Profit Variances

The profit variances are classisified as follows:

Classification of Profit Variances

Formulae

Profit Value Variance = Budgeted Profit − Actual Profit

Profit Price Variance = Actual quantity[ Standard rate of profit - Actual rate of profit]

Profit Volume Variance = Standard rate profit [Budgeted quantity - Actual rate of quantity]

Profit Mix Variance

= Revised Standard Profit − Standard Profit

Profit Quantity Variance

= Budgeted Profit − Revised Standard Profit

Sales Variances

All of the variances discussed till now are concerned with costs; the effects on profits due to adverse or favourable variances affecting direct materials, direct labour or overheads. Some companies calculate cost variances only, but to obtain the full advantages of standard costing, many companies also calculate sales variances. Sales variance affect a business in terms of changes in revenue: changes that have been caused either by a variation in sales quantities or in sales prices.There are two distinctly separate systems of calculating sales variances,which show the effect of a change sale as regards:

(i) Sales margin variance (on the basis of profit), and

(ii) Sales value variance (on the basis of turnover) Sales variances based on profit: 

Classification of Sales Margin Variances

The sales variances based on profit are also
called sales margin variances that indicates the deviation between actual profit and standard or budgeted profit.

Total Sales Margin Variance

This variance takes into account the differences between actual profit and standard or budgeted profit.

Total Sales Margin Variance = Actual Profit – Budgeted Profit

or
= [Actual quantity  × Actual profit per unit]-[Budgeted quanity of sales ×Budgeted profit per unit]
 

Sales Price Variances
The price variance is the difference between standard price of the quantity of sales affected and the actual price of those sales.Sales Price Variance

= Actual quantity of sales  Actual profit per unit -Standard profit per unit

= Actual quantity of sales × Standard price -Atcual quantity of sales × Actual price

Sales Volume Variances

It represents the difference between the actual units sold and the budgeted quantity multiplied by either the standard profit per unit or the standard contribution per unit. In absorption, costing standard profit per unit is used, but in marginal costing, standard contribution per unit must be used.

Fixed Overhead Variances

Fixed overhead represents all items of expenditure that more or less remain constant irrespective of the level of output or the number of hours worked. The fixed overheads are classified as follows:

Classification of Fixed Overhead Variances

The formulae for calculation of fixed overhead variances are given below:

Fixed Overhead Cost Variance

The fixed overhead cost variance represents the under/over absorbed fixed production overhead in the period. This under/over absorbed overhead may be due to differences between actual and budgeted fixed overheads, i.e., expenditure variances, and/or differences between the actual and budgeted levels of activity i.e., volume variances.

Fixed Overhead Expenditure Variance

This variance is also called budget variance, obtained by comparing the total fixed overhead cost actual incurred against the budgeted fixed overhead cost.

Fixed Overhead Expenditure Variance = Budgeted overheads – Actual overheads

Fixed Overhead Volume Variance
The volume variance is computed by taking the difference between overhead absorbed on actual output and those on budged output.

Fixed Overhead Volume Variance
= (Actual output × Standard rate) – Budgeted fixed overheads

or

= Standard rate (Actual output – Budgeted output)

or

= Standard rate per hour[Standard hours produced − Budgeted hours]