Variance Analysis
Dr.Kaveri S
Assistant Professor
Rajadhani Business School
Standard Cost
Standard cost are predetermined cost which may be used as a
yardstick to measure efficiency with which actual cost has been
incurred under given circumstances.
Standard Costing
• Standard costing is a technique which is used in many industries,
where production is of repetitive in nature.
• Standard costing is that technique in which the standard cost is
determined before starting the production.
Procedure of Standard Costing
• Set the predetermined standards for sales margin and production
costs.
• Collect the information about the actual performance.
• Compare the actual performance with the standards to arrive at the
variance.
• Analyze the variances and ascertaining the causes of variance.
Variance
• A variance is the difference between a budgeted, planned, or
standard cost and the actual amount incurred.
• Variances can be computed for both costs and revenues.
Variance analysis
• Variance analysis is an analytical tool that managers can use to
compare actual operations to budgeted estimates. It refers to the
investigation of deviations in financial performance from the
standards defined in organizational budgets.
Objectives of Variance Analysis
• The objective of variance analysis is to exercise cost control and cost
reduction.
• A positive efficiency leads to favorable variance.
• A negative variance leads to inefficiency.
• In the case of unfavorable variance the responsible persons are
enquired and find the root causes for such unfavorable variances.
and take remedial action.
Classification of Variance
Labour
cost
variance
Material Overhead
cost cost
variance variance
variance
Material cost variance
Material cost variance MCV is the difference between actual cost of
materials used and the standard cost for the actual output.
MCV=Standard Cost of Material - Actual Cost of Material
Standard Cost of Material = SQ x SP
Actual Cost of Material = AQ x AP
Material Price
variance
Material Cost
Variance
Material
Usage Variance
Material Price Variance
Material Price Variance is the difference between the actual cost of
direct material and the standard cost of quantity purchased or
consumed.
MPV = (SP - AP) x AQ
Material Usage Variance
Material Usage Variance is otherwise called as material quantity
variance. Usage Variance is the measure of difference between the
actual quantity of material utilized during a period and the standard
consumption of material for the level of output achieved.
MUV = (SQ -AQ) X SP
Classification of Material Usage Variance
Material Usage Variance
Material Mix Material Yield
Variance Variance
Material Mix Variance
It is the portion of the material usage variance which is due to the
difference between the Standard and the actual composition of mix.
MMV = SP x (SQ -AQ)
In case standard quantity is revised due to shortage of a particular
category of materials, the formula will be changed as follows :
MMV = SP x (RSQ -AQ)
Where, RSQ = Revised standard quantity.
Material Yield Variance
This variance arises due to spoilage, low quality of materials and
defective production planning etc. Materials Yield Variance may be
defined as "the difference between the Standard Yield Specified and
the Actual Yield Obtained." This variance may be calculated as under:
MYV=(AY-SY) X Standard Material Price per Unit
SY=Standard output for Actual Mix
AY= Actual Output
QUESTIONS
Calculate Material Cost Variance, Material Quantity variance and
Material price variance from the following.
Material Standard Actual
Qty Rate Qty Rate
A 2000 5 1800 6
B 1000 8 1100 7
Ans:
Material Cost Variance:
MCV=Standard Cost- Actual Cost
Standard Cost= SQ X SP
Actual Cost=AQ X AP
Material A
Material Cost Variance=(2000x5)-(1800x6)=10,000-10,800= Rs
800(Adverse)
Material B
MCV=(1000x8)-(1100x7)=Rs 300(Favourable)
Total MCV= (Material Variance A +Material Variance B)
=-800+300
=-500(Adverse)
Material Price Variance =MPV = (SP - AP) x AQ
Material A
MPV = (SP - AP) x AQ
(5-6)x1800=Rs1800(Adverse)
Material B
(8-7)x1100=Rs 1100(Favourable)
Total MPV=Material Price Variance A + Material Price Variance B
=-1800+1100=Rs 700(Adverse)
Material Quantity Variance = MUV = (SQ -AQ) X SP
Material A
=(2000-1800) x 5 = 1000 (Favourable)
Material B
=(1000-1100) x 8 = 800(Adverse)
Total Material Quantity Variance = MQV of Material A +MQV of
Material B
= 1000+-800=200(Favourable)
