he following points highlight the four major types of

variance analysis. The types are: 1. Material Variances 2.

Labour Variances 3. Variable Overhead Variances 4. Sales
Variances.
Variance Analysis: Type # 1.
Material Variances:

Some Definitions:
1. Direct Materials Usage Variance:
“The difference between the standard quantity specified for actual
production and the actual quantity used at standard purchase
price.”

2. Direct Materials Price Variance:

“The difference between the standard price and actual
price for the actual quantity of materials.”

3. Direct Materials Total Variance:

ADVERTISEMENTS:

“The difference between the standard direct material cost

of the actual production volume and the actual cost of
direct material.”
How to find out?

Formulae:
(i) Actual quantity used for production x Standard price Minus

(ii) Standard quantity for production x Standard price Actual

quantity purchased x Actual price

Minus:
ADVERTISEMENTS:

Actual quantity purchased x Standard price

Note:
The actual usage is to be calculated as follows:
Opening stock + Purchase – Closing stock = USAGE

Causes of Material Variances:

(i) Price Variances:
(a) Buying lower or higher quality of materials than planned.

(b) Losing or gaining quantity discounts by purchasing in smaller or

larger quantity of materials than planned.

(c) Paying higher or lower price than planned.

(d) Close substitute materials are bought due to unavailability of

planned material,

(ii) Usage variance:

(a) Buying of substitute materials because of unavailability of
standard materials.

(b) Greater or lower yield from materials than expected or planned.

(c) Greater or lower rate of scrap than anticipated.

Alternative Approach:
Material Cost Variance:
1. Actual Quantity x Actual Rate

2. Actual Quantity x Standard Rate

3. Standard Mix of Actual Quantity x Standard Price

4. Standard Quantity for Actual Output x Standard Rate.

Problem 1:
Sanrare Perfumery Ltd. provides the following
information from their records:
The standard material requirements for 10 kg. of a
product are :

During March, 1999, 100 kgs. of the product were

produced. The actual consumptions of materials were as
under:

Calculate:
(i) Material Cost Variance

(ii) Material Price Variance

(iii) Material Usage Variance

Problem 2:
The Standard Material cost to produce a tonne of chemical
is:
300 kgs. of material A @ Rs.10 per kg.

400 kgs. of material B @ Rs. 5 per kg.

500 kgs. of material C @ Rs. 6 per kg.

During a period, 100 tonnes of mixture X were produced

from the usage of:
35 tonnes of material A at a cost of Rs.9,000 per tonne

42 tonnes of material B at a cost of Rs.6,000 per tonne

53 tonnes of material C at a cost of Rs.7,000 per tonne

Calculate material price, usage and mix variances.

1. Material Cost Variance:

Standard Cost for Actual Quantity – Actual Cost

= Rs.8,00,000 – Rs.9,38,000 = Rs.1,38,000 (A)

2. Material Price Variance = AQ (SP – AP):

Problem 3:
From the following data compute:
(i) Material Cost Variance

(ii) Material Price Variance

(iii) Material Usage Variance

Standard quantity required 500 kgs.

Standard price @ Rs.10 per kg.

Actual quantity used 600 kgs.

The above quantity was bought at Rs. 5,400.

Problem 4:
From the following particulars compute:
(i) Material Cost Variance

(ii) Material Price Variance

(iii) Material Usage Variance

Quantity of material purchased: 5,000 units

Value of materials purchased: Rs,50,000

Standard Quantity of materials required for the product 5,500 units

Standard rate of material per unit Rs.10.50

Variance Analysis: Type # 2.

Labour Variances:
Labour variance analyses the variance of actual labour
cost from standard labour cost due to the following
factors:
(a) Rate of pay;

(b) Labour efficiency;

(c) Labour mix; and

(d) Idle time etc.

Labour Variance may be classified as follows:

 Some definitions:
(i) Direct Labour Rate Variance:
Definition:
“The difference between the standard and actual direct
labour hour rate per hour for the total hours worked” —
Terminology.
(ii) Direct Labour Efficiency Variance:
“The difference between the standard hours for the actual
production and the hours actually worked valued at the standard
labour rate”—Terminology.

