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Variance analysis

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ALIHYA SHIN
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6 views

Variance analysis

Uploaded by

ALIHYA SHIN
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Variance analysis is a financial management tool used to analyze the differences (or variances)

between budgeted and actual figures in a business or organization's performance. It helps


managers understand why performance deviates from expectations and provides insights into
areas that need corrective actions.

Types of Variance Analysis:

1. Sales Variance:

o Sales Price Variance: The difference between the actual sales price and the
expected sales price, multiplied by the actual quantity sold.

o Sales Volume Variance: The difference between the actual quantity sold and the
expected quantity, multiplied by the budgeted price.

Formula:

o Sales Price Variance = (Actual Price - Budgeted Price) × Actual Quantity

o Sales Volume Variance = (Actual Quantity - Budgeted Quantity) × Budgeted Price

2. Cost Variance:

o Direct Material Variance: Analyzes the difference between the actual cost of
materials used and the expected cost based on standard usage.

▪ Material Price Variance: (Actual Price per Unit of Material - Standard Price
per Unit of Material) × Actual Quantity Used

▪ Material Usage Variance: (Actual Quantity Used - Standard Quantity


Allowed) × Standard Price

o Direct Labor Variance: Analyzes the difference between the actual labor costs and
the expected costs based on standard labor rates and hours.

▪ Labor Rate Variance: (Actual Labor Rate - Standard Labor Rate) × Actual
Hours Worked

▪ Labor Efficiency Variance: (Actual Hours Worked - Standard Hours


Allowed) × Standard Labor Rate

o Variable Overhead Variance: Analyzes variances related to variable overhead costs


(such as utilities, indirect materials, etc.).

▪ Variable Overhead Spending Variance: (Actual Variable Overhead -


Budgeted Variable Overhead) × Actual Activity Level

▪ Variable Overhead Efficiency Variance: (Actual Hours - Standard Hours) ×


Standard Variable Overhead Rate

o Fixed Overhead Variance: Analyzes the difference in fixed overhead costs (e.g.,
rent, salaries).
▪ Fixed Overhead Budget Variance: The difference between the actual fixed
overhead and the budgeted fixed overhead.

▪ Fixed Overhead Volume Variance: The difference due to the number of


units produced, compared to the expected output.

3. Profit Variance: This is the overall difference between the actual profit and the budgeted
profit. It’s derived from the sum of sales variances and cost variances.

Formula:

o Profit Variance = (Actual Profit - Budgeted Profit)

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