Variance Analysis Practice Questions

Why do cost variances occur?

You pay more or less than budgeted

 Price/Rate Variance
You use more or less than budgeted
 Usage/Efficiency Variance

Variance Analysis
-Allows us to identify inefficiencies with production process or estimation and budgeting
process
-Also helps in assigning responsibility

Basic Formulas:
Price Var. = (Std. Price pu – Actual Price pu) x Total Actual Qty Purchased

Usage Var. = (Total Std. Qty. - Total Actual Qty Used) x Std. Price pu

Total Std. Qty. = Std. Qty. pu x Actual Production (Flexible Budget prepared just before
conducting a Variance Analysis)

Static Budget = Std. Qty. pu x Budgeted Production (Prepared at the beginning of the Budget
Period)

Flex Budget Var. =

(Std. Price pu x Std. Qty. pu x Actual Production) – (Actual Price pu x Total Actual Qty.)

Mix Variance = (Act. Qty. @ Std Mix - Act. Qty. @ Act. Mix) x Std. Price pu

Yield Variance = (Std. Qty. @ Std. Mix - Act. Qty. @ Std. Mix) x Std. Price pu

Production Volume Variance = Static Budget for Budgeted Production - Flex Budget for Actual
Production

1. A company had a budgeted production of 12000 units and actual production of 13200 units.
Two types of raw material, P and Q are used in the manufacturing of the products. The budgeted
raw material requirement of the company was expected to be 3 lbs. of Material P at a price of $
0.25 per lbs. and 2 lbs. of Material Q at a price of $ 0.35 per lbs. for every unit produced. The
company actually ended up using 42000 lbs. of P at an actual cost of $0.19 per lbs. and 25000
lbs. of Q at an actual cost of $0.38 per lbs. Calculate all possible direct material variances.

2. The actual sales of product are 5900 units. The budgeted sales for the same are 6000 units.
The direct material standards and actual direct material used in production for the product are as
follows:
Direct Material Standards
Need p.u. Rate p.u.
DM X 2 $2
DM Y 1 $3

Direct Material Actuals

Product B Total Units Rate p.u
DM X 12200 $1.9
DM Y 5800 $3.2

Calculate all possible direct material variances.

3. The company budgeted to produce 10,000 units but eventually produced 10,200 units. Two
types of direct labors are used in the production process. The direct labor standards and actual
direct labor used in production are as follows:

Standard 10000 units

Type of DL Hours Rate$ Total
X 2000 8 16000
Y 4000 10 40000
56000

Actual 10200 units

Type of DL Hours Rate$ Total
X 1900 8.1 15390
Y 4200 9.9 41580
56970

Calculate all possible direct labor variances.

4. ABC Games produces three handheld games X, Y and Z. The CEO has discovered that the
total Contribution Margin (CM) for the 4th quarter of 2002 came in lower than expected (budget).
It is your job, as the senior vice president of marketing, to explain why the actual results were
different from the budgeted. DEF Research estimated 4th quarter sales of handheld games
worldwide to be 400,000 units, however, actual 4th quarter sales were 500,000 units.

BUDGETED OPERATING DATA, 4th quarter 2003:

Selling VC / unit CM / unit Sales
Price volume
(units)
X $379 $182 $197 12,500
Y 269 98 171 37,500
Z 149 65 84 50,000
 Total = 100,000

ACTUAL OPERATING DATA, 4th quarter 2003:

Selling VC / unit CM / unit Sales
Price volume
(units)
X $349 $178 $171 11,000
Y 285 92 193 44,000
Z 102 73 29 55,000
Total = 110,000
Calculate all of the CM variances for the 4th quarter.