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Variance Analysis: Material, Labour, Overhead and

Sales Variances!
The function of standards in cost accounting is to
reveal variances between standard costs which are
allowed and actual costs which have been recorded.
The Chartered Institute of Management Accountants
(UK) defines variances as the difference between a
standard cost and the comparable actual cost
incurred during a period. Variance analysis can be
defined as the process of computing the amount of,
and isolating the cause of variances between actual
costs and standard costs. Variance analysis involves
two phases:
(1) Computation of individual variances, and
(2) Determination of Cause (s) of each variance.
We now turn to explain below the computation of
material, labour and factory overhead variances:

I. Material Variance:
The following variances constitute materials
variances:

Material Cost Variance:

Material cost variance is the difference between the


actual cost of direct material used and standard cost
of direct materials specified for the output achieved.
This variance results from differences between
quantities consumed and quantities of materials
allowed for production and from differences between
prices paid and prices predetermined.
This can be computed by using the following
formula:
Material cost variance = (AQ X AP) (SQ X SP)
Where AQ = Actual quantity
AP = Actual price
SQ = Standard quantity for the actual output
SP = Standard price
Material Usage Variance:
The material quantity or usage variance results when
actual quantities of raw materials used in production

differ from standard quantities that should have been


used to produce the output achieved. It is that portion
of the direct materials cost variance which is due to
the difference between the actual quantity used and
standard quantity specified.
As a formula, this variance is shown as:
Materials quantity variance = (Actual Quantity
Standard Quantity) x Standard Price
A material usage variance is favourable when the total
actual quantity of direct materials used is less than the
total standard quantity allowed for the actual output.
Example:
Compute the materials usage variance from the
following information:
Standard material cost per unit
Materials issued
Material A 2 pieces @ Rs. 10=20 (Material A 2,050
pieces)
Material B 3 pieces @ Rs. 20 =60 (Material B
2,980 pieces)
Total = 80
Units completed 1,000
Solution:
Material usage variance = (Actual Quantity Standard
Quantity) x Standard Price
Material A = (2,050 2,000) x Rs. 10 = Rs. 500

(unfavourable)
Material B = (2980 3000) x Rs. 20 = Rs. 400
(favourable)
Total = Rs. 100 (unfavourable)
It should be noted that the standard rather than the
actual price is used in computing the usage variance.
Use of an actual price would have introduced a price
factor into a quantity variance. Because different
departments are responsible, these two factors must
be kept separate.
(a) Material Mix Variance:
The materials usage or quantity variance can be
separated into mix variance and yield variance.
For certain products and processing operations,
material mix is an important operating variable,
specific grades of materials and quantity are
determined before production begins. A mix variance
will result when materials are not actually placed into
production in the same ratio as the standard formula.
For instance, if a product is produced by adding 100
kg of raw material A and 200 kg of raw material B, the
standard material mix ratio is 1: 2.
Actual raw materials used must be in this 1: 2 ratio,
otherwise a materials mix variance will be found.
Material mix variance is usually found in industries,

such as textiles, rubber and chemicals, etc. A mix


variance may arise because of attempts to achieve
cost savings, effective resources utilisation and when
the needed raw materials quantities may not be
available at the required time.
Materials mix variance is that portion of the materials
quantity variance which is due to the difference
between the actual composition of a mixture and the
standard mixture.
It can be computed by using the following
formula:
Material mix variance = (Standard cost of actual
quantity of the actual mixture Standard cost of
actual quantity of the standard mixture)
Or
Materials mix variance = (Actual mix Revised
standard mix of actual input) x Standard price
Revised standard mix or proportion is calculated
as follows:
Standard mix of a particular material/Total standard
quantity x Actual input
Example:
A product is made from two raw materials, material A
and material B. One unit of finished product requires
10 kg of material.

The following is standard mix:

During a period one unit of product was produced


at the following costs:

Compute the materials mix variance.


Solution:
Material mix variance = (Actual proportion Revised
standard proportion of actual input) x Standard price.

(b) Materials Yield Variance:


Materials yield variance explains the remaining
portion of the total materials quantity variance. It is
that portion of materials usage variance which is due
to the difference between the actual yield obtained
and standard yield specified (in terms of actual
inputs). In other words, yield variance occurs when
the output of the final product does not correspond
with the output that could have been obtained by
using the actual inputs. In some industries like sugar,
chemicals, steel, etc. actual yield may differ from

expected yield based on actual input resulting into


yield variance.
The total of materials mix variance and materials yield
variance equals materials quantity or usage variance.
When there is no materials mix variance, the materials
yield variance equals the total materials quantity
variance. Accordingly, mix and yield variances explain
distinct parts of the total materials usage variance and
are additive.
The formula for computing yield variance is as
follows:
Yield Variance = (Actual yield Standard Yield
specified) x Standard cost per unit
Example:
Standard input = 100 kg, standard yield = 90 kg,
standard cost per kg of output = Rs 200
Actual input 200 kg, actual yield 182 kg. Compute the
yield variance.

In this example, there is no mix variance and


therefore, the materials usage variance will be equal
to the materials yield variance.
The above formula uses output or loss as the basis of
computing the yield variance. Yield variance can also
be computed on the basis of input factors only. The
fact is that loss in inputs equals loss in output. A lower
yield simply means that a higher quantity of inputs
have been used and the anticipated or standard
output (based on actual inputs) has not been
achieved.
Yield, in such a case, is known as sub-usage
variance (or revised usage variance) which can be
computed by using the following formula:
Sub-usage or revised usage variance = (Revised
Standard Proportion of Actual Input Standard
quantity) x Standard Cost per unit of input
Example:
Standard material and standard price for
manufacturing one unit of a product is given
below:

