VARIANCE ANALYSIS

COST VARIANCES
1) Material variances (single raw material)
Case - I Material quantity purchased = Material quantity consumed
(i) Total material cost variance Here:
= SC x SQ – AC x AQ SC = Standard cost per Kg
OR AC = Actual cost per Kg
= MPV + MQV AQ = Actual total quantity used for actual output
(ii) Material price variance [MPV] SQ = Standard total quantity which should have been used
= AQ x SC – AQ x AC for actual output
(iii) Material usage/quantity variance [MQV]
= SC x SQ – SC x AQ

Case - II Material quantity purchased ≠ Material quantity consumed

(a) If inventory is measured at standard cost (i.e. MPV is recorded at the time of purchase)
(i) Total material cost variance
= SC x SQ – [SC x Opening RM + AC x AQ(purchased) – SC x Closing RM]
OR
= MPV + MQV
(ii) Material price variance
= AQ(purchased) x SC – AQ(purchased) x AC
(iii) Material usage variance
= SC x SQ – SC x AQ(used)

(b) If inventory is measured at actual cost (i.e. MPV is recorded at the time of issuance)
[If nothing is mentioned even then assume this case in question]
(i) Total material cost variance
= SC x SQ – AC x AQ(used)
OR
= MPV + MQV
(ii) Material price variance
= AQ(used) x SC – AQ(used) x AC
(iii) Material usage variance
= SC x SQ – SC x AQ(used)

2) Direct labor variances (single type of labor)

Case - I No separate record of idle time is kept OR Hours worked = hours paid
(i) Total labor cost variance Here:
= SR x SH – AR x AH SR = Standard rate per hour
OR AR = Actual rate per hour
= LRV + LEV AH = Actual total hours used for actual output
(ii) Labor rate variance [LRV] SH = Standard total hours which should have been used
= SR x AH – AR x AH for actual output
(iii) Labor efficiency variance [LEV]
= SR x SH – SR x AH

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VARIANCE ANALYSIS

Case - II Separate record of idle hours is kept OR Hours worked ≠ hours paid
(a) Idle time is not part of standard cost (i.e. ignored in standard card) (default case in exam)
(i) Total labor cost variance
= SR x SH – AR x AH(paid)
OR
= LRV + LEV + Idle time variance

(ii) Labor rate variance

= AH(paid) x SR – AH(paid) x AR

(iii) Idle time variance

= SR x AH(worked) – SR x AH(paid)

(iii) Labor efficiency variance

= SR x SH – SR x AH(worked)

(b) Idle time is made part of standard cost as a separate element

(i) Total labor cost variance
= SR x SH(paid) – AR x AH(paid) Here:
OR SH (paid) = Standard total hours which should have been
= LRV + LEV + Idle time variance paid for actual output
(ii) Labor rate variance SH (idle) = Standard total hours which should have been
= AH(paid) x SR – AH(paid) x AR remained idle for actual output
(iii) Idle time variance SH (worked) = Standard total hours which should have been
= SH (idle) x SR – AH (idle) x SR worked for actual output
(iv) Labor efficiency variance
= SR x SH(worked) – SR x AH(worked)

3) VOH variance
(i) Total variable OH cost variance
= SR x SH – AR x AH Here:
OR SR = Standard rate per hour (machine or labor)
= Spending variance + Efficiency variance AR = Actual rate per hour (machine or labor)
(ii) VOH expenditure / spending variance AH = Actual total hours (machine or labor) used for
= AH x SR – AH x AR actual output
(iii) VOH efficiency variance SH = Standard total hours (machine or labor) which
= SR x SH – SR x AH should have been used for actual output

