variance analysis in financial management

7/26/2019 Variance Analysis in financial management

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Variance Analysis


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Analysis of Variances

Analysis of variance is helpful incontrolling the performance and achievingthe prots that have been planned.

Analysis of variance is helpful in controllingthe performance and achieving the protsthat have been planned.

The deviation of the actual cost or protor sale from the standard cost or prot orsales is known as variance.


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When actual cost is less than standard costor actual prot is better than standardprot, it is known as favourable variance

and such variance is usually a sign ofeciency of the organiation.

When actual cost is more than standardcost or actual prot or turnover is less thanstandard prot or turnover, it is calledunfavourable variance and is usually anindicator of ineciency of the organiation.


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Analysis of variance may be donein respect of each elements of cost

and sales.!irect "aterial Variance

!irect #abour Variance

$verheads Variance%ales Variance


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Direct Material Variance

"aterial &ost Variance

"aterial 'rice Variance"aterial (sage or )uantity

Variance

"aterial "i* Variance

"aterial +ield Variance


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ormulae

Material Cost Variance

!i-erence between standard cost of materialsspecied and actual cost of material used.

"&V %td "aterial &ost for actual output/%"&0

/10 Actual "aterial &ost/A"&0

%"& %td price per unit * %td )ty of materials

A"& Actual 'rice per unit * Actual )ty ofmaterials


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ormulae

Material Price Variance

!i-erence between standard priceand the actual price of the material.

"'V Actual )ty /%td price 2 Actualprice0

Material Usage Variance

!i-erence between std 3ty ofmaterial and actual 3ty used.

"(V %td 'rice /%td )ty 2 Actual )ty0


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Material Mix Variance (MMV)

"aterial mi* variance is the di-erencebetween standard and the actualcomposition of a mi*ture. Thisvariance arises because the ratio ofmaterials being changed from the

standard ratio set. 4t is calculated asdi-erence between the standard priceof standard mi* and standard price of

actual mi*.


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Actual weight of mix and the standard weight ofmix do not dier

%tandard unit cost * /standard 3uantity 2

actual 3uantity0

%tandard cost of standard mi* /20

%tandard cost of actual mi*

!f the standard is revised due to shortage of a"articular ty"e of material# the material mix

variance is calculated as follows$

%tandard unit cost * /5evised standard 3uantity 2

Actual 3uantity0

%tandard cost of revised standard mi* /20

%tandard cost of actual mi*


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Material %ield Variance (M%V)

4t is that portion of the material usagevariance which is due to the di-erencebetween the standard yield speciedand the actual yield obtained. Thisvariance measures the abnormal loss

or saving of materials.


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&hen standard and actual mix do not dier

+ield variance %tandard rate *

/Actual yield 2 %tandard yield0

%tandard rate %tandard cost of standard mi* 6et standard output 2 %tandard loss

&hen actual mix diers from standard mix

+ield variance %tandard rate *

/Actual yield 2 5evised %tandard yield0%tandard rate %tandard cost of revised standardmi*

6et standard output


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'abour Variances

#abour cost variance

#abour rate varianceTotal labour eciency variance

#abour eciency variance

#abour idle time variance

#abour mi* variance

#abour yield variance


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'abour cost variance

4t is the di-erence between the standard cost of labourallowed for the actual output achieved and the actual costof labour employed. 4t is also known as wages variance.

#abour variance /%tandard cost of labour 2 Actual cost of labour0

'abour rate variance

4t is that portion of the labour cost variance which arises

due to the di-erence between the standard rate speciedand the actual rate paid.

#abour rate variance

Actual time taken 2 /%tandard rate 2 Actual rate0


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otal labour eciency variance4t is that part of labour cost variance which arisesdue to the di-erence between standard labourcost of standard time for actual output and

standard cost of actual time paid for.Total labour eciency variance

/%tandard time for actual output 2 Actual timepaid for0

'abour eciency variance4t is that portion of labour cost variance whicharises due to the di-erence between the standardlabour hours specied for the output achieved

and the actual labour hour spend.


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'abour idle time variance

4t is suitable to calculate only when there is abnormalidle time. 4t is that portion of labour cost variancewhich is due to the abnormal idle time of workers.

4dle time variance /Abnormal idle time * standardrate0

'abour mix variance

#ike materials mi* variance and is a part of labour

eciency variance. The variance shows to themanagement as to how much of labour cost varianceis due to the change in the composition of labour force.


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#abour mi* variance

%tandard cost of standard composition / 2 0

/Actual time taken0

%tandard cost actual composition

/Actual time worked0

'abour yield variance

#ike material yield variance and arises due to the di-erencebetween yield that should have been obtained by actual

time utilied on production and actual yield obtained.%tandard labour cost per unit

Actual yield in units 2 %tandard yield in units e*pected from

the actual time worked on production


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*verhead Variance

$verhead cost can be dened as thedi-erence between the standard cost of

overhead allowed for the actual outputachieved and the actual overheads costincurred. $verhead cost variance is under orover absorption of overheads.

$verhead cost variance

Actual output * %tandard overhead rate perunit /20 Actual overhead cost


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$verhead cost variance can be classied as 7

Variable overhead varianceVariable overhead e*penditure variance

Variable overhead eciency variance

i*ed overhead variance

8*penditure variance

Volume variance

&apacity variance&alendar variance

8ciency variance


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Variable overhead variance

4t is the di-erence between the standard variableoverhead cost allowed for the actual outputachieved and the actual variable overhead cost.