Materials yield variance always equal sub-usage


variance. The difference lies only in terms of
calculation. The former considers the output or loss in
output and the latter considers standard inputs and

actual input used for the actual output. Mix and yield
variance both provide useful information for
production control, performance evaluation and review
of operating efficiency.
Materials Price Variance:
A materials price variance occurs when raw materials
are purchased at a price different from standard price.
It is that portion of the direct materials which is due to
the difference between actual price paid and standard
price specified and cost variance multiplied by the
actual quantity. Expressed as a formula,
Materials price variance = (Actual price Standard
price) x Actual quantity
Materials price variance is un-favourable when the
actual price paid exceeds the predetermined standard
price. It is advisable that materials price variance
should be calculated for materials purchased rather
than materials used. Purchase of materials is an
earlier event than the use of materials.
Therefore, a variance based on quantity purchased is
basically an earlier report than a variance based on
quantity actually used. This is quite beneficial from the
viewpoint of performance measurement and
corrective action. An early report will help the
management in measuring the performance so that

poor performance can be corrected or good


performance can be expanded at an early date.
Recognizing material price variances at the time of
purchase lets the firm carry all units of the same
materials at one pricethe standard cost of the
material, even if the firm did not purchase all units of
the materials at the same price. Using one price for
the same materials facilities management control and
simplifies accounting work.
If a direct materials price variance is not recorded until
the materials are issued to production, the direct
materials are carried on the books at their actual
purchase prices. Deviations of actual purchase prices
from the standard price may not be known until the
direct materials are issued to production.
Example:
Assuming in Example 1 that material A was
purchased at the rate of Rs 10 and material B was
purchased at the rate of Rs 21, the material price
variance will be as follows:
Materials price variance = (Actual Price Standard
Price) x Actual Quantity
Material A = (10 10) x 2,050 = Zero
Material B = (21 20) x 2,980 = 2980 (un-favourable)
Total material price variance = Rs 2980 (un-

favourable)
The total of materials usage variance and price
variance is equal to materials cost variance.

II. Labour Variances:


Direct labour variances arise when actual labour costs
are different from standard labour costs. In analysis of
labour costs, the emphasis is on labour rates and
labour hours.
Labour variances constitute the following:

Labour Cost Variance:

Labour cost variance denotes the difference between


the actual direct wages paid and the standard direct
wages specified for the output achieved.
This variance is calculated by using the following
formula:
Labour cost variance = (AH x AR) (SH x SR)
Where:
AH = Actual hours
AR = Actual rate

SH = Standard hours
SR = Standard rate
1. Labour Efficiency Variance:
The calculation of labour efficiency or usage variance
follows the same pattern as the computation of
materials usage variance. Labour efficiency variance
occurs when labour operations are more efficient or
less efficient than standard performance. If actual
direct labour hours required to complete a job differ
from the number of standard hours specified, a labour
efficiency variance results; it is the difference between
actual hours expended and standard labour hours
specified multiplied by the standard labour rate per
hour.
Labour efficiency variance is computed by
applying the following formula:
Labour efficiency variance = (Actual hours Standard
hours for the actual output) x Std. rate per hour.
Assume the following data:
Standard labour hour per unit = 5 hr
Standard labour rate per hour = Rs 30
Units completed = 1,000
Labour cost recorded = 5,050 hrs @ Rs 35
Labour efficiency variance = (5,050-5,000) x Rs 30 =
Rs 1,500 (unfavourable) It may be noted that the

standard labour hour rate and not the actual rate is


used in computing labour efficiency variance. If
quantity variances are calculated, changes in
prices/rates are excluded, and when price variances
are calculated, standard quantities are ignored.
(i) Labour Mix Variance:
Labour mix variance is computed in the same manner
as materials mix variance. Manufacturing or
completing a job requires different types or grades of
workers and production will be complete if labour is
mixed according to standard proportion. Standard
labour mix may not be adhered to under some
circumstances and substitution will have to be made.
There may be changes in the wage rates of some
workers; there may be a need to use more skilled or
expensive types of labour, e.g., employment of men
instead of women; sometimes workers and operators
may be absent.
These lead to the emergence of a labour mix
variance which is calculated by using the
following formula:
Labour mix variance = (Actual labour mix Revised
standard labour mix in terms of actual total hours) x
Standard rate per hour
To take an example, suppose the following were

the standard labour cost data per unit in a factory:

In a period, many class B workers were absent and it


was necessary to substitute class B workers. Since
the class A workers were less experienced with the
job, more labour hours were used.
The recorded costs of a unit were:

Labour mix variance will be calculated as follows:


Labour mix variance = (Actual proportion Revised
standard proportion of actual total hours) x standard
rate per hour
Revised standard proportion:

(ii) Labour Yield Variance:


The final product cost contains not only material cost
but also labour cost. Therefore, gain or loss (higher or
lower output than the standard output) should take
into account labour yield variance also. A lower output
simply means that final output does not correspond
with the production units that should have been
produced from the hours expended on the inputs.
It can be computed by applying the following
formula:
Labour yield variance = (Actual output Standard
output based on actual hours) x Av. Std. Labour Rate
per unit of output.
Or
Labour yield variance = (Actual loss Standard loss

on actual hours) x Average standard labour rate per


unit of output
Labour yield variance is also known as labour
efficiency sub-variance which is computed in terms of
inputs, i.e., standard labour hours and revised labour
hours mix (in terms of actual hours).
Labour efficiency sub-variance is computed by
using the following formula:
Labour efficiency sub-variance = (Revised standard
mix standard mix) x Standard rate
2. Labour Rate Variance:
Labour rate variance is computed in the same manner
as materials price variance. When actual direct labour
hour rates differ from standard rates, the result is a
labour rate variance. It is that portion of the direct
wages variance which is due to the difference
between actual rate paid and standard rate of pay
specified.
The formula for its calculation is:
Labour rate variance = (Actual rate Standard rate) x
Actual hours
Using data from the example given above, the labour
rate variance is Rs 25,250, i.e.,
Labour rate variance = (35 30) x 5050 hours = 5 x
5050 = Rs 25,250 (unfavourable)