(iii) Direct Labour Total Variance:

“The difference between the standard direct labour cost and the
actual direct labour cost incurred for the production achieved”—
Terminology.

Types:
(i) Labour Cost Variance:
Formulae:
(i) (Actual Labour Hours x Actual Rate)

Minus (Actual Labour Hours x Standard Rate)

Causes:
Labour cost may arise due to changes in the following
factors:
(i) Actual Wage Rate may be more or less than Standard Wage Rate.

(ii) Actual Labour Hours may be more or less than Standard Labour
Hours.
(iii) There may be some idle hours due to abnormal situation like
strike, lockout, shortage of power which were not considered at the
time of fixing the standard labour cost.

(iv) There may be shortage of workers having standard level of

efficiency.

(v) Actual Output may be more or less than Standard Output or

yield.

(ii) Labour Rate Variance:

According to I.C.M.A., London, Labour Rate Variance “is that
portion of labour (wages) variance which is due to the difference
between the Standard Rate of pay specified and Actual Rate paid.”

Labour Rate Variance:

= (SR x AH) – (AR x AH)

= (SR – AR) x AH

Causes:
Labour Rate variance may be caused by the following
factors:
(i) Employment of more skilled and efficient workers who demand
higher wages.

(ii) Scarce supply of labour might have raised the wage rates.

(iii) On the contrary, excess supply of labour might have lowered

down the wage rate.

(iv) Overtime allowances, bonus and extra shift allowances might

have been paid.

(v) Change in method of wage payment.

(vi) Due to government policy general wage rate might have gone
up.
(vii) Due to an agreement with the trade unions there may be
modification of terms and conditions of wage payment and as a
result the rate of wages may go up.

(viii) Faulty recruitment and placement of workers.

(ix) New workmen now paid though not included in the standards.

(iii) Labour Time (efficiency) Variance:

This is like Materials Quantity Variance. According to I.C.M.A.,
London “it is that portion of labour (wages) variance which is due to
the difference between standard labour hours specified for the
output achieved and actual hours expended”.

This variance reflects the efficiency or inefficiency of the workers.

Labour Efficiency Variance = (SH x SR) – (AH x SR) = SR x (SH –
AH) It is to be noted carefully that actual labour hours used in the
formula should be labour hours actually taken for production.

Causes:
Labour Efficiency Variance may be caused by:
(i) Go-slow tactics adopted by the trade unions.

(ii) Absence of maintenance up to standard level.

(iii) Poor quality of raw materials.

(iv) Loss in waiting time.

(v) Lack of proper and efficient supervision.

(iv) Idle-Time Variance:

Sometimes workers may remain idle in the factory due to strike,
power failures, machine break-down, etc. The hours for which
workers are not provided with work facilities are known as idle
hours. They get wages for these idle hours. Obvious idle hours do
affect the labour cost variance.
This kind of variance is undesirable and that is why reasons for
these variances are to be identified and measures should be taken to
control them.

Idle Time Variance = Idle Hours x S.R.

(v) Labour Yield Variance:

This variance arises on account of the difference between Standard
Yield and Actual Yield : Labour Yield Variance = (AY – SY) x SLC
per unit

(vi) Labour Mix. Variance:

Labour Mix. Variance = (Revised Hours – Actual Hours) x S.R.

Revised Hours will be calculated:

RH = Actual Hours x Standard Mix Ratio. Alternative Approach

Labour Cost Variances

Alternative Approach:
1. Actual Hours x Actual Rate

2. Actual Hours x Standard Rate

3. Standard Hours for Actual Output x Standard Rate

Or, Earned Standard Hours

4. Standard Hours is Standard Mix. for Actual Output x

Standard Rate :
1. Rate of Pay Variance = 2-1

2. Efficiency Variance = 3-2

3. Labour Mix. Variance = 4-2

4. Total Variance = 3-1

Problem 5:
The following information is obtained from a Standard Cost Card.
Labour Rate Rs.2 00 per hour

Hours — 3 hours per unit

Actual production data are:

Units produced are 250

Labour rate Rs.2-25 per hour

Hours worked—800

Calculate Labour Cost Variance and analyse it.

