Variance Analysis

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1 Introduction

In earlier chapters we looked at the layout of the management accountant’s profit statements.

Unlike the financial accountant, the purpose for the management accountant is to explain (usually monthly) why the actual profit is different from the budgeted profit.

If the reasons for the difference can be identified, the information can be used for control purposes e.g. an overspend in one month can be investigated and attempts made to correct any problem for future months.

2 Total variances

A company has prepared the following standard cost card:

	$ per unit
Materials (4 kg at $4.50 per kg)	18
Labour (5 hrs at $5 per hr)	25
Variable overheads (5 hrs at $2 per hr)	10
Fixed overheads (5 hrs at $3 per hr)	15
	$68

Budgeted selling price $75 per unit.

Budgeted production	8,700 units
Budgeted sales	8,000 units
There is no opening inventory

The actual results are as follows:

Sales:	8,400 units for $613,200
Production:	8,900 units with the following costs:

Materials (35,464 kg)	163,455
Labour (Paid 45,400hrs; worked 44,100 hrs)	224,515
Variable overheads	87,348
Fixed overheads	134,074

Prepare a flexed budget and calculate the total variances

	Original Fixed Budget	Flexed Budget	Actual	Variances
	$	$	$
Sales (units)	8,000	8,400	8,400
Production (units)	8,700	8,900	8,900

Sales	600,000	630,000	613,200	16,800	(A)
Materials	156,000	160,200	163,455	3,255	(A)
Labour	217,500	222,500	224,515	2,015	(A)
Variable o/h	87,000	89,000	87,348	1,652	(F)
Fixed o/h	130,500	133,500	134,074	574	(A)
	591,600	605,200	609,392
Closing inventory	(47,600)	(34,000)	(34,000)
	544,000	571,200	575,392
Profit	$56,000	$58,800	$37,808	20,992	(A)

3 Analysis of cost variances

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The total variance that we have calculated for materials indicates that the actual expenditure on materials was not $18 per unit. However, this could be either because we used the wrong amount of materials (which should have been 4 kg per unit) or that we paid the wrong price (which should have been $4.50 per kg). More likely of course, it would be a combination of the two.

We will therefore analyse this and the other variances in as much detail as possible.

Using the data from example 1, analyse each of the cost variances.

Materials

Labour

Variable Overheads

Fixed Overheads

Materials

Expense variance

Actual purchases	at actual cost	163,455
35,464kg
	at standard cost
	($4.50)	159,588
		$3,867	(A)

Usage variance

	kg
Actual usage	35,464
Standard usage for actual production
(8,900 u × 4kg)	35,600
	136	kg

at a standard cost ($4.50) = $612 (F)

Labour

Rate of Pay variance

Actual hours paid at actual cost	224,515
45,400 hours at standard cost ($5)	227,000
	$2,485	(F)

Idle Time Variance

Actual hours paid	45,400
Actual hours worked	44,100
	1,300	hrs

at a standard cost ($5) = $6,500 (A)

Efficiency variance

Actual hours worked	44,100
Standard hours for actual production
(8,900 u × 5hrs)	44,500
	400	hrs

at a standard cost ($5) = $2,000 (F)

Variable overheads Expenditure variance

Actual hours worked	at actual cost	87,348
44,100	at standard cost	88,200
		$852	(F)

Efficiency variance

Actual hours worked	44,100
Standard hours for actual production
(8,900u × 5hrs)	44,500
	400	hrs

at a standard cost ($2) = $800 (F)

Fixed overheads

Expenditure variance

Actual total	134,074
Original budget total	130,500
	$3,574	(A)

Capacity variance

Actual hours worked	44,100
Budget hours (8,700u × 5hrs)	43,500
	600	hrs

at a standard cost ($3) = $1,800 (F)

Efficiency variance

Actual hours worked	44,100
Standard hours for actual production
(8,900u × 5hrs)	44,500
	400	hrs

at a standard cost ($3) = $1,200 (F)

4 Sales Variances

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Although we have already calculated the sales variances in example 1, you may be asked to calculate them independently.

Using data from example 1, calculate the Sales price variance and the Sales volume variance

Sales price variance

	$
Actual sales at actual selling price	613,200
Actual sales at standard selling price (8,400u × $75)	630,000
	$16,800	(A)

Sales volume variance

	units
actual sales	8,400
budgeted sales	8,000
	400	u × $7	= $2,800 (F)
Profit	(Standard profit per unit)

5 Marginal costing

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In the previous examples, the company had been using absorption costing. They could alternatively have been using marginal costing. The variances are all calculated exactly as before, with the exception of the sales volume variance, and the fixed overhead variance.

Using data from example 1, calculate the sales volume variance and the fixed overhead variance, on the assumption that the company is using marginal costing.

Sales volume variance

	units
actual sales	8,400
budgeted sales	8,000
	400	u × $22	= $8,800 (F)
Profit	(Standard contribution per unit)

Fixed overhead expenditure variance

	$
Actual total fixed overheads	134,074
Budgeted total fixed overheads (8,700u × $15)	130,500
	$3,574	(A)

(This is the only fixed overhead variance if marginal costing is being used)

Answer the questions one at a time. Your progress is saved so you can leave and come back.

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