The number of actual hours worked is used in place of


the number of the standard hours specified because
the objective is to know the cost difference due to
change in labour hour rates, and not hours worked.
Favourable rate variances arise whenever actual rates
are less than standard rates; unfavourable variances
occur when actual rates exceed standard rates.
3. Idle Time Variance:
Idle time variance occurs when workers are not able
to do the work due to some reason during the hours
for which they are paid. Idle time can be divided
according to causes responsible for creating idle time,
e.g., idle time due to breakdown, lack of materials or
power failures. Idle time variance will be equivalent to
the standard labour cost of the hours during which no
work has been done but for which workers have been
paid for unproductive time.
Suppose, in a factory 2,000 workers were idle
because of a power failure. As a result of this, a loss
of production of 4,000 units of product A and 8,000
units of product B occurred. Each employee was paid
his normal wage (a rate of? 20 per hour). A single
standard hour is needed to manufacture four units of
product A and eight units of product B.
Idle time variance will be computed in the

following manner:
Standard hours lost:
Product A = 4, 000/ 4 = 1,000 hr.
Product B = 8, 000 / 8 = 1,000 hr.
Total hours lost = 2,000 hr.
Idle time variance (power failure)
2,000 hours @ Rs 20 per hour = Rs 40,000 (Adverse)

III. Overhead Variances:


The analysis of factory overhead variances is more
complex than variance analysis for direct materials
and direct labour. There is no standardisation of the
terms or methods used for calculating overhead
variances. For this reason, it is necessary to be
familiar with the different approaches which can be
applied in overhead variances.
Generally, the computation of the following
overhead variances are suggested:

(1) Total Overhead Cost Variance:

This overall overhead variance is the difference


between the actual overhead cost incurred and the
standard cost of overhead for the output achieved.
This can be computed by applying the following
formula:
(Actual overhead incurred) (Standard hours for the
actual output x Standard overhead rate per hour)
Or
(Actual overhead incurred) (Actual output x
Standard overhead rate per unit)
To illustrate the overall overhead variance, assume
that the actual overhead for a department amounts to
Rs 1,00,000 for the month of January and standard
(or allowed) hours for work performed total 4,500
hours, while actual hours used are 5,000.

If overhead rate is Rs 20 per hour, the overall


overhead variance will be the following:

(2) Variable Overhead Variance:

It is the difference between actual variable overhead


cost and standard variable overhead allowed for the
actual output achieved.
The formula for computing this variance is as
follows:
(Actual Variable Overhead Cost) (Actual Output x
Variable Overhead rate per unit)
Or
(Actual Variable Overhead Cost) (Std. hours for
actual output x Std. Variable overhead rate per hour)

(3) Fixed Overhead Variance:


This variance indicates the difference between the
actual fixed overhead cost and standard fixed
overhead cost allowed for the actual output.
This variance is found by using the following
formula:
Fixed Overhead Variance = (Actual Fixed Overhead
Cost Fixed Overhead absorbed)
Or

(Actual Fixed Overhead Cost) (Actual Output x


Fixed Overhead rate per unit)
Or
(Actual fixed overhead cost) (Std. hours for actual
output x Std. fixed overhead rate per hour)

(4) Variable Overhead Expenditure


(Spending or Budget) Variance:
This variance indicates the difference between actual
variable overhead and budgeted variable overhead
based on actual hours worked.
This variance is found by using the following:
(Actual variable overhead Budgeted variable
overhead)

(5) Variable Overhead Efficiency


Variance:
This variance is like labour efficiency variance and
arises when actual hours worked differ from standard
hours required for good units produced. The actual
quantity produced and standard quantity fixed might
be different because of higher or lower efficiency of
workers employed in the manufacturing of goods.
This variance is found by using the following
formula:
(Actual hours Standard hours for actual output) x
Standard variable overhead rate per hour

(6) Fixed Overhead Expenditure


(Spending or Budget) Variance:
This variance indicates the difference between actual
fixed overhead and budgeted fixed overhead.
The formula for computing this variance is as
follows:
(Actual fixed overhead Budgeted fixed overhead)
If actual fixed overhead costs are greater than
budgeted fixed costs, an unfavourable variance
results because actual costs exceed the budget.
Actual overhead costs seldom equal budgeted costs
because property tax rates may change, insurance
premiums may increase or equipment changes may
affect depreciation rates. As an illustration, assume
that a company completed 36,000 units (equal to
18,000 standard production hours) in 18,500 hours at
the recorded fixed cost of Rs 7,51,000. The standard
fixed cost rate per hour is Rs 40. Therefore,
Expenditure variance = (Actual fixed overhead costs
Budgeted fixed overhead costs)
That is, = 7,51,000 (18,500 x 40)
= 7,51,000 7,40,000
= Rs 11,000 (Unfavourable)
The expenditure or budget variance provides
management with information which helps in

controlling costs. The budget variance is usually


prepared on a departmental basis and the factors that
cause the budget variances are, therefore,
controllable by departmental managers.

(7) Fixed Overhead Volume Variance:

Volume variance relates to only fixed overhead. This


variance arises due to the difference between the
standard fixed overhead cost allowed (absorbed) for
the actual output and the budgeted fixed overhead
based on standard hours allowed for actual output
achieved during the period. The variance shows the
over-or-under-absorption of fixed overheads during a
particular period. If the actual output is more than the
standard output, there is over-absorption and variance
is favourable. If actual output is less than the standard
output, the volume variance is unfavourable.
The formula for computing this variance is as
follows:
(Budgeted fixed overhead applied to actual output
Budgeted fixed overhead based on standard hours
allowed for actual output)
Or
(Actual production Budgeted production) x Std. fixed
overhead rate per unit
Volume variance is further sub-divided into three

variances:

(8) Fixed Overhead Calendar Variance:

It is that portion of volume variance which is due to


the difference between the number of actual working
days in the period to which the budget is applicable
and budgeted number of days in the budget period.
If actual working days is more than the budgeted
working days, the variance is favourable as work has
been done on days more than budgeted or allowed
and vice-versa.
The formula is as follows:
(No. of actual working days No. of budgeted working
days) x Std. fixed overhead rate per day. Calendar
variance can be computed based on hours or output.
Then the formulae are:
Hours Basis:
Calendar Variance = (Revised Budget Capacity hours
Budget Hours) x Std. Fixed Overhead rate per hour
If revised budgeted capacity hours are more than the
budgeted hours, the variance will be favourable. In the
reverse situation, the variance will be unfavourable.
Output Basis:
Calendar Variance = (Revised budgeted quantity in
terms of actual number of days worked Budgeted
quantity) x Standard fixed overhead rate per unit

If revised budgeted quantity is more than the


budgeted quantity; the variance is favourable; if
revised budgeted quantity is less, the variance will be
unfavourable.

