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A variance is the difference between an actual result and an expected result. The process by which the total difference between standard and actual results is analysed is known as variance analysis. When actual results are better than the expected results, we have a favourable variance (F). If, on the other hand, actual results are worse than expected results, we have an adverse (A).
Variance Components
Material variance
Material Cost Variance
Price Variance
Quantity Variance
Mix Variance
Yield Variance
Material Cost Variance. It represents the difference between actual cost of material used and standard cost of material specified for output achieved. Material cost variance arises due to variation in prices and usage of materials. Difference between (actual quantity of materials used x actual rate) and (standard quantity of material required for the specified output x standard rate) will be material cost variance. Material cost variance: (SQ*SP ) - (AQ* AP) SP - STANDARD PRICE; AP - ACTUAL PRICE; SQ - STANDARD QUANTITY; AQ - ACTUAL QUANTITY.
Material Quantity Variance It is part of cost variance occurred due to difference between actual quantity used and standard quantity specified for output. It helps to identify whether the materials are used in proper manner. A debit balance of material usage variance indicates that material used was in excess of standard requirements. Credit balance shows will show savings in the use of material. Material Quantity Variance = (SQ AQ) * SP SP - STANDARD PRICE ; SQ - STANDARD QUANTITY; AQ - ACTUAL QUANTITY. Material Price variance When actual price paid for the materials is more or less than the standard price of the materials, the difference is called direct materials price variance. If actual price paid is more than the standard price the difference is called unfavourable materials price variance. And if the actual price paid is less than the standard price of the materials, the difference is called favourable materials price variance. Material Price variance = (SP AP) AQ SP - STANDARD PRICE; AP - ACTUAL PRICE; AQ - ACTUAL QUANTITY Material Mix Variance The variance is that part of material usage variance which is due to difference between actual composition of mix and standard composition of mixing the different types of materials. Short supply is the most common reason for this variance. Material Mix Variance = (SM- AM ) * SP SP - STANDARD PRICE; AP - ACTUAL PRICE; SQ - STANDARD QUANTITY; AQ - ACTUAL QUANTITY
Material Yield Variance Output depends on input of material. In this circumstances, if 10% of input material in course of normal loss of production. Then, 90% of total input of material will be expected output. If actual yield obtained happens to be different from the standard yield specified, there will be a yield variance. Material Yield Variance = (SY- AY)* SR SP - STANDARD PRICE; AP - ACTUAL PRICE; SQ - STANDARD QUANTITY; AQ ACTUAL QUANTITY EXAMPLE
The following information has been furnished by AB ltd. which has adopted standard costing: Standard: Materials for 150 kg finished products Price of materials Actual: Output Materials used Cost of materials
Calculate: (a) Material cost variance; (b) Material price variance & (c) Material usage variance. Solution: Standard quantity of material required for actual output:=300000 * 200 Actual quantity of material 150 Standard price Actual price = 684000 360000 (a) Material cost variance: Standard Cost-Actual Cost = (400000*Rs.4) Rs.684000 (b) Materials price variance: Actual quantity * Price Difference = 360000 * (Rs.4.00-1.90) (c) Material Usage Variance: Standard price * Usage difference = Rs.4 * (400000-360000) Check: Material cost variance = Price + Usage Rs.916000 Favourable
Rs.160000 Favourable
Rs.916000 Favourable
Labour cost variance Direct labour cost variance is the difference between the standard cost for actual production and the actual cost in production Labour cost variance = (AH * AR SH *SR)
Labour rate variance Direct labour rate variance is the difference between the amount of actual hours worked at actual rate and actual hours worked at standard rate. Labour rate variance = (Actual rate Standard rate ) * Actual hours Labour efficiency variance Difference between the amount of labour time that should have been used and the labour that was actually used, multiplied by the standard rate. Labour efficiency variance = (Actual hours worked Standard rate) (Standard hours allowed Standard rate)
EXAMPLE The information regarding composition and weekly wages rates of labour force engaged in a particular job is as follows: Workers Std. No. Std. Rate Actual No. Actual Rate as per skill Hours per hour Hours per hour ------------------------------------------------------------------------
75 45 60
60 40 30
70 30 80
70 50 20
Calculate the following: LCV LRV LEV Solution 1. Labour Cost Variance (LCV) = (SH x SR) (AH x AR) Skilled = (75 x 60) (70 x 70) = 4500 - 4900 Semi-skilled = (45 x 40) (30 x 50) = 1800 1500 = (60 x 30) (80 x 20) = 1800 1600
400(A)
300 F
Unskilled
Total LCV = 2. Labour Cost Variance LRV = AH (SR AR) Skilled = 70 (60 70) Semi-Skill = 30 (40 -50) Unskilled = 80 (30-20
= 700(A) = 300(A) = 8000(F) -------Total LRV = 200 A --------= 300 F = 600 F = 600 A --------Total LEV = 300 (F) ---------
3. Labour efficiency Variance LEV = SR (SH AH) Skilled = 60 (75-70 Semi-skilled = 40 (45-30) Unskilled = 30 (60-80
Verification LCV = LRV + LEV 100 (F) = 200 (A) + 300 (F) 100 (F) = 100 (F)
IDEL TIME VARIANCE The difference between the number of hours budgeted for work and the number of paid hours not spent working (idle time). Idel Time Variance = Actual time Standard time For example, if employees of a company were budgeted to make products for 8,000 hours, but only did work for 7,800 hours, then 200 hours were spent in idle time. This is often further calculated by multiplying the idle time by the wage rate. If the wage rate is Rs.10/hour, then the idle time carried a cost of Rs2,000 (200 hours x Rs.10/hour).
