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Subject COMMERCE

Paper No and Title PAPER NO. 6: ACCOUNTING FOR MANAGERIAL

DECISIONS
Module No and Title MODULE NO. 17: KINDS OF VARIANCES

Module Tag COM_P6_M17

TABLE OF CONTENTS
1. Learning Outcomes
2. Introduction
3. Direct Material Variances
4. Direct labour Variances
5. Overhead Variances

5.1 Variable Overhead Variance

5.2 Fixed Overhead Variance

COMMERCE PAPER NO. 6 ; ACCOUNTING FOR MANAGERIAL DECISIONS
MODULE NO.17 ; KINDS OF VARIANCES
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6. Summary

1. Learning Outcomes
After studying this module, you shall be able to

 Know the different kinds of material variances, labour variances and overhead variances,
 Identify the subcomponents of material variances,
 Categorize the labour variances,
 Understand the fact that overhead cost variance includes fixed cost variance and variable
cost variance.

2. Introduction
The variance results when there is a difference between the standard cost allowed and the actual
cost incurred. We should understand the kinds of variances before doing the computation work
related to it. The total Cost variance ( standard cost – actual cost) is divided into variance for
each element of cost, that is, material cost variance, labour cost variance and overhead cost
variance which are further bifurcated between various sub- components.
Total Cost Variance

Direct Material
Cost Variance
Diract Labour Cost
Variance
Overhead Cost
Variance

COMMERCE PAPER NO. 6 ; ACCOUNTING FOR MANAGERIAL DECISIONS

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3. Direct Material Variance

The variance arising with respect to the component ‘material’ constitutes material variance. The
variance may arise as a result of the difference between the actual price paid and standard price
expected, actual units produced from material and the standard expected, actual mix of material
and the standard mix etc. The different types of material variances are discussed below.

a. Material cost variance is the difference between the standard cost of material allowed for the
actual output achieved and the actual cost of material used. It is favourable when the actual
cost of material is less than the standard cost of material for actual output and adverse when
actual cost is higher than the standard cost. Material Cost Variance can be further sub divided
into Material Price Variance and Material Usage / Quantity Variance.

Material Cost
Variance

Material Usage
Material Price
/ Quantity
Variance
Variance

Material Mix Material Sub

Variance Usage Variance

b. Material price variance arises when the firm purchases the raw material at a price
different than the standard price.
c. Material Usage variance arises when there is a difference between the actual quantities of
raw material and standard quantities of raw material to produce the output achieved. The
Material Usage Variance is sub divided into Material Mix Variance and Material Revised
Usage Variance or Material sub- usage Variance.
d. Material Mix Variance may arise in a situation where the firm uses different proportion
(mix) of raw material to produce the finished product. The firm pre determines the
standard mix to be used for production but its actual mix may differ than expected
because of many reasons like, price rise in the cost of material, delay in purchasing the
material etc.

COMMERCE PAPER NO. 6 ; ACCOUNTING FOR MANAGERIAL DECISIONS

MODULE NO.17 ; KINDS OF VARIANCES
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e. Material Revised Usage Variance takes into account those reasons other than those of
material mix variance that attributes to material usage Variance. It undertakes the
difference between the Standard Quantity and Revised Standard Quantity. When there is
no difference between the total actual quantities of all the material and total standard
quantities of all the material then the Revised Standard quantity would be same as
Standard quantity resulting into no Material Revised Usage Variance.
f. Material Yield Variance measures the difference in actual output/ yield for a given set of
inputs and the standard output/ yield for a given set of inputs.

4. Direct Labour Variances

The term Labour Variance denotes variance with respect to the labour and it arises when there is a
difference between the actual labour cost and standard labour cost. The different kinds of labour variances
are discussed in this section.

Labour Cost
Variance

Labour Time/ Labour Rate

Efficiency
Variance Variance

Labour Sub
Idle Time Labour Mix
Efficiency
Variance Variance
Variance

a. Labour cost variance is the difference between the standard cost of labour allowed for the
actual output achieved and the actual cost of labour used. It can be further sub divided into
Labour Rate Variance and Labour Time / Efficiency Variance.
b. Labour rate variance arises when the firm pays the wages at a rate different than the standard
wage rate.
c. Labour Efficiency variance is that part of the labour cost variance which is due to the
difference between the actual labour hours and standard labour hours specified to produce the
COMMERCE output achieved.PAPER NO.Efficiency
The Labour 6 ; ACCOUNTING
/ Time VarianceFOR MANAGERIAL
is sub divided into IdleDECISIONS
Time
Variance, Labour MODULE NO.17
Mix Variance ; KINDS
and Labour – Efficiency
SubOF VARIANCES Variance.
d. Idle time means the workers are not able to utilize the total time for which they are paid for
and sitting idle for some time.
e. Labour Mix Variance may arise in a situation where the firm uses different proportion (mix)
of labour to produce the finished product.
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5. Overhead Variances
The total Overhead Cost Variance results whenever there is a difference between the actual
overhead cost incurred and the standard overhead cost for the actual output achieved. Overhead
Cost variance is divided into Fixed Overhead Variance and Variable Overhead Variance. This
section discusses Variable overhead variances and Fixed overhead variances.

