Variance Analysis

Performance report Variance is a deviation

usually means a of an actual amount
comparison of actual from the expected
results with some or budgeted amount.
Budget/Standard
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 Variance Analysis - Objective

• Identify the causes of the variances of financial

performance and

• Identify Organizational Unit/Activity/Person

responsible for it.

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 Analytical Framework used for
Variance Analysis
- Identify the key causal factors that affect profits.
- Break down the overall profit variance by these causal factors.

- Estimate the degree of impact of each factor on the profit.

- Try to calculate the specific, separable impact of each causal

factor by varying only that factor, holding all other factors
constant.
- Add complexity sequentially, one layer at a time.(peel the onion)
- Stop the process digging dip when the further digging is not
justified
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 Variance Analysis

Total
Variance

Non Mfg Costs Mfg Costs Sales

Variance Variance Variance

Admn. Mktg. R&D Variabl Fixed Volume Selling

e Cost Cost Price

Materia Direct Variabl Market Industr

l Labor e O/H Share y
Volume

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 Favorable or Unfavorable Variance?

To determine whether
a variance is
favorable or
unfavorable, use logic
rather than
memorizing a
formula.

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 Sales Variance

ariance +

SPV = Actual Qty. Sold * (Budgeted Price

– Actual Price)
geted Qty. Sold -
S Mix V = Budgeted Price* (Budgeted Mix of
Actual Qty. - Actual Mix of Actual Qty.)
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 Cost Variance :– Material

Price Variance

MPV = Material Price Variance = Actual Usage *

(Budgeted Price – Actual Price)

M Mix V = Budgeted Price * (Budgeted Mix of Actual

Usage - Actual Mix of Actual Usage)
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 Cost Variance :– Labor

e Variance +

Labor Rate Variance = Actual Usage * (Budgeted Rate –

Actual Rate)

te *

Labor Idle Time variance = Idle Time * Budgeted Rate

Labor Efficiency Variance = Budgeted Rate *
(Standard
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Input –Actual Input)
Horngren/Sundem/Stratton
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 Cost Variance :– Overhead

Fixed Overhead
Fixed Overhead Variance = (Actual Output * Standard
Fixed O/H per unit) - Actual F O/H incurred
Standard F O/H per unit = Total Standard Fixed O/H / Budgeted
output

Variable Overhead

ual Output * Standard V

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 Reasons for Variance
There are basically two reasons why actual
results might differ from the standard.

activity and fixed costs per peri

vities were n

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 Analysis of Cost data and variance
Analysis –

Total Variance Profits

Non Mfg Costs Mfg Costs Sales Variance

Variance Variance

Admn. Mktg. R&D Variable Fixed Volume Selling

Cost Cost Price

Material Direct Variable Market Industry

Labor O/H Share Volume

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