VARIANCE ANALYSIS • A VARIANCE IS THE DIFFERENCE BETWEEN PLANNED/BUDGETED COSTS AND THE ACTUAL COSTS
• IF THE ACTUAL RESULTS ARE BETTER THAN THE EXPECTED RESULTS, THERE WILL BE A FAVOURABLE VARIANCE (F)
• IF THE ACTUAL RESULTS ARE WORSE THAN THE EXPECTED RESULTS, THERE WILL BE AN ADVERSE VARIANCE (A)
• RAISE QUESTION ON OCCURRENCE AND CAUSE OF VARIANCE AND TAKING REMEDIAL ACTION
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COST VARIANCES & SALES VARIANCES COSTS VARIANCES Direct material variances Direct labour variances Variable overhead (VOH) variances Fixed overhead (FOH) variances
SALES (REVENUE) VARIANCES Sales price variance Sales volume variance
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(1) COST VARIANCE •Cost variance = Price variance + Quantity variance Cost variance is the difference between the standard cost and the Actual cost •Price variance = (standard price – actual price)*Actual quantity A price variance reflects the extent of the profit change resulting from the change in activity level •Quantity variance = (standard quantity – actual quantity)* standard cost A quantity variance reflects the extent of the profit change resulting from the change in activity level
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FORMULA FOR COST VARIANCES Direct material variance (AQ x AP – SQ x SP) Materials price (AP – SP) x AQ
Materials usage (AQ – SQ) x SP Direct labour cost variance (SR x SH – AR x AH)
Labour rate (AR – SR) x AH
Idle time (always adverse) (AHw – AHpd) x SR
Labour efficiency (AH – SH) x SR
VOH variance (AVOH – SVOH) VOH Expenditure AVOH - (AH x VOAR)
VOH Efficiency (AH – SH) x VOAR FOH variance (FOH absorbed – FOH incurred)
FOH Expenditure (BFOH – AFOH) FOH Efficiency (SH – AH) x FOAR
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FOH Volume (SH x FOAR) – BFOH FOH Capacity (BH – AH) x FOAR
MATERIAL COST VARIANCE • MATERIAL PRICE VARIANCE = (STANDARD PRICE – ACTUAL PRICE)*ACTUAL QUANTITY
• MATERIAL USAGE VARIANCE = (STANDARD QUANTITY – ACTUAL QUANTITY)* STANDARD PRICE = (STANDARD QUANTITY FOR ACTUAL PRODUCTION – ACTUAL QUANTITY PRODUCTION) * STANDARD PRICE
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LABOUR COST VARIANCE • LABOUR RATE VARIANCE = (STANDARD PRICE – ACTUAL PRICE)*ACTUAL QUANTITY
• LABOUR EFFICIENCY VARIANCE = (STANDARD QUANTITY – ACTUAL QUANTITY)*STANDARD PRICE = STANDARD QUANTITY FOR ACTUAL PRODUCTION – ACTUAL QUANTITY USED) * STANDARD PRICE
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HZL Ltd. makes and sells a single product. The company uses a Standard marginal costing system. It plans to produce and sell 1000 units in May 2017. A budget statement is produced as follow: Budgeted income statement for the month ended 31 May 2017 $ $ Sales ($50*1000) 50000 Less: Variable cost of goods sold Direct materials ($3*4000) 12000 Direct labour ($5*3000) 15000 Variable overheads ($2*3000) 6000 33000 Budget contribution 17000 Fixed overhead 3000 Budget profit 14000
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The actual sales and production is 800 units. The actual income statement is shown as follows:
Income statement for the month ended 31 May 2017
$ Sales ($60*800) Less: Variable cost of goods sold Direct materials ($3.2*2400) Direct labour ($6*3200) Actual Variable overheads Contribution Fixed overhead Net profit
$ 48000
12000 15000 5500 32380 15620 2600 13020
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Material cost variance
Material price variance = (standard price – actual price)*actual quantity = ($3 - $3.2)*2400 = $480 (A) Material usage variance = (Standard quantity – actual quantity)* standard price = (Standard quantity for actual production – actual quantity production) * standard price = (4*800 – 2400)*$3 = $2400 (F)
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MATERIAL COST VARIANCE
• MATERIAL PRICE VARIANCE • MATERIAL USAGE VARIANCE • TOTAL MATERIAL COST VARIANCE 13
$480 (A) $2400 (F) $1920 (F)
Labour cost variance
Labour rate variance = (standard price – actual price)*actual quantity = ($5 - $6)*3200 = $3200 (A)
Labour efficiency variance = (standard quantity – actual quantity)*standard price = Standard quantity for actual production – actual quantity used) * standard price = (3* 800 – 3200)*$5 = $4000 (A)
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LABOUR COST VARIANCE
• LABOUR RATE VARIANCE • LABOUR EFFICIENCY VARIANCE • TOTAL LABOUR COST VARIANCE
$3200 (A) $4000 (A) $7200 (A)
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OVERHEADS VARIANCE
•VARIABLE OVERHEADS VARIANCE •FIXED OVERHEADS VARIANCE 17
VARIABLE OVERHEADS VARIANCE