(9) Fixed Overhead Efficiency Variance:

It is that portion of volume variance which arises when


actual hours of production used for actual output differ
from the standard hours specified for that output. If
actual hours worked are less than the standard hours,
the variance is favourable and when actual hours are
more than the standard hours, the variance is
unfavourable.
The formula is:
Fixed Overhead Efficiency Variance = (Actual hours
Standard hours for actual production) x Fixed
overhead rate per hour
Fixed Overhead Efficiency Variance = (Actual
production Standard production as per actual time
available) x Fixed overhead rate per unit

(10) Fixed Overhead Capacity Variance:


It is that part of fixed overhead volume variance which
is due to the difference between the actual capacity
(in hours) worked during a given period and the
budgeted capacity (expressed in hours). The formula
is

Capacity Variance = (Actual Capacity Hours


Budgeted Capacity) x Standard fixed overhead rate
per hour
This variance represents idle time also. If actual
capacity hours are more than the budgeted capacity
hours, the variance is favourable and if actual capacity
hours are less than the budgeted capacity hours the
variance will be unfavourable.
In case actual number of days and budgeted number
of days are also given, then budgeted capacity hours
will be calculated in terms of actual number of days
and it will be known as revised budgeted capacity
hours, i.e., budgeted hours in actual days worked.
In this situation, the formula for calculating
capacity variance will be as follows:
Capacity Variance = (Actual Capacity hours Revised
Budgeted Capacity hours) x Standard fixed overhead
rate per hr.
In the above formula, the variance will be favourable if
actual capacity hours are more than the revised
budgeted hours. However, if actual capacity hours are
lesser than the revised budgeted hours, the variance
will be adverse as lesser hours means that lesser
actual hours have been worked taking the actual days
utilised into account.

Two-way, Three-way and Four-way


Variance Analysis:
The above overhead variances are also classified as
Two-way, Three-way and Four-way variance.
The different variances under these categories are
listed below:
(A) Two-way Variance Analysis:
The two-way analysis computes two variances budget
variance (sometimes called flexible budget or
controllable variance) and volume variance, which
means:
(i) Budget variance = Variable spending variance +
Fixed spending (budget) Variance + Variable
efficiency variance
(ii) Volume variance = Fixed volume variance
(B) Three -Way Variance Analysis:
The three-way analysis computes three variances
spending, efficiency and volume variances. Therefore,
(i) Spending variance = Variable spending variance +
Fixed spending (budget) variance
(ii) Efficiency variance = Variable efficiency variance
(iii) Volume variance = Fixed volume variance
(C) Four-way Variance Analysis:
The four-way analysis includes:
(i) Variable spending variance

(ii) Fixed spending (budget) variance


(iii) Variable efficiency variance
(iv) Fixed volume variance.
Illustrative Problem 1:
Budgeted hours for month of March = 180 hours
Standard rate of article produced per hour = 50units
Budgeted fixed overhead = Rs 27, 000
Actual Production = 9, 2000 units
Actual hours for Production = 175 hours
Actual fixed Overhead Costs = Rs 28, 000
Calculate Overhead Cost Variances.
Solution:
1. Overhead Cost Variance:
(Actual Overhead Cost Standard Overhead of actual
output)
(Rs 28,000-9,200 units x 3)
Rs 28,000 27,600 = Rs 400 (unfavourable)
Standard Overhead rate per unit = Rs 27,000/(180 hrs
x 50) = 27,000/9, 000 = Rs 3
2. Overhead Expenditure Variance:
(Actual Overhead Budgeted Overhead)
(Rs 28,000 27,000) = Rs 1,000 (unfavourable)
3. Overhead Volume Variance:
(Budgeted Overhead for actual output Budgeted
fixed overhead)

(Rs 3 x 9,200 units 2,700)


(27,600 27,000) = Rs 600 (favourable)
It can be calculated in the following manner also:
(Actual Production Budgeted Production) x Std. rate
per unit
(9,200 9,000) x Rs 3 = Rs 600 (favourable)
Or
(Budgeted hrs for actual production Budgeted
hours) x Std. rate per hour
( 184 hrs-180) x Rs 150
4 x 150 = Rs 600 (favourable)
For 9,000 units standard hours required = 180 hrs.
For 9,200 units standard hours (9, 200 x 180)/9, 000 =
184 hrs
Illustrative Problem 2:
From the following data, calculate overhead
variances:

Solution:
1. Total Overhead Cost Variance:

Actual overhead cost (Actual units x Std. Rate)


(Rs 3,05,000 + 4,70,000) (16,000 x Rs 50)
Rs 7,75,000 Rs 8,00,000 = Rs 25,000 (favourable)
Standard rate = Standard Overhead /Standard Output
2. Variable Overheads Variance:
Actual variable cost (Actual units x Std. Rate)
4,70,000 (16,000 x Rs 30)
Rs 4,70,000 Rs 4,80,000 = Rs 10,000 (favourable)
3. Fixed Overhead Variance:
Actual fixed overhead cost (Actual units x Std. Rate
of fixed overhead)
3,05,000-(16,000 x 20)
3,05,000 3,20,000 = Rs 15,000 (favourable)
4. Volume Variance:
(Actual units x St. rate) Budgeted fixed overheads
(16,000 x Rs 20) Rs 3,00,000 = Rs 20,000
(favourable)
5. Expenditure Variance:
Actual fixed overheads Budgeted fixed overheads
Rs 3,05,000 Rs 3,00,000 = Rs 5,000 (unfavourable)
6. Capacity Variance:
Std. Rate x (Revised budget units Budgeted units)
Revised budgeted units = Budgeted units + Increase
in capacity
= 15,000 + 5/100 x 15,000= 15,750 units 100

