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Prepared byDiane TannerUniversity of North Florida

Variance Analysis

Chapter 7

Variance Analysis Often performed separately for each of

the four manufacturing costs Direct labor variances Direct materials variances Variable manufacturing overhead variances Fixed manufacturing overhead variances

actual cost > standardUnfavorable Variance

actual cost < standardFavorable Variance

Are all favorable variances good?

Causes of Labor Variances• Two causes

–Price (P)• Paid too much per hour or

paid less than expected per hour

–Quantity (Q)• Used too many DL hours

or used fewer DL hours than expected

Labor VariancesP

Q

A S S

A A S

Labor Price (Rate) Variance

Labor Quantity (Efficiency) Variance

Rate per hour is more or less than

allowed.

Incurred too many or less than allowed

hours.

Total Labor Variance

Labor Price Variance +

Labor Quantity Variance

Responsibility for Labor VariancesProduction supervisors

make work assignments, monitor the efficiency of

employees, authorize pay raises, and

terminate employees.

I am responsible for the labor rate and labor

efficiency variances.

Causes of Material Variances• Two causes

–Price (P)• Paid too much or paid less

than expected for material per unit

–Quantity (Q)• Used too much or used

less than expected

Isolation of Material Variances

I need to know as early as possible to make

product pricing or quantity changes

The material price variance is isolated at

the purchase date. Why?

As a purchasing manager,I need the price variance

sooner so that I can better identify purchasing problems.

Price Variance

Computed on the entire quantity purchased

Quantity Variance Computed only on the

quantity used

Material VariancesPQ

A S S SA A A Sp up

Material Price Variance

Material Quantity Variance

Indicates if materials cost more or less per material

unit than allowed.

Indicates if more or less materials were

used.

Material Price Variance +

Material Quantity Variance

Total Material Variance

Responsibility for Material Variances

I am not responsible for this unfavorable material

quantity variance. You purchased cheapmaterial, so my peoplehad to use more of it.

You used too much material because of poorly trained

workers and shoddy equipment maintenance,

and you are a lousy scheduler! You make me overnight the material

making it cost more, causing unfavorable price variances.

Variable Overhead Variances

VOH Spending Variance

VOH Efficiency Variance

Actual VOH Cost

Actual DLH x

Std Rate

VOH Flexible Budget

Applied VOH

VOH Production Volume Variance

VOH Flexible Budget Variance

Total VOH Variance

VOH Production Volume Variance

This is the underapplied or overapplied variable overhead amount.

Fixed Overhead Variances

FOH Spending Variance

FOH Efficiency Variance

Actual FOH Cost

FOH Static

Budget

FOH Flexible Budget

Applied FOH

FOH Production Volume Variance

FOH Flexible Budget Variance

Total FOH Variance

FOH Production Volume Variance

This is the underapplied or overapplied fixed overhead amount.

Applied OverheadOverhead costs are applied to products and services

using a predetermined overhead rate (POHR).

Applied VOH = [VOHR × Actual Activity]

Applied FOH = [FOHR × Actual Activity]

Estimated VOHVariable OH rate = Estimated Activity Estimated FOHFixed OH rate = Estimated Activity

Overhead Variance Responsibility

• Spending variances– Production supervisor – if he selects specific OH items– Purchasing manager – if he works with supplier on cost

• Efficiency variances– Production supervisor – controls use of overhead items

• Production volume variance– No one is responsible We know why it exists.– Exists because the volume of production/sales is

less/more than budgeted

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Predictable Variances Variances that always have zero balances

VOH production volume variance Amount allowed per activity on the flexible

budget is the same as the VOH applied FOH efficiency variance

It is not possible to reduce a FOH cost simply by being more efficient.

Behavioral ConsiderationsStandard costs and variance analysis can1) Provide very useful control

measures 2) Aid in performance

evaluations3) Cause dysfunctional

behavior among employees and managers

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The End