• VARIABLE OVERHEADS VARIANCE IS THE DIFFERENCE BETWEEN THE STANDARD VARIABLE OVERHEADS ABSORBED INTO THE ACTUAL OUTPUT AND THE ACTUAL OVERHEADS INCURRED
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Actual VO
Budgeted VO (SP * Actual hours worked
VO expenditure variance/ VO spending variance
Absorbed VO (SP* standard hours for actual output
VO efficiency variance
Total VO variance (under-/over- absorbed)
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CALCULATION ON OVERHEAD ABSORBED • STEP 1
Budgeted overheads POAR = Budgeted activity level in standard hours
• STEP 2 Overhead absorbed = POAR * Standard hours for actual number of units produced
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VARIABLE OVERHEADS VARIANCE
• VARIABLE OVERHEADS VARIANCE
= VARIABLE OVERHEADS ABSORBED – ACTUAL VARIABLE OVERHEADS INCURRED
• VARIABLE OVERHEADS EXPENDITURE VARIANCE = STANDARD VARIABLE OVERHEADS FOR ACTUAL HOURS WORKED – ACTUAL VARIABLE OVERHEADS INCURRED
• VARIABLE OVERHEADS EFFICIENCY VARIANCE = STANDARD VARIABLE OVERHEADS FOR STANDARD HOURS OF OUTPUT – ACTUAL VARIABLE OVERHEAD ABSORBED = (STANDARD HOURS FOR ACTUAL OUTPUT – ACTUAL HOURS WORKED)* STANDARD PRICE
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HZL Ltd. makes and sells a single product. The company uses a Standard marginal costing system. It plans to produce and sell 1000 units in May 2017. A budget statement is produced as follow: Budgeted income statement for the month ended 31 May 2017 $ $ Sales ($50*1000) 50000 Less: Variable cost of goods sold Direct materials ($3*4000) 12000 Direct labour ($5*3000) 15000 Variable overheads ($2*3000) 6000 33000 Budget contribution 17000 Fixed overhead 3000 Budget profit 14000
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The actual sales and production is 800 units. The actual income statement is shown as follows: Income statement for the month ended 31 May 2017 $
Sales ($60*800) Less: Variable cost of goods sold Direct materials ($3.2*2400) Direct labour ($6*3200) Actual Variable overheads Contribution Fixed overhead Net profit
$ 48000
12000 15000 5500 32380 15620 2600 13020
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Budgeted overheads POAR = Budgeted activity level in standard hours = $6000 3000 = $2 Overhead absorbed = POAR * Standard hours for actual number of units produced = $2 *3 hr per unit * 800 units Standard hr per unit = 3000 hr /1000 units
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VARIABLE OVERHEADS VARIANCE • VARIABLE OVERHEADS VARIANCE = VARIABLE OVERHEADS ABSORBED – ACTUAL VARIABLE OVERHEADS INCURRED = $4800 - $5500 = $700 (A)
• VARIABLE OVERHEADS EXPENDITURE VARIANCE = STANDARD VARIABLE OVERHEADS FOR ACTUAL HOURS WORKED – ACTUAL VARIABLE OVERHEADS INCURRED
= ($2* 3200 HR) - $5500 = $900 (F)
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• VARIABLE OVERHEADS EFFICIENCY VARIANCE = STANDARD VARIABLE OVERHEADS FOR STANDARD HOURS OF OUTPUT – ACTUAL VARIABLE OVERHEAD ABSORBED = (STANDARD HOURS FOR ACTUAL OUTPUT – ACTUAL HOURS WORKED)* STANDARD PRICE = (3 HR *800 UNITS – 4 HR *800 UNITS)*$2 = $1600 (A)
Actual hour per unit = $3200 hr/800 units
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VARIABLE OVERHEADS VARIANCE • VARIABLE OVERHEADS EXPENDITURE VARIANCE $900 F • VARIABLE OVERHEADS EFFICIENCY VARIANCE $1600 A • TOTAL VARIABLE OVERHEAD VARIANCE $400 A
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POSSIBLE REASONS FOR COST VARIANCES VARIANCES Direct material price
FAVOURABLE Discount received Care taken in purchasing Change in material standard Market excesses
ADVERSE Price increase Careless purchasing Change in material std/quality Change in mode of transportation Market shortages
Direct material usage
Use of higher quality Effective use Allocating materials to the right jobs
Defective materials Excessive waste Wrong allocation of materials Change in job specification
Direct labour rate
Use of unskilled or lower skilled worker
Increase in wage rate Use higher skilled worker
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POSSIBLE REASONS FOR COST VARIANCES CONTINUE… VARIANCES Direct labour efficiency / Ohd efficiency
Idle time (always adverse)
Overhead exp
FAVOURABLE Output produce sooner than expected Error in allocating labour to job Use of unskilled or lower skilled worker not available
Savings in cost incurred Economical use of services
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ADVERSE Lost time in excess of std allowed Output lower than std set Error in time allocated to jobs m/c breakdown Insufficient materials Illness / injury worker Increase in cost of service used Excessive use of service Change in service type
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