10-1
SALES VARIANCE ANALYSIS & PROFIT RECONCILIATIONS
14. Variance analysis
Direct material variances (Total, Price and usage variance)
Direct labor variances (total, rate and efficiency variance)
Variable overhead variance -total, expenditure & efficiency variance
Fixed overhead (total, expenditure, volume, capacity & efficiency)
Reasons for cost variances
Sales variances (Price and Volume Variances)
Operating statements
Deriving actual data from standard cost details & variances
Inter-relationships between variances
10-2
Sales Variances
There are two causes of sales variances: a difference in selling price, and
difference in sales volume.
Sales volume variance: calculates effect on profit of actual sales volume
being different from that of budgeted.
Sales volume variance = (Actual Quantity Sold – Budget Quantity sold) x
Standard Margin**
Sales price variance shows effect on profit of selling at a different
price from that budgeted.
Sales price variance =(Actual Price – Budget Price) x Actual Quantity sold
10-3
Sales Variances
Effect on profit will differ depending upon whether a
marginal or absorption costing system is being used.
• Under absorption costing any difference in units is
valued at standard profit per unit.
• Under marginal costing any difference in units is valued
at standard contribution per unit.
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Example
The following data relates to 20X8.
• Budgeted output and sales for the year: 900 units
• Actual sales: 1,000 units @ Rs 650 each
• Standard selling price: Rs 700 per unit
• Budgeted contribution per unit: Rs 245
• Budgeted profit per unit: Rs 205
Calculate sales volume variance (under absorption and marginal
costing) & sales price variance
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Operating statement - Reconciliation of budget and actual results
Purpose of calculating variances is to identify different effects of
each item of cost / income on profit compared to budgeted profit.
Variances are summarised in a reconciliation statement (also called
operating statement).
10-6
Operating statement - Reconciliation of budget and actual results
Budgeted profit X
Sales volume variance (using std profit per unit) X
Standard profit on actual sales X
Sales price variance X
• Cost variances:
Rs Rs
Material price
Material usage
Labour rate
Labour efficiency
Variable overhead rate
Variable overhead efficiency
Fixed overhead volume – Production
Fixed overhead expenditure – Production
Fixed overhead expenditure – Non-production
Total X
Actual profit X
10-7
Example
Chapel Ltd manufactures a chemical protective called Rustnot. Following
standard costs apply for the production of 100 cylinders:
• Materials 500 kgs @ Rs 80 per kg 40,000
• Labour 20 hours @ Rs 150 per hour 3,000
• Fixed overheads 20 hours @ Rs 100 per hour 2,000
45,000
Monthly sales budget is 10000 cylinders. Selling price= Rs 600/ cylinder
For November following actual sales information is available:
• Produced/sold 10,600 cylinders
• Sales value Rs 6,300,000
• Material purchased and used 53,200 kgs Rs 4,250,000
• Labour 2,040 hours Rs 310,000
• Fixed overheads Rs 220,000
Prepare an operating statement for November detailing all variances.
10-8
Multiple choice questions (MCQs)
1. J Ltd operates a standard cost accounting system. Following
information is extracted from its standard cost card & budgets:
Budgeted sales volume 5,000 units
Budgeted selling price Rs 10.00 per unit
Standard variable cost Rs 5.60 per unit
Standard total cost Rs 7.50 per unit
If it used a standard marginal cost accounting system and its
actual sales were 4,500 units at a selling price of Rs 12.00, its
sales margin (contribution) variance would be
A) Rs 6,800 favourable B) Rs 6,800 adverse
C) Rs 800 favourable D) Rs 800 adverse
10-9
ABC company manufactures and sells product X. The standards for materials
and labor costs to manufacture one unit of product X are as follows:
Direct materials: 6lbs. @ $2 per lb.
Direct labor: 1 hour @ $8 per hour
ABC company purchased 26,000 pounds of direct materials for $27,300 and
manufactured 4,000 units of product X during January 2012.
The following variances data belong to the January 2012:
• Materials price variance: $2,600 Unfavorable
• Materials quantity variance: $2,000 Unfavorable
• Direct labor rate variance: $1,520 Unfavorable
• Direct labor efficiency variance: $1,600 Favorable
Required:
1. Compute standard quantity of direct materials allowed or January production.
2. Compute actual quantity of materials used (in pounds) for January production.
3. Compute standard direct labor hours allowed for January production.
4. Compute actual direct labor hours worked for January production.
5. Compute actual direct labor rate.
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A note on Variable Overheads Efficiency Variance
• Overhead efficiency variance is really misnamed, since it does not
measure efficiency (waste) in use of variable overhead items. The
variance arises solely because of inefficiency in base underlying
incurrence of variable overhead cost. If incurrence of variable
overhead costs is directly tied to actual machine-hours worked, then
excessive number of machine-hours worked causes the incurrence of
variance in variable overhead costs that would have been avoided had
production been completed in standard time allowed.
• In short, overhead efficiency variance is independent of any spillage,
waste, or theft of overhead supplies or other variable overhead items
that may take place during a month.
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• If overhead is applied using direct labor hours, then variable
overhead efficiency variance and direct labor efficiency variance will
always be favorable or unfavorable together. Both variances are
computed by comparing number of direct labor-hours actually worked
to standard hours allowed. That is, in each case the formula is:
Efficiency variance = SR(AH – SH) Only “SR” part of formula,
standard rate, differs between two variances.
10-12
End of Chapter