Variance Analysis: Type # 3.

Variable Overhead Variances:

Types:
(i) Variable Overhead Variance:
The difference between the actual overheads incurred and the
variable overheads absorbed. This variance is simply the under-
absorption of overheads.

(ii) Variable Overhead Expenditure Variance:

Definition:
The difference between the actual overheads incurred and the
allowed variable overheads based on the actual hours worked is
known as Variable Overhead Expenditure Variance (VOEV).

(iii) Variable Overhead Efficiency Variance:

Definition:
The difference between the variable overheads and the absorbed
variable overheads is known as Variable Overhead Efficiency
Variance.

Formulae:

Problem 6:
Problem 7:
Calculate variable overhead expenditure variance from
the following particulars:

Variance Analysis: Type # 4.

Sales Variances:
A number of standard costing systems have been designed to
present Material, Labour and Overhead cost variances as discussed
earlier. No doubt, these variables are invaluable, but many
accountants do think that a system will remain incomplete if sales
variances are not included in the presentation of information to the
management.

Methods of Sales Variances:

There are two methods of calculating sales variances
namely:
(i) The Turnover Method:
This method shows the effect of a change in sales on turnover.

(ii) The Margin Method:

This method shows the effect of a change in sales on profit margin.
Both the methods are very useful and should be understood by
management accountants for taking managerial decisions.

Causes of Sales Variance:

Sales variances are basically caused by two changes which
may occur when comparing budgeted sales with actual
sales:
(i) Those due to price and

(ii) Those due to volume.

The change in volume may be caused by:
(i) Changes due to a change in quantity and

(ii) Changes due to a change in ‘mix’ of sales.

An example will clarify the matter:

In the above case, the volume of sales is as budgeted, but

the selling prices have changed in both the products:
Change in volume:

Here, the price and quantity are as budgeted but the ‘mix’ of
products has changed from A 50%, and B 50% to A 60% and B 40%.

(i) Sales Value Variance:

(Actual Value of Sales – Budgeted Vale of Sales)
Actual Sales = Actual Quantity sold x Actual selling price.

Budgeted Sales = Standard Quantity x Standard selling price.

If actual sales are more than the budgeted sales, there is favourable
variance and if actual sales < budgeted sales the variance will be
unfavorable.

(ii) Sales Price Variance:

(Actual selling price – Budgeted selling price) x Actual Quantity

If actual sales price < budgeted sales, the variance is favourable and
vice versa.

(iii) Sales Volume Variance:

(Actual Quantity – Budgeted Quantity) x Budgeted selling price

If the actual quantity sold exceeds the budgeted sales quantity then
the variance is favourable and if the actual quantity sold is less than
budgeted sales quantity, the variance is taken as unfavorable.

(iv) Sales Mix Variance:

(Actual mix quantity sold – Actual quantity in standard proportion)
x standard selling price. (Budgeted price per unit of actual mix –
Budgeted price per unit of budgeted mix) x Total actual quantity.

(v) Sales Quantity Variance:

(Total actual quantity – Total budgeted quantity) x Budgeted price
per unit of budgeted mix.

Problem 8:
The budgeted and actual sales of a concern manufacturing
and marketing a single product are furnished below:
Budgeted sales 10,000 units at Rs.4 per unit.

Actual sales 5,000 units at Rs.3.50 per unit

8,000 units at Rs.4 per unit

Calculate:
(a) Sales Price Variance
(b) Sales Volume Variance

The revised terminology of cost accounting published in 1966 by the

Institute of Cost and Management Accountants favours this method
of calculating sales variances.

Problem 9:
Compute the following variances from the data given
below:
(i) Total sales margin variance,

(ii) Sales volume variance,

(iii) Sales margin price variance,

(iv) Sales margin quantity variance.