= Capacity variance
= Rs 20 (15,750 units 15,000 units)
= Rs 20 x 750 = Rs 15,000 (favourable)
7. Calendar Variance:
Increase or decrease in production due to more or
less working days x Std. rate per unit within 25 days,
standard production with increased capacity = 15,750
units within 2 days (27 25),
production will be increased by = (15, 750 x 2)/25 =
1,260 units
Calendar variance = 1,260 units x Rs 20
= Rs 25,200 (favourable)
8. Efficiency Variance:
Std. rate x (Actual production Std. production)
Standard production:
Budgeted production = 15,000 units
Production increased due to increase in capacity 5%
= 750 units
Now budgeted production = 15,000 + 750 = 15,750
units
Production increased due to 2 more working days
Units for 2 days = (15, 750 x 2)/25 days = 1,260 units
Total units = 15,750 + 1,260
= 17,010 units
Efficiency Variance = Rs 20 (16,000 units 17,010

units)
Rs 20 (- 1,010 units) = Rs 20,200 (unfavourable)
Illustrative Problem 3:
In department A the following data is submitted
for the week ending 31st October:

Statement of fixed overhead variances of


department A:
A. Expenditure variance:
(Actual overhead Budgeted overhead)
Rs 1,50,000 Rs 1,40,000 = Rs 10,000 (Adverse)
B. Volume variance:
Std. fixed overhead rate per unit x (Actual output
Budgeted output)
Rs 100 (1,200 1,400) = Rs 20,000 (Adverse)
C. Total overhead cost variance:
(Actual overhead Overhead recovered by actual

output)
Rs 1,50,000 Rs 1,20,000 = Rs 30,000 (Adverse)
(a) Efficiency variance:
Std. fixed overhead rate per unit x (Actual production
Std. production for actual hours)
Rs 100 (1200 32 x 35) = Rs 8000 (Favourable)
(b) Capacity variance:
Std. fixed overhead rate per hour (Actual hours
Standard hours)
Rs 3,500 (32 40) = Rs 28,000 (Adverse)
Illustrative Problem 4:
A Cost Accountant of a company was given the
following information regarding the overheads for
February, 2012:
(a) Overheads cost variance Rs 1,400 adverse.
(b) Overheads volume variance Rs 1,000 adverse.
(c) Budgeted hours for February 2012, 1,200 hours.
(d) Budgeted overheads for February 2012, Rs 6,000.
(e) Actual rate of recovery of overheads Rs 8 per
hour.
You are required to assist him in computing the
following for February, 2012:
(1) Overheads expenditure variance.
(2) Actual overheads incurred.
(3) Actual hours for actual production.

(4) Overheads capacity variance.


(5) Overheads efficiency variance.
(6) Standard hours for actual production.
Solution:
Computation of Required Variances
(1) Overheads Expenditure Variance
= Overheads Cost Variance Overheads Volume
Variance
= Rs 1,400 (A) Rs 1,000 (A)
= Rs 400 (A)
(2) Actual Overheads incurred
= Budgeted Overheads + Overhead Expenditure
Variance
= Rs 6,000 + Rs 400 (A)
= 6,400
(3) Actual hours for actual production
Actual overheads incurred/Actual rate of recovery of
overheads per hour
= Rs 6,400/8 = 800 hours
(4) Overheads Capacity Variance
= Standard Overhead x (Actual Hours Budgeted
Hours)
= 5 x (800 hours 1,200 hours)
= Rs 2,000 (A)
= Standard Rate of Overhead = Budgeted overheads /

Budgeted hours
= Rs 6, 000/1, 200 = Rs 5 per hour
(5) Overhead Efficiency Variance
= Overheads Volume variance Overhead Capacity
variance
= Rs 1,000 (A) Rs 2,000 (F)
= Rs 1,000 (F)
(6) Standard Hours for Actual Production
Volume Variance
= Standard Overheads Rate x (Standard hours for
Actual Production Budgeted Hours) or 1,000 (A) = 5
(x- 1,200)
or 1,000 (A) = 5 x 6,000
or -5 x = 5,000
or x = 1,000 hours
Illustrative Problem 5:
New India Company uses a standard costing system.
The company prepared its budget for 2012 at
10,00,000 machine hours for the year. Total budgeted
overhead costs is Rs 12,50,00,000. The variable
overhead rate is Rs 100 per machine hour (Rs 200
per unit).
Actual results for 2012 are as follows:

Required:
(I) Compute for the fixed overhead
(a) Budgeted amount
(b) Budgeted cost per machine hour
(c) Actual cost
(d) Volume variance
(II) Compute variable overhead spending variance
and variable overhead efficiency variance.
Solution:
(I) For fixed overhead:
(a) Budgeted Amount:
Total budgeted overhead = Rs 12,50,00,000
Less: Budgeted variable overhead (10,00,000
machine hrs x Rs 100 budgeted rate per machine
hour) = 10,00,00,000
Budgeted fixed overhead 2,50,00,000
(b) Budgeted (fixed) cost per machine hour:
= Rs 2,50,00,000 budgeted amount/10,00,000
budgeted machine hours
= Rs 25 per machine hour

(c) Actual cost (fixed):


It is calculated through fixed overhead spending
variance.
Fixed overhead spending variance = Actual cost
incurred Budgeted amount
Actual cost = Budgeted amount + Unfavourable
spending variance
= 2,50,00,000+ 60,00,000 A
= Rs 3,10,00,000
Because fixed overhead spending variance is
unfavourable, the amount of actual costs is higher
than the budgeted amount.
(d) Production Volume Variance:
Budgeted variable overhead per unit = Rs 200
Budgeted variable overhead rate = Rs 100 per
machine hour
Therefore budgeted machine hours allowed per unit =
Rs 200/Rs 100
= 2 machine hours
Formula:
Budgeted fixed overhead Fixed overhead absorbed
or allowed for actual output units
= Rs 2,50,00,000 (Rs 25 per machine hour x 2
machine hours per unit x 4,98,000 units)
= Rs 2,50,00,000 Rs 2,49,00,000 (absorbed fixed

overhead)
= Rs 1,00,000 Adverse
Or
Another formula:
(St hrs for actual production Budgeted hrs) x St.
fixed overhead rate per hr
= (2 x 4,98,000) (10,00,000 hrs) x Rs 25
= (9,96,000 hrs 10,00,000 hrs) x Rs 25
= Rs 1,00,000 Adverse
Or
Another formula:
(Budgeted production Actual production) x St. fixed
overhead rate per unit
Standard fixed overhead rate per unit = Budgeted
fixed overhead/Budgeted units
= Rs 2,50,00,000/5,00,000 units
= Rs 50 per unit
Budgeted units = 2 machine hour needed for 1 unit
In 10,00,000 machine hours, units produced will be
= 10,00,000/2 = 5,00,000 units
Now, applying the formula
(5,00,000 units 4,98,000 units) x Rs 50
= 2,000 units x Rs 50 = Rs 1,00,000 Adverse
(II) For Variable overhead
(a) Variable overhead spending variance:

