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Variance Analysis - Basic Formulas
1) Material, Labour, Variable Overhead Variances
Solve using the following:
(1) AQ x AP
(2) AQ x SP
(3) SQ x SP
2-1= Price Variance
3-2= Usage Variance
AQ Actual Quantity
AP Actual Price
SP Standard Price
SQ Standard Quantity*
* Normally the toughest to calculate - what you "should have used"
based on actual production
MF: Remember, Price + Usage Variance = Total Variance
2) Sales Variances
(1) AQ x AP
(2) AQ x SP
(3) AQ x SC
(4) SQ x SC
1-2= Sales Price Variance
3-4= Sales Volume Variance
AQ Actual Sales Quantity
AP Actual Sales Price
SP Budgeted Sales Price
SQ Standard Quantity (what you should have sold i.e. budget sales volume)
SC Standard Contribution (can also be budget gross profit per unit)
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3) Fixed Overhead Variances
a) In a Marginal Costing System: (only one variance)
(1) Expenditure Variance: Budget Expenditure - Actual Expenditure
b) In an Absorption Costing System: (two variances)
(1) Expenditure Variance: Budget Expenditure - Actual Expenditure
(2) Volume Variance: (Standard - Budget) x OAR
OAR: Overhead Absorption Rate
Standard: The quantity you absorbed based on actual production*
* Quantity could be units/machine hours/labour hours
c) In an Absorption Costing System using labour hours (two or four variances)
(1) Expenditure Variance: Budget Expenditure - Actual Expenditure
(2) Volume Variance: (Standard - Budget) x OAR
The volume variance can be broken down into Capacity and Efficiency variances:
(3) Capacity Variance: (Actual - Budget) x OAR
(4) Efficiency Variance: (Standard - Actual) x OAR
OAR: Overhead Absorption Rate
Standard: The quantity you absorbed based on actual production
MF: How to tie in Volume,Capacity and Efficiency:
Volume Capacity Efficiency
= +
Variance Variance Variance
Standard Actual Standard
= x
Budget Budget Actual
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4) Mix and Yield Variances
The sales volume and materials/labour usage variances can be broken down into
mix and yield variances if more than one type of product is being sold or more than
one type of material/labour is being used:
(Q1) (Q2) (Q3)
Actual Quantity Actual Quantity Standard Quantity
in in in
Actual Proportions Standard Proportions Standard Proportions
(Q2 - Q1) x Standard* = Mix Variance
(Q3 - Q2) x Standard* = Yield Variance
Standard* = standard cost/standard rate/standard contribution depending on
whether you are looking at materials/labour/sales
MF:
Q1 is normally given in the question i.e. actual quantity used broken down by actual proportions
Q2 is the actual quantity used broken down by standard ("normal") proportions
Q3 is the tricky one, calculated as follows: In relation to your actual output , what standard ("normal")
quantity would you expect to use to achieve it?
