Basic Variance Analysis !

A variance is the difference between an actual result and an

expected result. In standard costing, cost variances are the
difference between the standard costs and actual costs of
units produced.
Variance analysis is the process by which the total
difference between standard and actual results is analysed.
When actual results are better than expected results, we
have a favourable variance (F). If actual results are worse
than expected results, we have an adverse variance (A).

Cost Variances !

 Variance Analysis Cost Variances

The Comparison of standards to Actual results for both
Variable and Fixed Costs

 It Consist of :
Material Variances
Labour Variances
Variable OH Variances
Fixed OH Variances

Material Variances
The Total variance can be sub classified in to :
Material Price Variance
Material Usage Variance

Key Proforma

SQSP
Usage
AQSP
Price
AQAP

Labour Variances
The Total variance can be sub classified in to :
Labour Rate Variance
Labour Efficiency Variance

Key Proforma
SHSR
Efficiency
AHSR
Rate
AHAR

Variable OH Variances
The Total variance can be sub classified in to :
Expenditure Variance
Efficiency Variance

Key Proforma
SHSR
Efficiency
AHSR
Expenditure
AHAR

Fixed OH Variances
The Total Fixed Overhead Variance will be similar to the
under/over absorption of overhead.
The Total variance can be sub classified in to :
Volume Variance If the company produces more or less units
and hence absorb more or less OH than budgeted
Expenditure Variance If the company spends more or less
fixed overhead than budgeted.

Key Proforma
Standard Fixed OH Cost
Volume
Budgeted Fixed OH Cost
Expenditure
Actual Fixed OH Cost

Further Analysis
SHSR
Efficiency
AHSR
Capacity
BHSR
Expenditure
AHAR

Sales Variance !

Revenue Variances - Sales Variances & Operating

Statements
Calculating Variances associated with revenues and
reconciling Budgeted Profits or Contribution to Actual Profit or
Contribution
Sales Variances identify any changes between the selling
price and the standard cost

Key Formula
Volume Variance
(AS BS) x SPM
Price Variance
(AP SP) x AS

Operating Statements !

Absorption Costing Operating Statements

Key Proforma
Budgeted Profit
X
Sales Volume Variance
X
Std Profit
X
Sales Price Variance
X
AS Std CoS
X
Cost Variances
X
Actual Profit
X

Marginal Costing - Differences !

Marginal Costing
Variances that remain the same
All Variable Cost Variances
Sales Price Variance
Fixed OH Expenditure Variance
Variances that Changes
Sales Volume Variance
Fixed OH Volume Variance

Marginal Costing Operating Statements

Key Proforma
Budgeted Contribution
Sales Variances
AS Std Variable CoS
Variable Cost Variances
Actual Contribution
Budegted Fixed OH
X
Fixed OH Variances
X
Actual Profit
X

X
X
X
X
X
X
X

The controllability of fixed costs

Committed fixed costs are those costs arising from the
possession of plant, equipment, buildings and an
administration department to support the long-term
needs of the business. These costs (depreciation, rent,
administration salaries) are largely non-controllable in the
short term because they have been committed by longerterm decisions affecting longer-term needs.
Discretionary fixed costs, such as advertising and research
and development costs, are incurred as a result of a top
management decision, but could be raised or lowered at
fairly short notice (irrespective of the actual volume of
production and sales).

Controllability and dual responsibility

Quite often a particular cost might be the responsibility of
two or more managers.
A reporting system must allocate responsibility
appropriately

The controllability of fixed costs

Committed fixed costs are those costs arising from the
possession of plant, equipment, buildings and an
administration department to support the long-term
needs of the business. These costs (depreciation, rent,
administration salaries) are largely non-controllable in the
short term because they have been committed by longerterm decisions affecting longer-term needs.
Discretionary fixed costs, such as advertising and research
and development costs, are incurred as a result of a top
management decision, but could be raised or lowered at
fairly short notice (irrespective of the actual volume of
production and sales).

The controllability of fixed costs

Committed fixed costs are those costs arising from the
possession of plant, equipment, buildings and an
administration department to support the long-term
needs of the business. These costs (depreciation, rent,
administration salaries) are largely non-controllable in the
short term because they have been committed by longerterm decisions affecting longer-term needs.
Discretionary fixed costs, such as advertising and research
and development costs, are incurred as a result of a top
management decision, but could be raised or lowered at
fairly short notice (irrespective of the actual volume of
production and sales).

Doubts !

Thank You !