Variance Analysis and Classification of Variances

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Variance analysis

·       The deviations between standard costs, profits or sales and actual costs, profits or sales respectively will be known as variances.

·       Can be favourable and unfavourable, controllable or uncontrollable.

·       Significance: Cost control and measuring performance, assigning responsibility and accountability, management by exception, helps in decision making, warning for corrective action.

 

Classification of variances

·       Total Cost Variance is divided into:

o   Direct Material Cost Variance

o   Direct Labour Cost Variance

o   Overhead Cost Variance

 

Direct Material Cost Variance

·       Material cost variance is the difference between the standard cost of material allowed for the actual output achieved and the actual cost of material used.

·       Variance that may arise as a result of difference between actual price paid and standard price expected, actual units produced from material and the standard expected, actual mix of material and the standard mix etc.

·       Material price variance arises when the firm purchases the raw material at a price different than the standard price. Actual Quantity(Standard price – Actual price)

·       Material Usage variance arises when there is a difference between the actual quantities of raw material and standard quantities of raw material to produce the output achieved. Standard price(standard quality – Actual quantity)

·       Material Mix Variance may arise in a situation where the firm uses different proportion (mix) of raw material to produce the finished product.

·       Material Yield Variance measures the difference in actual output/ yield for a given set of inputs and the standard output/ yield for a given set of inputs. Standard rate(Actual yield – Standard yield)

·       π‘†π‘‘π‘Žπ‘›π‘‘π‘Žπ‘Ÿπ‘‘ π‘Ÿπ‘Žπ‘‘π‘’ =       π‘†π‘‘π‘Žπ‘›π‘‘π‘Žπ‘Ÿπ‘‘ π‘π‘œπ‘ π‘‘     

𝑁𝑒𝑑 π‘†π‘‘π‘Žπ‘›π‘‘π‘Žπ‘Ÿπ‘‘ π‘œπ‘’π‘‘π‘π‘’π‘‘

 

Direct labour variances

·       The term Labour Variance denotes variance with respect to the labour and it arises when there is a difference between the actual labour cost and standard labour cost.



·       Labour cost variance is the difference between the standard cost of labour allowed for the actual output achieved and the actual cost of labour used. Standard labour cost – Actual labour cost

·       Labour rate variance arises when the firm pays the wages at a rate different than the standard wage rate. Actual time(Standard rate – Actual rate)

·       Labour Efficiency variance is that part of the labour cost variance which is due to the difference between the actual labour hours and standard labour hours specified to produce the output achieved. Standard wage rate(Standard time – Actual time)

·       Idle time variance is the standard cost of actual time paid to workers for which they have not worked due to abnormal reasons. Idle hours ∗ Standard rate

·       Labour Mix Variance may arise in a situation where the firm uses different proportion (mix) of labour to produce the finished product.

o π‘†π‘‘π‘Žπ‘›π‘‘π‘Žπ‘Ÿπ‘‘ π‘π‘œπ‘ π‘‘ π‘œπ‘“ 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 π‘†π‘‘π‘Žπ‘›π‘‘π‘Žπ‘Ÿπ‘‘ πΏπ‘Žπ‘π‘œπ‘’π‘Ÿ 𝑀𝑖π‘₯ −

π‘†π‘‘π‘Žπ‘›π‘‘π‘Žπ‘Ÿπ‘‘ π‘π‘œπ‘ π‘‘ π‘œπ‘“ π΄π‘π‘‘π‘’π‘Žπ‘™ π‘™π‘Žπ‘π‘œπ‘’π‘Ÿ π‘šπ‘–π‘₯

o   When standard and actual time of labour mix are different:

o  π‘‡π‘œπ‘‘π‘Žπ‘™π‘‘π‘–π‘šπ‘’π‘œπ‘“π‘Žπ‘π‘‘π‘’π‘Žπ‘™π‘™π‘Žπ‘π‘œπ‘’π‘Ÿπ‘šπ‘–π‘₯  × π‘†π‘‘π‘Žπ‘›π‘‘π‘Žπ‘Ÿπ‘‘ π‘π‘œπ‘ π‘‘ π‘œπ‘“ π‘ π‘‘π‘Žπ‘›π‘‘π‘Žπ‘Ÿπ‘‘ π‘™π‘Žπ‘π‘œπ‘’π‘Ÿ π‘šπ‘–π‘₯  −

π‘‡π‘œπ‘‘π‘Žπ‘™π‘‘π‘–π‘šπ‘’π‘œπ‘“π‘ π‘‘π‘Žπ‘›π‘‘π‘Žπ‘Ÿπ‘‘π‘™π‘Žπ‘π‘œπ‘’π‘Ÿπ‘šπ‘–π‘₯

π‘†π‘‘π‘Žπ‘›π‘‘π‘Žπ‘Ÿπ‘‘ π‘π‘œπ‘ π‘‘ π‘œπ‘“ π‘Žπ‘π‘‘π‘’π‘Žπ‘™ π‘™π‘Žπ‘π‘œπ‘’π‘Ÿ π‘šπ‘–π‘₯

 

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