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GROUP MEMBERS • • • • AYMEN CHOUDHARY (FA09-BBA-021) MEHROZ ZIA (FA08-BBA-056) MASAB UMAIR(FA08-BBA-063) WALEED ABBAS(FA08-BBA-096) .

CONTENTS DEFINATION TYPES OF VARIANCE ANALYSIS SPENDING VARIANCE IDLE CAPACITY QUESTIONS .

The concept of variance is intrinsically connected with planned and actual results and effects of the difference between those two on the performance of the entity or company. . Variances can be computed for both costs and revenues. planned or standard amount and the actual amount incurred/sold. a variance is the difference between a budgeted.WHAT IS VARIANCE ANALYSIS? In budgeting (or management accounting in general).

there are two types of variances: 1.TYPES OF VARIANCE ANALYSIS. • When effect of variance is concerned. In common use favorable variance is denoted by the letter F .usually in parentheses (F). • Variances can be divided according to their effect or nature of the underlying amounts . . • When actual results are better than expected results given variance is described as favorable variance.

o Direct material variances 3.CONTD…. o Variable production overhead variances . o Direct labour variances 4. • The second typology (according to the nature of the underlying amount) is determined by the needs of users of the variance information and may include e. • Variable cost variances 2.usually in parentheses (A). 1.: 1.g. • When actual results are worse than expected results given variance is described as adverse variance. or unfavourable variance. In common use adverse variance is denoted by the letter A or the letter U .

…. • Direct material variance: The direct material total variance is the difference between what the output actually cost and what it should have cost. • Direct labor variance: The direct labour total variance is the difference between what the output should have cost and what it did cost. in terms of labour.. in terms of material. .

Remember that overhead absorption rate = Budgeted fixed production overhead Budgeted level of activity .….. • Variable production variance: The variable production overhead total variance is the difference between what the output should have cost and what it did cost.or over-absorbed fixed production overhead. in terms of variable production overhead. • Fixed production overhead variance: The total fixed production variance is an attempt to explain the under.

…. and what it was. . The selling price variance is a measure of the effect on expected profit of a different selling price to standard selling price. It is calculated as the difference between what the sales revenue should have been for the actual quantity sold. • Sales variance.

. • If actual overhead had been less then budgeted.SPENDING CAPACITY • A variance due to budget or expense factors. the spending variance would be favorable • Any difference between actual and budgeted fixed overhead would be included as part of the spending variance.

• The cause of a capacity variance. whether favorable or unfavorable should always be determined and possible reasons for the variance discovered .IDLE CAPACITY • A variance due to volume or activity factors.

266 favorable: spending variance $779 unfavorable: and applied factory overhear $16.PRACTICAL QUESTIONS 1. • Actual factory overhead. The Kreiter Company was totally destroyed by the fire during June. based on capacity utilized.: • Budget allowance. However.234 • required. certain fragments of its cost records were recovered with the following date: idle capacity variance $1. .

000 direct labor hours.000 estimated direct labor hours= $3. and actual FOH expenditures were $631.….000 • Required: The spending and idle capacity variance. • During the year. 210.00 predetermined factory overhead rate. the company worked. .. The Henkel company made the following data available from its accounting records and reports: • $600.000 estimated factory overhead\200. • Further analysis indicates that one third of the rate is variable cost oriented. 2.

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