Variance Analysis
Transcript of Variance Analysis
Strategic Cost Management
USOL, PU, Chandigarh19 November , 2013
Standard costing
• Management control can be exercised only if benchmarks or norms exists against which actual performance can be measured
• For an organization as a whole, the strategic planning exercise provides the basis for developing performance expectations.
Standard, Standard Cost and Standard Costing
• A standard is a predetermined estimate of quantities of input namely material, labour, and others and the prices or usage rates.
• Acc to Chartered Institute of Management Accountants (CIMA), “ A standard is a predetermined measurable quantity set in defined conditions against which actual performance can be compared, usually for an element of work, operations or activity.
Continue..• Standard cost: are carefully predetermined costs that are
usually expressed on a per unit basis. They are target costs basically.
• Acc to CIMA, “a predetermined calculations of how much costs should be under specified working conditions
• It is built up from an assessment of the value of the cost elements and correlates technical specifications and the quantification of material, labour and other cost to the prices/ wage rates expected to apply during the period in which the standard cost is intended to be used
Standard Costing• Standard costing: acc to CIMA, “ a technique which uses standard for
costs and revenue for the purpose of control through variance analysis”
• Utilities of Standard costingCost controlRevenue decisions and diagnosisinventory valuationmotivationAid to record keeping and cost reductionmanagement by exceptionperformance measurement
Variance and variance analysis
• Variance: acc to CIMA, “ the difference between planned, budgeted or standard costs and actual costs.
• Variance analysis: acc. to CIMA, “the analysis of variance arising in a standard costing system into their constituent parts”
Types of VA
• Variance analysis– DM variance– DL variance– Overhead variance
DM cost variance analysis
Material cost variance
Price variance Usage variance
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Usage variance
Yield variance Mix variance
formulae
• DM cost variance: difference between standard cost of actual quantity of goods manufactured and the actual material cost
• It shows the saving or excess cost in purchase and use of direct material.
• DM variance= (SC* actual output)- actual material cost of input
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• Material price variance: is the difference between the standard price and the actual price of materials used in the production.
• Material price variance= AQ( SP- AP)
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• Material usage variance: difference between standard quantity of material prescribed for actual production and actual quantity used
• Represents the efficiency with which the materials have been used in the manufacturing process.
• Material usage variance= SQ used in actual production- actual quantity used
• Standard quantity used in actual production= Standard material quantity* actual production/standard production
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• Material yield variance: is a subdivision of the material usage variance
• Difference between standard quantity of production based on actual input and actual quantity produced
• = Standard cost( standard yield/output based on actual input- actual output)
• Standard output based on actual input= Standard output* actual material input/ standard material input
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• Material mix variance: difference between standard mix of materials and the actual mix of materials.
• Highlights the cost incidence of the difference between the actual quantity used quantity that should have been used if the total quantity of input was mixed in accordance with standard proportion.
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• = standard cost of standard mix- standard cost of actual mix
• Standard mix= standard quantity of each material in a mix* actual total input/ standard total quantity of materials in a mix.
DL cost variance analysis
DL cost variance
Efficiency variance Mix variance Idle time
variance Rate variance
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• DL cost variance: difference between standard direct labour cost of actual quantity of goods produced and the actual direct labour cost
= (SR* Standard lab hr. used)- (AR*actual direct labour used)
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• Direct labour rate variance: difference between standard wage rate and the actual wage rate per hour of labour employed in manufacturing.
• = Actual hours( SR- AR)
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• Direct labour mix variance: sub division of direct labour usage variance
• Difference between standard composition and the actual composition of direct labour.
• = standard cost of standard mix- standard cost of actual mix
• Standard mix= standard time for each grade of labour* actual time taken/ standard total time
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• Direct labour idle time variance: difference between actual hours paid and hours actually worked
• = standard wage rate per hour* abnormal idle hours
Overhead varianceOverhead variances
Variable overhead variance
Variable overhead spending variance
Variable overhead efficiency variances
Fixed overhead variance
Fixed overhead budget variances
Fixed overhead volume variances
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• Variable overhead spending variance= (Standard variable overhead rate* actual hours
worked)- actual variable overhead
Standard variable overhead rate per hour=Budgeted variable overhead/ budgeted hours
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• Variable overhead efficiency varianceis the difference between the standard time allowed for actual production and actual time taken.Highlights the cost incidence of the difference between the actual efficiency and the standard efficiency
=Standard variable overhead rate per hour( actual output in terms of standard hours- Actual hours worked)
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• Fixed overhead variance analysis difference between the budgeted fixed
overhead and actual fixed overhead= (standard fixed overhead rate* actual
production)- actual fixed overheads
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• Fixed overhead budget variance=budgeted fixed overhead- actual fixed
overheadsFixed overhead volume variance=Standard fixed overhead rate( budgeted output-
actual output)
Thank you!