(Budgeted Variable overhead cost Actual Variable


overhead)
Budgeted variable overhead cost = Actual hrs works x
St. Variable overhead rate per hour
= 9,60,000 hrs x Rs 100
= Rs 9,60,00,000
Now, applying the formula
(Rs 9,60,00,000 Rs 10,08,00,000)
= Rs 48,00,000 Adverse
Or
Another formula:
(St. machine hr rate Actual machine hr rate) x Actual
hrs worked
= (Rs 100 Rs 10, 08, 00, 000/9, 00, 000 hrs) x 9, 60,
000 hrs
= (Rs 100 Rs 105) x 9,60,000 hrs
= Rs 48,00,000 Adverse
(b) Variable overhead efficiency Variance:
(St. hours for actual output Actual hrs) x St. Variable
overhead rate per hour
= ((4,98,000 units x 2 hrs) 9,60,000 hrs) x Rs 100
= (9,96,000 hrs 9,60,000 hrs) x Rs 100
= 36,000 hours x Rs 100
= Rs 36,00,000 Favourable
Note:

The other variances, although not asked in the


question, have been computed as below.
(Ill) For Fixed overhead:
Calender Variance, Efficiency Variance, Capacity
Variance.
(a) Fixed overhead Calender Variance:
= (Budgeted hrs Revised budgeted Capacity hrs) x
St. fixed overhead rate per hour
= (10,00,000 hrs 2 hrs x 4,98,000 units) x Rs 25
= (10,00,000 hrs 9,96,000 hrs) x Rs 25
= 4,000 hrs x 25 = Rs 1,00,000 Adverse
Variance is adverse because of lesser use of hours
available.
(b) Fixed overhead Efficiency Variance:
(st. hr for actual production Actual hrs) x Fixed
overhead rate per hour
= (2 hrs x 4,98,000 units) 9,60,000 hrs ) x 25
= (9,96,000 hrs 9,60,000 hrs) x 25
= 36,000 hrs x Rs 25
= Rs 9,00,000 F
It is favourable because actual hrs are less than
standard hours.
(c) Fixed Overhead Capacity Variance:
(Budgeted Capacity hrs Actual Capacity hours) x St.
fixed overhead rate per hr

= (9,96,000 hrs 9,60,000 hrs) x Rs 25


= 36,000 hrs x Rs 25
= Rs 9,00,000 Adverse
Since actual hours are less than budgeted hours, in
terms of capacity utilisation, it indicates Adverse
Variance
Fixed Overhead Expenditure Variance:
(also known as Spending or Budget Variance)
(Budgeted fixed overhead Actual fixed overhead)
= Rs 2,50,00,000 Rs 3,10,00,000
= Rs 60,00,000 Adverse
This is already given in the question.
Fixed Overhead Variance:
(budgeted fixed overhead cost Actual fixed overhead
cost)
Budgeted fixed overhead cost =
(i) Actual output units x St. fixed overhead rate per
unit
Or
(ii) St. hours for actual output x St. fixed overhead rate
per hour
Applying the formula:
(i) (4,98,000 units x Rs 50 per unit) Rs 3,10,00,000
= 2,49,00,000-3,10,00,000
= Rs 61,00,000 Adverse

Or
(ii) (9,96,000 hrs x Rs 25 per hr) Rs 3,10,00,000
= Rs 2,49,00,000 Rs 3,10,00,000
= Rs 61,00,000 Adverse
Verification:
Fixed overhead Variance = Fixed overhead
expenditure variance + Fixed overhead volume
variance
Rs 61,00,000 A = Rs 60,00,000 A + Rs 1,00,000 A
Variable Overhead Variance:
(Budgeted variable overhead cost Actual variable
overhead cost) Budgeted variable overhead cost =
(i) Actual output units x St. variable overhead rate per
unit
Or
(ii) St. hours for actual output x St. variable overhead
rate per hour
Applying the formula:
(i) (4,98,000 units x Rs 200 per unit) Rs
10,08,00,000
= Rs 9,96,00,000 Rs 10,08,00,000
= Rs 12,00,000 Adverse
Or
(ii) (9,96,000 hrs x Rs 100) Rs 10,08,00,000
= Rs 9,96,00,000 Rs 10,08,00,000

= Rs 12,00,000 Adverse
Verification:
Variable overhead variance = Variable overhead
expenditure variance + Variable overhead efficiency
variance
Rs 12,00,000 A = Rs 48,00,000 A + Rs 36,00,000 F
Rs 12,00,000 A = Rs 12,00,000 A
Total Overhead Cost Variance:
(Budgeted overhead cost Actual overhead cost)
Budgeted overhead cost =
(i) Actual output units x St. overhead rate per unit
Or
(ii) St. hours for actual output x St. overhead rate per
hour
Applying the formula:
St. overhead rate per unit = Variable overhead rate +
Fixed overhead rate = Rs 200 + Rs 50 = Rs 250
Or
St. overhead rate per hour =
= Variable overhead rate per hour + Fixed overhead
rate per hour
= Rs 100 + Rs 25 = Rs 125
(i) (4,98,000 units x Rs 250) (Rs 3,10,00,000 + Rs
10,08,00,000)
= Rs 12,45,00,000 Rs 13,18,00,000

= Rs 73,00,000 Adverse
Or
(ii) (9,96,000 hrs x Rs 125) (Rs 3,10,00,000 + Rs
10,08,00,000)
= Rs 12,45,00,000-Rs 13,18,00,000
= Rs 73,00,000 Adverse
Verification:
Total overhead cost variance = Fixed overhead cost
variance + Variable overhead cost variance
Rs 73,00,000 A = Rs 61,00,000 A + Rs 12,00,000 A
Rs 73,00,000 A = Rs 73,00,000 A
Illustrative Problem 6:
The following information has been extracted
from the books of Goru Enterprises which is
using standard costing system:
Actual output = 9,000 units
Direct wages paid = 1,10,000 hours at Rs 22 per hour,
of which 5,000 hour, being idle time, were not
recorded in production
Standard hours = 10 hours per unit
Labour efficiency variance = Rs 3,75,000 (A)
Standard variable Overhead = Rs 150 per unit
Actual variable Overhead = Rs 16,00,000
You are required to calculate:
(i) Idle time variance