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VARIANCE ANALYSIS

4) Fixed OH variance
(i) Total fixed OH cost variance
= Applied fixed OH – Actual fixed OH
OR
= Spending variance + volume variance
(ii) Fixed OH expenditure / spending variance
= Budgeted fixed OH – Actual fixed OH
(iii) Fixed OH volume variance
= Applied fixed OH – Budgeted fixed OH
Here:
AH = Actual total hours (machine or labor) used
for actual output
SH = Standard total hours (machine or labor) which
should have been used for actual output
BH = Standard total hours (machine or labor) which
would be used for budgeted output
Applied fixed OH = SR x SH
Budgeted fixed OH = SR x BH

Volume variance can be further analyzed into:

(a) Fixed OH efficiency variance
= SR x SH – SR x AH
(b) Fixed OH capacity variance
= SR x AH – BH x SR
Notes - In case of marginal costing, there is NO fixed OH volume variance

SALE VARIANCE
1) Sales price variance
= AQ (sale) x Actual price – AQ (sale) x Standard price

2) Sales volume variance

(a) Sales profit volume variance [used in case of absorption costing]
= [AQ (sale) – BQ (sale)] x standard profit per unit
(It is used if SCC is prepared on absorption costing)
(b) Sales contribution volume variance [used in case of marginal costing]
= [AQ (sale) – BQ (sale)] x standard contribution per unit

Exam notes:
- If not given in question, students should prepare a detailed standard cost card first from
information given in question. It will help in calculating variances.
- If standard cost card is not given but budgeted P&L is given in question, then “per unit costs” from
budgeted P&L will be the standard costs.
- All above formulas are designed so that “positive” answer shows “favorable variance” and
“negative” answer shows “adverse variance”.
- All cost variances are calculated for actual FG production for the period instead of sales.
- If process costing is mixed, then SH/AH and SQ/AQ will be based on "equivalent produced FG
units for the period calculated using FIFO basis" instead of "actual FG units produced for the
period"

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VARIANCE ANALYSIS

OPERATING STATEMENT [i.e. Reconciliation of budgeted profit and actual profit]

Rs. Rs.
Budgeted GP X
Sale variances:
Sale price variance X
Sale volume variance X X
Cost variances:
Material price variance X
Material usage variance X
Labor rate variance X
Labor efficiency variance X
Labor Idle time variance X
VOH spending variance X
VOH efficiency variance X
FOH spending variance X
FOH volume variance [Only for absorption costing] X X
Actual profit X

Exam notes:
- Add all “favorable variances” and deduct all “adverse variances” in above format.
- Replace "fixed OH efficiency and capacity variances" with "fixed OH volume variance" and
"Material yield and mix variances" with "material usage variance" if separately required in
question.
- If FG and WIP stocks are valued at actual cost then an adjustment is required as follows:
[Actual cost of closing stock - Standard cost of closing stock] XXX
[Standard cost of opening stock - Actual cost of opening stock] XXX

ADVANCED VARIANCE ANALAYSIS

1) Material mix and yield variances
If a product uses more than one type of direct materials and such materials are substitutable (i.e. less of one type
of material can be compensated by more of another material), then material usage variance is further analyzed
into:
- Material mix variance
- Material yield variance
The total of these two variances is equal to material usage variance.
(i) Mix variance
- Following formula is applied to each RM individually and then totaled:
= [AQ in SM – AQ in AM] x SC
here:
AQ in SM = Actual total, of all material quantities used, split in standard mix
AQ in AM = Actual material quantities used

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VARIANCE ANALYSIS

(ii) Yield variance

- Following formula is applied to each RM individually and then totaled:
= [SQ in SM – AQ in SM] x SC
here:
AQ in SM = Actual total, of all material quantities used, split in standard mix
SQ in SM = Standard material quantity of each material to be used for actual output

Exam notes:
If losses are also incorporated as a part of standard card then “SQ in SM” column is calculated as
follows:
If FG is given units:
SQ in SM = standard material (kg) x Actual FG production (units) / FG units for which standard is
set
If FG is given Kgs:
SQ in SM = standard material (kg) x Actual FG production (Kgs) / FG Kgs of which standard is set

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