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Analysing cost of raw material of a product:-
Budgeted cost: 10
Budgeted quantity: 1,000
Total budgeted cost: 10,000Actual cost: 11
Actual quantity: 1,200
Total actual cost: 13,200Total variance: 13,200 – 10,000 = 3,200
The confusion comes from the same result while using 2 different formulas.
1. first formula:-
– Price variance (actual price – budgeted price) * actual quantity = 1,200 unfavorable
– Quantity variance (actual quantity – budgeted quantity) * budgeted price = 2,000 unfavorable
– Total variance = 3,2002. Second formula:-
– Price variance (actual price – budgeted price) * budgeted quantity = 1,000 unfavorable
– Quantity variance (actual quantity – budgeted quantity) * actual price = 2,200 unfavorable
– Total variance = 3,200I assume that the figures would materialise if a huge fluctuation occures.
All of your formulae are wrong and so is your calculation of the total variance.
(and for materials we look at the price variance and the usage variance – there is no such thing as a quantity variance)The total cost variance is not the difference between actual and budget. It is the difference between the actual total cost and the standard cost for the actual production. The total cost variance in your example is 13,200 – 12,000 = 1,200 (adverse)
I suggest that you watch the free lectures on basic variances.
Yes, thank you. I was wrong.
What if we used the same date in analysing the variance between the previous year’s sales and current year’s sales to know the effect of price change and effect of sales volume?
I replace the budgeted cost with previous year’s sales price.
and I replace budgeted quantity with previous year’s quantity sold.I use this formula in my audit of sales as an analytical procedure.
In practice you do whatever is most useful for managing the business, and what you suggest would be fine.
However, for Paper F5 we always are comparing with the budget rather than with the previous year and the free lectures do go through all the ‘rules’ needed for F5.
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