This variance is represented by e*penditurevariance only because variable overhead cost willvary in proportion to production so that only achange in e*penditure can cause such variance.

Actual output * %tandard variance overhead rate/10

Actual variable overheads


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Variable overhead ex"enditure variance

V$8V Actual hours worked *

%tandard variable overhead rate per hour /10

Actual variable overheadVariable overhead eciency variance

V$8V %tandard time for actual production*

%tandard variable rate per hour /20

Actual hour worked * %tandard variable

overhead rate per hour


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+ixed overhead variance

4t is that portion of total overheads cost variance which isdue to the di-erence between the standard cost of *edoverheads allowed for the actual output achieved and the

actual *ed overhead cost incurred.$V Actual output * %tandard *ed overhead

rate per unit /2 0 Actual *ed overheads

,x"enditure variance

4t is that portion of the *ed overhead variance which is due

to the di-erence between the budgeted *ed overheads andthe actual *ed overheads incurred during a particularperiod.

8V 9udgeted *ed overheads /20 Actual *ed overheads


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Volume variance4t is that portion of the *ed overhead variancewhich arises due to the di-erence between thestandard cost of *ed overhead allowed for the

actual output and the budgeted *ed overhead for aperiod during which the actual output has beenachieved.

This variance shows the over or under absorption of

*ed overheads during a particular period. 4f theactual output is more than the budgeted output,there is over1recovery of *ed overheads andvolume variance is favourable and vice versa ifthe actual output is less than the budgeted output.

This is so because *ed overheads are not e*pected


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Ca"acity variance

4t is that portion of volume variance which is due toworking at higher or lower capacity than the budgetedcapacity. &apacity variance is related to the under and

over utiliation of plant and e3uipment and arises dueto idle time, strikes and lock1out, breakdown of themachinery, power failure, shortage of materials andlabour, absenteeism, overtime, changes in number ofshifts. The variance arises due to more or less workinghours than the budgeted working hours.

&V %tandard rate /5evised budgeted unit 2 9udgetedunits0


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Calendar variance

4t is that portion of the volume variance which is due tothe di-erence between the number of working days inthe budget period and the number of actual working

days in the period to which the budget is applicable.4f the actual working days are more than the standardworking days, the variable will be favourable and viceversa if the actual working days are less than thestandard days.

&V 4ncrease or decrease in production due to

more or less working days at the rate of

budgeted capacity * %tandard rate per unit


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,ciency variance

4t is that portion of the volumevariance which is due to the di-erencebetween the budgeted eciency ofproduction and the actual eciencyachieved. This variance is related to

the eciency of workers and plan.8V %tandard rate per unit *

/Actual production 2 %tandard

production0


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-ales Variances

%ales variances have complete analysis of protvariance because prot is the di-erence between salesand cost.

%ales variance may be calculated in two di-erent ways.The rst method of calculating sales variances is protmethod of calculating sales variances and the second isknown as value method of calculating sales variance.

These may be computed so as to show the e-ort onprot or to show the e-ect on sales value.

%ales variance showing the e-ect on prot are moremeaningful, so these would be considered rst.


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Pro.t method of calculatingsales variances

Total sales margin variance%ales margin variance due to

selling price

%ales margin variance due tovolume

%ales margin variance due to sales

mi*ture


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Value method of calculatingsales volume

%ales value variance%ales price variance

%ales volume variance

%ales mi* variance

%ales 3uantity variance


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Pro.t method of calculating sales volume

otal sales margin variance

T%"V /Actual prot 2 9udgeted prot0

-ales margin variance due to selling "rice4t is that position of total sales margin variancewhich is due to the di-erence between the actualprice of 3uantity of sale e-ected and the standardprice of those sales.

T%"V Actual 3uantity of sales *

/Actual selling price per unit 2 %tandard price perunit0


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-ales margin variance due to volume

4t is that portion of total sales margin variance whicharises due to the number of articles sold being more orless than the budgeted 3uantity of sales.

%"V %tandard prot per unit */Actual 3uality of sales 2 9udgeted 3uality of sales0

-ales margin variance due to sales mix

Which arises because of di-erent portion of actual sales

mi*. 4t is taken as di-erent between the actual andbudgeted 3uantities of each product of which the salesmi*ture is composed, valuing the di-erence of3uantities at standard prot.


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%"V%" %tandard prot per unit *

/%tandard proportion for actual sales 2 9udgeted3uantity of sales0

-ales margin variance due to sales /uantities

4t is that portion of sales margin variance due tovolume which arises due to the di-erence betweenthe actual and budgeted 3uantity sold of eachproduct.

%"V%) %tandard prot per unit *

/%tandard proportion for actual sales 2 9udgeted3uantity of sales0


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Value method of calculating sales variances

-ales value variances

4t is the di-erence between the standard value andactual value of sales e-ected during the period.

%VV /Actual value of sales 2 9udgeted value of sales0

-ales "rice variance

4t is that portion of sales value variance which arisesdue to the di-erence between actual price and standard

price specied.%'V Actual 3uantity sold /Actual price 2 %tandardprice0


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-ales volume variance

4t is that portion of the sales valuevariance which arises due to di-erencebetween actual 3uantity of sales andstandard 3uantity of sales.

%VV %tandard price *

/Actual 3uantity 2 9udgeted 3uantity ofsales0

variance analysis in financial management

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