1. SH = Standard Hours 2. SR = Standard Rate per hour 3. AH = Actual Hour 4. AR = Actual Rate per hour 5. RSH = Revised Standard Hour 6. LCV = Labour Cost Variance 7. LRV = Labour Rate Variance 8. LEV = Labour Efficiency Variance 9. LMV = Labour Mix Variance 10. LITV = Labour Idle Time Variance
VOHEfV VOHExV FOHVV Variable Overhead Variable Overhead Fixed Overhead Efficiency Variance Expenditure Variance Volume Variance
VOHEfV = (actual labour-hours - standard labour-hours allowed for actual production) X standard variable overhead rate.
Reasons of occurrence of Volume Variance are: a. b. c. d. There is a decrease in the consumer demand. Plant capacity is in excess. Due to poor scheduling or input bottlenecks, there is a stoppage of plant. Allowances have not been made as a result of fluctuations of calendar.
FOHCapV = Standard fixed overhead rate per hour * (Budgeted hours Actual hours) Reasons of occurrence of Fixed Overhead Capacity Variance is (i.e. the reasons why actual activity & normal activity are not equal): a. There are bottlenecks & low output which arises as a result of poor production scheduling. b. There are machine breakdowns which are not expected. c. There is a shortage of skilled operatives or materials. d. Strikes e. Natural calamities such as flood etc.
FOHCalV= Excess/ deficit hours worked * Standard fixed overhead rate per hour
EXAMPLE At a certain factory budgeted quantity of 2000 units of a product are to be produced for a 20 working day month. Rs.100000 was the budgeted amount of fixed overhead for the period. During the month actual quantity of 1500 units was produced. Rs. 120000 was the actual amount of fixed overhead incurred for the period. At 100 units per working day was set the standard rate of production. Only 18 days were actually worked during the month. Calculate the fixed overhead variance. Solution: Standard Fixed Overhead per unit = Budgeted Overhead Budgeted Production = 100000 = 50 per unit. 2000 Fixed Overhead recovered by Actual production = Actual Production * Standard rate = 1500 * 50 = 75000 Standard Production in actual days = Actual days worked * Standard rate of production = 18 * 100 = 1800 units (a) Fixed Overhead Variance = Overhead Recovered Actual Overhead = Rs.75000 Rs. 120000
Rs. 45000 A
(b) Fixed Overhead Expenditure variance = Budgeted Overhead Actual Overhead = Rs. 100000 Rs. 120000 (c) Fixed Overhead Volume Variance = Standard Rate per unit * (Budgeted Production Actual Production) = Rs.50 * (2000 1500) Check: Fixed Overhead Variance = Expenditure + Volume 25000 A 45000 A 20000 A
The volume variance can be analysed now into sub-variances, viz., capacity & efficiency. (d) Fixed Overhead Capacity Variances: Standard Rate per unit * (Budgeted Production Standard Production) = Rs. 50 * (2000 1800) 10000 A
(e) Fixed Overhead Efficiency Variance: Standard Rate per unit * (Standard Production Actual Production) = Rs. 50 * (1800 1500) 15000 A