COMMERCE PAPER NO. 6 ; ACCOUNTING FOR MANAGERIAL DECISIONS

MODULE NO.17 ; KINDS OF VARIANCES
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Total Overhead
Cost Variance

Fixed overhead Variable Overhead

Variance Variance

Fixed Overhead Variable Overhead Variable Overhead

Fixed Overhead
Expenditure Expenditure Efficiency
Volume Variance
Variance Variance Variance

Fixed Overhead
Fixed Overhead Fixed Overhead
Efficiency
Capacity Variance Calendar Variance
Variance

5.1 Variable Overhead Variances

a. Variable overhead Cost Variance measures the difference between Absorbed

Variable overhead and Actual Variable Overhead. The Variable Overhead Cost
Variance is sub divided into Variable Overhead Expenditure / Spending/ Budget
Variance and Variable Overhead Efficiency Variance

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b. Variable Overhead Expenditure / Spending/ Budget Variance arise when there

is a difference between standard variable overhead and actual variable overhead
incurred.
c. Variable Overhead Efficiency Variance arises when there is a difference between
adsorbed variable overhead and standard variable overhead.

5.1 Fixed Overhead Variances

a. Fixed Overhead Cost Variance (FOCV) is that portion of total overhead cost variance that
arises due to difference between standard fixed overhead cost for actual output and actual
fixed overhead. It is divided into two variances, that is,
1. Fixed Overhead Expenditure Variance and
2. Fixed Overhead Volume Variance.
b. Fixed Overhead Expenditure / Spending / Budget Variance is that portion of fixed
overhead cost variance which arises due to the difference between budgeted fixed overhead
and actual fixed overhead.
c. Fixed Overhead Volume Variance is that portion of fixed overhead cost variance which
arises due to the difference between standard cost of overhead absorbed by actual
production and the budgeted overhead. Fixed Overhead Volume Variance is sub- divided into
Efficiency Variance, Capacity Variance and Calendar Variance.
d. Fixed Overhead Efficiency Variance is that portion of Fixed overhead volume variance
that arises due to the difference between the actual output and the standard output expected,
arising from the efficiency of workers or plant.
e. Fixed Overhead Capacity Variance is that portion of fixed overhead volume variance that
arises due to difference in standard and actual output because of under and over capacity
utilisation of plant and equipment attributing to factors like idle time, lockouts and strikes,
material shortage, machinery break down, labour turnover.
f. Fixed Overhead Calendar Variance arises when there is a difference between the number
of working days in the budgeted period and actual number of working days to which the
budget is applicable.

5. Summary
 The variance results when there is a difference between the standard cost allowed and the
actual cost incurred.
 The total Cost variance ( standard cost – actual cost) is divided into variance for each
element of cost, that is, material cost variance, labour cost variance and overhead cost
variance which are further bifurcated between various sub- components.
 The variance arising with respect to the component ‘material’ constitutes material
variance. Material cost variance is the difference between the standard cost of material
allowed for the actual output achieved and the actual cost of material used.
 Material Cost Variance can be further sub divided into Material Price Variance and
Material Usage / Quantity Variance. The Material Usage Variance is sub divided into

COMMERCE PAPER NO. 6 ; ACCOUNTING FOR MANAGERIAL DECISIONS

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Material Mix Variance and Material Revised Usage Variance or Material sub- usage
Variance.
 The term Labour Variance denotes variance with respect to the labour and it arises when
there is a difference between the actual labour cost and standard labour cost. Labour cost
variance is the difference between the standard cost of labour allowed for the actual
output achieved and the actual cost of labour used.
 Labour Cost Variance can be further sub divided into Labour Rate Variance and Labour
Time / Efficiency Variance. The Labour Efficiency / Time Variance is sub divided into
Idle Time Variance, Labour Mix Variance and Labour Sub – Efficiency Variance.
 The total Overhead Cost Variance results whenever there is a difference between the
actual overhead cost incurred and the standard overhead cost for the actual output
achieved. Overhead Cost variance is divided into Fixed Overhead Variance and Variable
Overhead Variance.

COMMERCE PAPER NO. 6 ; ACCOUNTING FOR MANAGERIAL DECISIONS

MODULE NO.17 ; KINDS OF VARIANCES