Variance Analysis

Variance is the difference between budgeted and the actual level of activity.The profitability of a business depends both on cost and on sales. Cost variance is the difference between what should have been the cost (Standard cost) and what has been the actual cost. In case the actual cost is less than the standard cost the variance is positive or favourable. However if the actual cost is more than the standard cost, variance is termed as unfavourable or negative. Similar is the case with the sales. In case the actual sales is more than the budgeted the variance is termed as favourable and if the actual sales is less than budgeted sale the variance is unfavourable.

The variance are classified into the following:

(i) Material Variance;

(ii) Fixed Overhead Variance;

(iii) Variable Overhead Variance;

(iv) Labour Variance;

(v) Sales Variance.

Variance analysis is the technique in which the planned activities of an undertaking are quantified in budgets, standard costs, standard selling prices and standard profit margins, and the difference between these and the actual results are compared.

Let us now discuss the ways to compare each of these variances.

Material Variance

For the purpose of calculating the material variance the following two types of standard need to be fixed:

(a) Material Price Standard;

(b) Material Quantity Standards.

The Material variance is classified as follows:

(i) Material Cost Variance: The material cost variance is also called material total variance and is the difference between the standard cost of material and actual cost of material used.

Material Cost Variance = (Standard unit × Standard price) –(Actual unit × Actual price)

(ii) Material Price Variance: A material price variance occurs when raw material is purchased at a price different from standard price.
Cost Management

Material Price Variance:
= Actual Quantity{Standard price per unit of material-Actual price per unit of material}
 

(iii) Material Usage Variance: The material quantity or usage variance results when actual quantity of material used differ from standard quantities that should have been used to produce the output achieved.

Material usage = [Standard Quantity-Actual Quantity] × Standard price per unit of material