You are on page 1of 2


Variance can occur due to

1. A variance is simply the difference
between a predetermined norm or
standard and the actual results.
2. The standards themselves may be
3. Systematic reasons

costs is the difference between the actual costs

and the budgeted costs.
Price Variance = Actual Fixed Manufacturing
Costs - Budgeted Fixed Manufacturing Costs
Key Points

1. Reasons for conducting variance

analyses. Variance analysis investigates
and analyzes the variance to find causes, to
Reasons for Materials Price and Efficiency
ascertain whether the firm needs to take
corrective steps, and to reward or penalize
employees, when appropriate.
1. purchase discounts
2. How to use the budget for performance
2. allow for material defects,
evaluation. Accountants compare actual
3. inexperienced workers who ruin
results achieved with budgets to derive
variances for performance evaluation.
4. improperly used materials
3. Different types of variances between
5. bought inferior materials,
actual results and the flexible budget.
6. ordered the wrong materials
a. purchasing and production variances,
Reasons for Labor Price and Efficiency
b. marketing and administrative cost
c. sales price variance,
1. wage rate change
d. and sales volume variance.
2. motivation
4. Responsibility Centers for Variances
3. poor materials,
a. Marketing - Sales volume, sales price,
4. faulty equipment,
and marketing cost variances
5. poor supervision,
b. Management Administrative costs
6. and scheduling problems.
c. Purchasing materials variances
d. Production - fixed manufacturing cost
variance and the remaining variable
manufacturing cost variances not
assigned to purchasing
1. cost per machine hour is either more or
the role of variance analysis in
less than the standard cost allowed per
service organizations. Service organizations
machine hour
2. the machine hours required to make the use profit variance analysis but define output
based on services provided, such as billable
actual production output exceed the
standard machine hours allowed to make hours in consulting firms or patient-days in
that output
Production Volume Variance is the
difference between the budgeted and applied
fixed costs.
Production Volume Variance = Budgeted Fixed
Manufacturing Costs - Applied Fixed
Manufacturing Costs
Price Variance (sometimes called the
spending variance) for fixed manufacturing

6. Explain the difference between price

and efficiency variances. The price variance
is the difference between the budgeted (or
standard) price and the actual price paid for
each unit of input. The efficiency variance
measures the efficiency with which the firm
uses inputs to produce outputs.
7. Identify the relation between actual,
budgeted, and applied fixed
manufacturing costs. Companies frequently

use a predetermined overhead rate to apply

fixed overhead to units produced. The price
variance is the difference between the actual
fixed overhead and the budgeted fixed
overhead. The production volume variance is
the difference between the budgeted fixed
overhead and the applied fixed overhead.

more responsive and informed decision making,

and (3) it uses worker skills and knowledge.

9. Explain how to compute the mix

variance When companies use multiple inputs
to produce output, the efficiency variance can
be divided into mix and yield components to
demonstrate how much of the variance was
8. Explain why an effective performance
caused by a deviation in input mix from the
measurement system requires employee
standard and how much was caused by the
involvement. Worker involvement is important over- or underuse of inputs, holding the mix
for three reasons: (1) It increases commitment
to the organization and its goals, (2) it leads to