Labor Hours = 190 hours.Actual Labor Hours = 190 hours.

2929
 FOCV =FOCV =
 Rs.530 – (Rs.500 /(2 x 100)units x 2x 90 units) = Rs.530Rs.530 – (Rs.500 /(2 x 100)units x 2x 90 units) = Rs.530
– (500/200) x 2x90 = Rs.80 (unfavorable)– (500/200) x 2x90 = Rs.80 (unfavorable)
 FOSV = Total Actual Overheads – Total BudgetedFOSV = Total Actual Overheads – Total Budgeted
Overheads = Rs.530 – Rs.500 = Rs.30Overheads = Rs.530 – Rs.500 = Rs.30
 FOEV =FOEV =
[(Std. Hrs per Unit x AO) – Actual Hrs Wrkd] x SFOR[(Std. Hrs per Unit x AO) – Actual Hrs Wrkd] x SFOR
= [(2 x 90) – 190] x 500 / (2x100) = - Rs.25= [(2 x 90) – 190] x 500 / (2x100) = - Rs.25
 Volume Variance = (Bud.Volume - Actual Volume) xVolume Variance = (Bud.Volume - Actual Volume) x
SFORSFOR
= 100 units – 90 units x (500/(2x100)) =10x2.5=Rs.25.= 100 units – 90 units x (500/(2x100)) =10x2.5=Rs.25.
 FOCV (Rs.80) = FOSV (Rs.30) + FOEV (Rs.25) + Vol.FOCV (Rs.80) = FOSV (Rs.30) + FOEV (Rs.25) + Vol.
Variance (Rs.25)Variance (Rs.25)

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