Cost Accounting 2

(ch:3)
Analysis Of Variations Of
indirect Costs

Section No:5
P r e p a r e d by : m a r i n a R o m a n y
Analysis Of The Total Variance Of indirect
costs.
to make an analysis of variations of indirect costs we need to
determine variation of indirect costs first then make an
analysis of this variance.
Variation of indirect costs = standard indirect costs – actual
indirect costs
Standard indirect costs = (standard allocation rate*standard
base*actual production)
Actual indirect costs = (actual allocation rate*actual
base*actual production)
analysis of variance under fixed budget

Binary analysis
1.Efficiency variance= (standard hours of actual
production- actual hours of actual production)
*standard allocation rate
2.Allocation rate variance= (standard allocation rate –
actual allocation rate) * actual hours of actual
production.
Triple analysis

1.Efficiency variance= (standard hours of actual production-

actual hours of actual production) *standard allocation rate
2.Spending variance= standard indirect costs of standard
production – actual indirect costs of actual production.
3.Capacity variance= (actual hours of actual production –
standard hours of standard production) * standard allocation
rate
Second: analysis of variance under flexible budget
Binary analysis
• controlled variance= (standard indirect costs of flexible budget – actual
indirect costs).
= {(standard variable rate*standard base*actual production) +standard fixed
costs} - actual indirect costs.

• uncontrolled variance= (standard indirect costs allowable -

standard indirect costs of flexible budget).
= (standard base*standard rate* actual production)- {(standard
variable rate*standard base*actual production) + standard fixed costs}
• Triple analysis

1- Efficiency variance = (standard hours of actual production-

actual hours of actual production) *standard allocation rate.
2- Spending variance= (standard indirect costs of flexible budget
– actual indirect costs of actual production).

3- Capacity variance= standard indirect costs of actual base of

actual production – standard indirect costs of flexible budget.
Example:
Kareem manufacturing company produces product y, the following data
were available on the manufacturing indirect costs.
Desc. Standard data Actual data
Indirect variable manufacturing 15,000 16,128
costs
Fixed indirect manufacturing 30,000 28,224
costs
The number of hours required 5 4.8
to produce the unit
Production volume 3000 2800

Required:
Determine the total variance in the indirect manufacturing costs and
make binary and triple analysis under fixed budget and flexible budget.
 solution
First: Determination of variance:
Standard allocation rate= (standard indirect costs of standard
production/standard allocation base of standard production)
= (45000/ (5*3000) =3 pound/hour

Actual allocation rate= (actual indirect costs of actual production/actual

allocation base of actual production)
= (44352/ (4.8*2800) =3.3 pound/hour
Standard indirect costs = (5*3*2800) = 42000
Actual indirect costs = (4.8*3.3*2800) = 44352
So: Variance = 42000-44352= -2352
second: analysis of variance under fixed budget (-2352)

1.Binary analysis
 Efficiency variance= {(5*2800)-(4.8*2800}*3= +1680

 Allocation rate variance={(3-3.3)*(4.8*28000)} =

-4032
1.Triple analysis

 Efficiency variance = +1680

 Spending variance={(15000+30000)-(16128+28224)}= +648

Or = {(5*3*3000)-(4.8*3.3*2800)}=+648

 Capacity variance={(4.8*2800)-(5*3000)}*3= -4680

second: analysis of variance under flexible budget(-2352)

1. Binary analysis
• Controlled variance= (standard indirect costs of flexible budget – actual indirect
costs).
= {(standard variable rate*standard base*actual production) +standard fixed costs} - actual indirect
costs.
= {(1*5*2800)+30000}-{4.8*3.3*2800)= -352
 Uncontrolled variance= (standard indirect costs allowable - standard
indirect costs of flexible budget).
= (standard base*standard rate* actual production)- {(standard variable
rate*standard base*actual production) + standard fixed costs}
=(5*3*2800)- {(1*5*2800)+30000}= -2000
2- Triple analysis
 Efficiency variance= + 1680
 Spending variance= (standard indirect costs of flexible budget –
actual indirect costs of actual production).
= {(5*1*2800)+30000}-{4.8*3.3*2800}=
-352
 Capacity variance= standard indirect costs of actual base of
actual production – standard indirect costs of flexible budget.
= {3*4.8*2800}-{(5*1*2800)+30000}= -3680