(ii) Total variable overhead variance


(iii) Variable overhead expenditure variance
(iv) Variable overhead efficiency variance.
Solution:
Actual output = 9,000 units
Idle time = 5,000 hours
Production time (Actual) = 1,05,000 hours
Standard hours for actual production = 10 hours/unit x
9,000 units = 90,000 hours.
Labour efficiency variance = Rs 3,75,000 (A)
i.e. Standard rate x (Standard Production time
Actual production time) = Rs 3,75,000 (A).
SR (90,000 1,05,000) = 3,75,000
SR = -3,75,000/-15,000 = Rs 25
(i) Idle time variance = 5,000 hours x 25 Rs hour = Rs
1,25,000. (A)
(ii) Standard Variable Overhead = Rs 150/unit
Standard hours = 10 hours/unit
Standard Variable Overhead rate/hour =150/10 =
Rs15/hour
Total Variable Overhead variance = Standard Variable
Overhead Actual Variable Overhead
= Standard Rate x Standard hours Actual rate x
Actual hours
= (15) x (10 x 9,000) 16,00,000

= 13,50,000 -16,00,000
Total Variable Overhead Variance = 2,50,000 (A)
(iii) Variable Overhead Expenditure Variance =
(Standard Rate x Actual Hours) (Actual Rate x
Actual Hours)
= (15 x 1,05,000) 16,00,000
= 15,75,000 16,00,000
= Rs 25,000 (A)
(iv) Variable Overhead Efficiency Variance = Standard
Rate x (Standard Hours for actual output Actual
hours for Actual output)
= 15 (90,000 1,05,000)
= 15 (-15,000)
= Rs 2,25,000 (A)
Alternative Solution:
Actual Output = 9,000 Units
Idle time = 5,000 hrs
Direct Wages Paid = 1,10,000 hours @ Rs 22 output
of which 5,000 hours being idle, were not recorded in
production.
Standard hours = 10 per unit.
Labour efficiency variance = Rs 3,75,000 (A)
Or
Standard Rate (Standard Time Actual Time) =
3,75,000

Or (90,000 1,05,000) = 3,75,000/Standard Rate.


Or Standard Rate = Rs 25/(i) Idle time variance = Standard Rate x Idle time
25 x 5,000 = Rs 1,25,000 (A)
(ii) Standard Variable Overhead/unit =150
Standard Rate = 150/10 = Rs 15/hour
Standard Quantity = 10 hours
Actual Variable Overhead = 16,00,000
Standard Variable Overhead = 150 x 9,000 =
13,50,000
Actual Variable Overhead = 16,00,000
Total Variable Overhead Variance = 2,50,000 (A)
(iii) Variable Overhead expenditure Variance =
Standard Variable Overhead for actual hours Actual
Variable Overhead
= (150 x 1,05,000)-16,00,000
= 15,75,000-16,00,000
= 25,000 (A)
(iv) Variable overhead efficiency variance = (Standard
Variable Overhead for actual output Standard
Variable Overhead for Actual hours)
= 15 (10 hours x 90,000 units 1,05,000)
= 15 (90,000 1,05,000)
= 15 (- 15,000)
= 2,25,000 (A)

Illustrative Problem 7:
The Norkhill Furniture Company has the following
standard cost per unit of furniture:

For July 2012, when 1100 units of furniture were


produced, the following information is available:
Lumber purchased: 50,000 feet at Rs 390 per 100
feet
Lumber used: 56,000 feet
Direct labour: 3,100 hours @ Rs 105
Variable overhead: Rs 1,55,000
Fixed Overhead: Rs 2,90,000
Any materials price variance is assigned to the
purchasing department at the time of purchase.
You are required to:
(a) Prepare a flexible budget for the actual level of
activity.
(b) Prepare a complete analysis of all variances,
including a three-way analysis of overhead variances.

Three-way Analysis of Overhead Variances:


(i) Spending variance = (Actual Overhead costs
Budgeted overhead costs based on actual hours)
= 4,45,000 (Rs 3,00,000 + 100 x 33,100 hours)
= 4,45,000- 4,55,000
= Rs 10,000 (F)
(ii) Efficiency variance
= (Budgeted overhead costs based on actual hours
Budgeted overhead costs based on Std. hours)

= (Rs 4,55,000 (Rs 3,00,000 + Rs 50 x 3300 hrs)


= 4,55,0000 4,65,000
= Rs 10,000 (F)
(iii) Volume variance
= (Budgeted overhead Costs based on Std. hours in
terms of actual units Applied over head costs)
= (Rs 150 x 3300 hrs) (Rs 150 x 3100 hrs)
= Rs 4,95,000 4,65,000
= Rs 30,000 (F)
Illustrative Problem 8:
Jumbo Food Products Ltd. operates a system of
standard costing and in respect of one of its
products which is manufactured within a single
cost centre, data for one week have been
analysed as follows:

The production and sales achieved resulted in no


changes of stock. You are required to compute:
(i) The actual output;
(ii) Actual profit;
(iii) Actual price per kg of material;
(iv) Actual rate per labour hour;

(v) Amount of production overhead incurred;


(vi) Amount of production overhead absorbed;
(vii) Production overhead efficiency variance;
(viii) Selling price variance;
(ix) Sales volume profit variance.

IV. Sales Variances:


Sales variance is the difference between the actual
value of sales achieved in a given period and
budgeted value of sales. There are many reasons for
the difference in actual sales and budgeted sales
such as selling price, sales volume, sales mix.
Sales variance can be calculated by using any of
the following two methods:
A. Sales variance based on turnover
B. Sales variances based on margin (i.e.,contribution
margin or profit)
The first approach i.e., sales variance based on
turnover, accounts for difference in actual sales and
budgeted sales. The sales variances using margin
approach accounts for difference in actual profit and
budgeted profit. In the margin method, it is assumed
that cost of production is constant, i.e., no difference
is assumed between actual cost of production and
standard cost of production.
The reason for this assumption is that cost variances
are calculated separately to analyse the difference
between actual cost and standard cost of production.
Therefore, cost side of the sales variance is assumed
constant under the margin method.
Sales variances computed under these two methods

show different amounts of variance.


