THE

CPA
BOARD EXAMS
OUTLINES
by theMahatma

#1

MANAGEMENT ADVISORY SERVICES

VARIANCE
ANALYSIS
Based on lectures by Rodelio Roque, CPA (CPAR)

DEFINITIONS

Variance analysis involves pinpointing differences of an entitys

actual performance from its standards, investigating them and
devising ways to mitigate such deviations. It covers only
manufacturing costs (materials, labor, overhead)

Standard costs represent those amounts that should have been

incurred for a particular actual level of activity, usually represented
in a per unit (not total) amount

Budgeted costs, in comparison, represent those amounts that

should be incurred for a particular budgeted future level of activity,
usually represented in a total amount. Thus, if the company
budgets Php 100,000 for materials for production of 5,000
budgeted units, it has a standard cost of Php 20/unit

Standard costs are basically estimates of entity specialists based

on attainable performance, set as a control measure and to
promote motivation among personnel. Variance data always
comes with the description as to their nature unfavorable or
favorable

THE MATERIALS, LABOR BASIC VARIANCES (TWO-WAY)

The basic materials variances (spending, efficiency) can be quickly

derived using the AAS formula, as follows:
Actual quantity used
Actual quantity used
Standard quantity used*

x
x
x

Actual price/unit
Standard price/unit
Standard price/unit

= A
= B
= C

*(actual units made x standard quantity/unit)

The difference of A and B represents the materials spending/price

variance. If A is bigger, there is an unfavorable variance
On the other hand, the difference of B and C is the materials

efficiency/usage variance. If B is bigger, there is an unfavorable

variance.
The labor variances follow the same AAS matrix as materials
variances, making use of course of labor data and standards such
as hours worked and the rate. Labor time excludes any idle time
Materials spending variance may be based on actual quantities
used (see AAS formula) and on actual quantities purchased. If
silent, it shall be based on the quantity purchased

THE OVERHEAD VARIANCES (TWO-, FOUR-WAY)

Analysis of manufacturing overhead variances is divided into two:

on the variable and fixed overhead. This also makes use of labor
data and standards. If the overhead variances are joined together,
the result would be the under- (unfavorable) or over-applied
(favorable) overhead, to be closed to Cost of Goods Sold
In the two-way overhead variance, the controllable (partly variable
and fixed) and volume (purely fixed) variances are computed, as
follows:
CONTROLLABLE = Actual total OH Budgeted overhead
VOLUME = Budgeted fixed OH Standard hours @ standard Fxd OH rate)

Controllable variance sums up the variable spending and efficiency

variances, and the fixed spending variance (there is no such thing
as fixed efficiency variance). If the actual total overhead is higher
than budgeted overhead, there is an unfavorable variance, and vv
Volume/capacity variance occurs due to the companys failure to
meet its budgeted level of activity, referred to as the denominator
level. This is usually the normal capacity of the entity, at 100%.
Alternatively, this variance can be computed as follows:
VOLUME VAR = (Actual level denominator level) x FxdOH rate

The level may be expressed in hours worked, output produced or

otherwise. If the actual level is less than the denominator level,
there is an unfavorable variance, and vice versa.
The fixed overhead rate is derived by dividing the budgeted fixed
overhead cost for the period with the denominator level
Due to plant expansions, the denominator level/capacity of the
entity might increase. In such case, only the volume variance would
be affected out of the other overhead variances
The analysis of variable overhead (for a four-way overhead
variance) follows that of the AAS formula, using labor figures. For
fixed overhead, the ABS formula is used:
Actual fixed overhead
= A
Budgeted production x (Standard hours x Standard rate) = B
Standard hours*
x Standard rate/hour
= C
*(actual hours x standard hours/unit)

The difference of A and B represents the fixed spending variance. If

A is bigger, there is an unfavorable variance
Similarly, the difference of B and C is the volume/capacity
variance, as noted above. If B is bigger, there is an unfavorable
variance

Q&A: IS BUDGETED OVERHEAD THE SAME AS APPLIED OVERHEAD?

The budgeted overhead figure is merely used for planning

purposes. Applied overhead is actually used in the costing
process: it is the amount debited to Work In Process together with
materials and labor costs
However, the two can be derived from each other. When budgeted
overhead is divided with budgeted labor hours (or some other
basis), the predetermined/standard overhead rate results. When

this is multiplied with actual hours (or some other actual basis),
applied overhead emerges. Also, any over- (under-) application of
overhead can be deducted (added) from the budgeted overhead
for the applied overhead

THE MIX AND YIELD VARIANCES

These variance apply when there are several material inputs to be

mixed/combined for processing the final product. They can also be
used for labor. When combined with materials purchase price
variance, the three make up the three-way materials variance
Mix variance is obtained as follows:
MIX VAR = Actual input @ standard price Actual input @ ASIC*
*Average Standard Input Cost (ASIC): standard input units @ standard
price standard input units for one product

A positive mix variance is unfavorable, which means the entity used

more input units than is necessary to produce a certain quantity of
the product
On the other hand, the yield variance is calculated as follows:
YIELD VAR = Actual input @ ASIC Actual output @ ASOC*
*Average Standard Output Cost (ASOC): standard input units @ standard
price actual input units for one product

Just as with mix variance, a positive yield variance is unfavorable,

which imply that the input units resulted to less output than is
expected of them

OTHER NOTES

Unfavorable variance can also be referred with terms as A,

under-absorbed or debit (credit for favorable variance)

Management by exception gives attention and focus only to large
variances as determined by the entity

The
Pangit A Co. has made the following information available for the
month of June. Fixed overhead was estimated at 19,000 machine
hours for the production cycle. Actual machine hours were 18,900 for
the period, which generated 3,900 units. The following are also
available:
Material purchased (80,000 pieces)
Php 314,000
Material quantity variance
Php 6,400 U
Machine hours used
18,900
VOH spending variance
Php 50 U
Actual fixed overhead
Php 60,000
Actual labor cost
Php 40,120
Actual labor hours
5,900
Standard direct material
20 piece @ Php 4/piece
Standard direct labor
1.5 hours @ Php 6/hour
Standard VOH
4.8 hours @ Php 2.50/hour
Standard FxdOH
4.8 hours @ Php 3/hour
ILLUSTRATION (CPAR FIRST PRE-BOARD EXAM 2016 ITEM)

Solve for: (a) materials price variance, (b) conversion cost efficiency
variance, and (c) fixed overhead non-controllable variance
SOLUTIONS AND EXPLANATIONS:
(A)

(B)

Since silent, the materials variance is one of materials

purchase variance. Thus: MPV = (3.925 4.000) 80,000
units = 6,000 U
Conversion cost efficiency variance is actually composed
of labor efficiency variance and the variable OH efficiency
variance. Thus: 750 U
LEV = (5,900 5,850) 6 = 300 U
VOEV = (18,900 18,720) 2.5 = 450 U

(C) This is the volume variance. Thus: (19,000x3) (3,900 x

4.8 x 3) = 840 U