Table of Contents
Types of Variances which we are going to study in this chapter are:-
- Cost Variances
- Material Variances
- Labour Variances
- Overhead Variance
- Fixed Overhead Variance
- Sales Variance
- Profit Variance
If you haven’t been through Variance Analysis Introduction, please consider going through that before proceeding for better understanding.
Cost Variances
A cost variance is a difference between an actual expenditure and the expected (or budgeted) expenditure. A cost variance can relate to virtually any kind of expense, ranging from elements of the cost of goods sold to selling or administrative expenses. This variance is most useful as a monitoring tool when a business is attempting to spend in accordance with the amounts stated in its budget.
The cost variance formula is usually comprised of two elements, which are:
- Volume variance. This is the difference in the actual versus expected unit volume of whatever is being measured, multiplied by the standard price per unit.
- Price Variance. This is the difference between the actual versus the expected price of whatever is being measured, multiplied by the standard number of units.
When you combine the volume variance and the price variance, the combined variance represents the total cost variance for whatever the expenditure may be.
Material Variances
The difference between the standard cost of direct materials and the actual cost of direct materials that an organization uses for production is known as Material Variance.
Material Cost Variance Formula:
Standard Cost – Actual Cost
In other words, (Standard Quantity x Standard Price) – (Actual Quantity x Actual Price)
Material Variance is further sub-divided into two heads:
- Material Price Variance:
MPV = (Standard Price – Actual Price) x Actual Quantity
- Material Usage Variance:
MUV = (Standard Quantity – Actual Quantity) x Standard Price
Labour Variances
Labor Variance arises when there is a difference between the actual cost associated with a labour activity from the standard cost.
Labor Variance Formula:
Standard Wages – Actual Wages
In other words, (Standard Hours x Standard Rate) – (Actual Hours x Actual Rate)
Labor Variance is further sub-divided into two heads:
- Labor Rate Variance:
LRV = (Standard Rate – Actual Rate) x Actual Hours
- Labor Efficiency Variance:
LEV = (Actual Hours – Standard Hours) x Standard Rate
Overhead (Variable) Variance
Variable Overhead Variance arises when there is a difference between the actual variable overhead and the standard variable overhead based on budgets.
Variable Overhead Variance Formula:
Standard Variable Overhead – Actual Variable Overhead
In other words, (Standard Rate – Actual Rate) x Actual Output
Variable Overhead Variance is further sub-divided into two heads:
- Variable Overhead Efficiency Variance:
VOEV = (Actual Output – Standard Output) x Standard Rate
- Variable Overhead Expenditure Variance:
VOEV = (Standard Output x Standard Rate) – (Actual Output x Actual Rate)
Fixed Overhead Variance
It arises when there is a difference between the standard fixed overhead for actual output and the actual fixed overhead.
Fixed Overhead Variance Formula:
= (Actual Output x Standard Rate per unit) – Actual Fixed Overhead
Fixed Overhead Variance is further sub-divided into two heads:
- Fixed Overhead Expenditure Variance:
FOEV = Standard Fixed Overhead – Actual Fixed Overhead
- Fixed Overhead Volume Variance:
FOVV = (Actual Output x Standard Rate per unit) – Standard Fixed Overhead
Sales Variance
Sales Variance is the difference between the actual sales and budgeted sales of an organization.
Sales Variance Formula:
= (Budgeted Quantity x Budgeted Price) – (Actual Quantity x Actual Price)
Sales Variance is further sub-divided into two heads:
- Sales Volume Variance:
SVV = (Budgeted Quantity – Actual Quantity) x Budgeted Price
- Sales Price Variance:
SPV = (Budgeted Price – Actual Price) x Actual Quantity
Profit Variance
Profit variance is the difference between the actual profit experienced and the budgeted profit level. There are four types of profit variance, which are derived from different parts of the income statement. They are:
- Gross profit variance. This measures the ability of a business to generate a profit from its sales and manufacturing capabilities, including all fixed and variable production costs.
- Contribution margin variance. This is the same as the gross profit variance, except that fixed production costs are excluded.
- Operating profit variance. This only measures the results of operations; it excludes all financing and extraneous gains and losses. This variance provides the best view of how the core operations of a business are functioning.
- Net profit variance. This is the most commonly-used version of the profit variance. It encompasses all aspects of a company’s financial results, without exception.
Conclusion
Thus, Variance Analysis is important to analyze the difference between the actual and planned behaviour of an organization. If such analysis is not carried out at regular intervals, it may cause a delay in the management action to control its costs.