The different sales variances under these two
approaches and their formula are given below:

A. Sales Variances Based on Turnover:

(i) Sales Value Variance:


Also known as sales variance, this variance shows the
difference between actual sales value and budgeted
sales value.
The formula is:
Sales Value Variance = (Actual value of sales
Budgeted value of sales)
Actual sales = Actual quantity sold x Actual selling
price
Budgeted sales = Standard quantity x Standard
selling price
Or
Sales value variance = (Actual quantity x Actual
selling price) (Standard quantity x Standard selling
price)

If actual sales are more than the budgeted sales,


there is favourable variance and if actual sales are
less than the budgeted sales, unfavourable variance
arises.
(ii) Sales Price Variance:
This variance is due to the difference between actual
selling price and standard or budgeted selling price.
The formula is:
Sales price variance = (Actual selling price
Budgeted selling price) x Actual quantity
If actual selling price is less than the budgeted selling
price, variance is favourable and if actual selling price
is more than the budgeted selling price, there will be
unfavourable sales price variance.
(iii) Sales Volume Variance:
Sales volume variance arises when the actual
quantity sold is different from the budgeted quantity. If
actual sales quantity exceeds the budgeted sales
quantity, there is a favourable sales volume variance
and if actual quantity sold is less than the budgeted
quantity, the variance is unfavourable.
The formula is:
Sales volume variance = (Actual quantity Budgeted
quantity) x Budgeted selling price
Sales volume variance is divided into two

variances:
(i) Sales mix variance
(ii) Sales quantity variance
(i) Sales Mix Variance:
Sales mix variance is one part of overall sales volume
variance. This variance shows the difference between
actual mix of goods sold and budgeted mix of goods
sold.
The formula is:
Sales Mix Variance = (Actual Mix of quantity sold
Actual quantity in standard proportion) x Standard
selling price
Or
Sales Mix Variance = (Budgeted price per unit of
actual mix Budgeted price per unit of budgeted mix)
x Total actual quantity.
If actual sales mix are more than the mix in standard
or budgeted proportion, the variance is favourable and
if actual mix sales are less than the standard mix (of
actual sales), the variance is unfavourable. Similarly, if
budgeted price per unit of actual mix is more than the
budgeted price per unit of budgeted mix, favourable
variance will arise. In the reverse situation, variance
will be unfavourable.
(ii) Sales Quantity Variance:

This variance is also a part of overall volume variance.


This variance shows the difference between total
actual sales quantity and total budgeted sales
quantity. If total actual quantity is more than the total
budgeted quantity, variance will be favourable and if
total actual quantity is less than the total budgeted
quantity, there will be unfavourable sales quantity
variance.
The formula is:
Sales quantity variance = (Total actual quantity Total
budgeted quantity) x Budgeted price per unit of
budgeted mix
The total of sales mix variance and sales quantity
variance will be equal to sales volume variance.

B. Sales Variance Based on Margin (i.e.,


Contribution Margin or Profit):
The sales variances using margin approach show the
difference in actual profit and budgeted profit only
whereas sales variances based on turnover show the
difference between total actual sales and total
budgeted sales.
The following sales variances are calculated if
margin or profit is the basis of calculation:
Sales Variances based on Margin or Profit

(i) Total Sales Margin Variance:

This variance indicates the aggregate or total variance


under the margin method. This variance shows the
difference between actual profit and budgeted profit.
The formula is:
Total sales margin variance = Actual Profit Budgeted
profit
If actual profit is more than the budgeted profit,
variance will be favourable and if actual profit is less
than the budgeted profit, unfavourable variance will
arise.

(ii) Sales Margin Price Variance:


This variance is one part of total sales margin
variance and arises due to the difference between
actual margin per unit and budgeted margin per unit.
It is significant to note that, assuming cost of
production being constant, the difference in the actual
margin and budgeted margin will only be because of
the difference between actual selling price and
budgeted selling price. The formula for calculating

sales margin price variance is


Sales Margin Price Variance = (Actual Margin per unit
Budgeted Margin per unit) x Actual quantity
If actual margin per unit is more than the budgeted
margin per unit, favourable variance will be found and
if actual margin is less than the budgeted margin,
variance will be unfavourable.

(iii) Sales Margin Volume Variance:

This variance shows the difference between actual


sales units and budgeted sales units.
The formula is:
Sales Margin Volume Variance = (Actual quantity
Budgeted quantity) x Budgeted Margin per unit.
If actual sales units are more than the budgeted sales
units, variance will be favourable and if actual sales
units are less than the budgeted sales units,
unfavourable variance will arise.
Sales margin volume variance can be calculated
using another formula which is:
Sales margin volume variance = (Standard profit on
actual quantity of sales Budgeted profit)
If standard profit exceeds budgeted profit, variance
will be favourable and if standard profit is less than the
budgeted profit, unfavourable variance will emerge.
Sales margin volume variance consists of:

(i) Sales margin mix variance and


(ii) Sales margin quantity variance.
(i) Sales Margin Mix Variance:
This variance shows the difference between actual
mix of goods and budgeted (standard) mix of goods
sold.
The formula is:
Sales Margin Mix Variance = (Actual sales mix
Standard proportion of actual sales mix) x Budgeted
margin per unit.
If budgeted margin per unit on actual sales mix is
more than the budgeted margin per unit on budgeted
mix, variance will be favourable. In the reverse
situation, unfavourable variance will arise.
(ii) Sales Margin Quantity Variance:
This variance will be found when the total actual sales
quantity in standard proportion is different from the
total budgeted sales quantity.
The formula is:
Sales Margin Quantity Variance = (Actual sales in
standard proportion Budgeted sales) x Budgeted
margin per unit on budgeted mix
If actual sales (in standard proportion) are more than
the budgeted sales, variance will be favourable and if
actual sales are less than the budgeted sales,

unfavourable variance will arise.