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Standard costs are predetermined cost which may be used as a yardstick to measure the efficiency with which actual costs has been incurred under given circumstance. To illustrate, the amount of raw material required to produce a unit of product can be determined and the cost of that raw material estimated. This becomes the standard material input. If actual raw material usage or costs differ from the standards, the difference which is called ‘variance’ is reported to manager concerned. When size of the variance is significant, a detailed investigation will be made to determine the causes of variance.
According to the chartered Institute of Management Accountants (C.I.M.A) London, “Standard cost is the predetermined cost based on technical estimates for materials, labour and overhead for a selected period of time for a prescribed set of working conditions.”
From the above definitions we may note that standard costs are:
i) Pre-determined cost: Standard cost is always determined in advance and ahead of actual point of time of incurring of costs.
ii) Based on technical estimated: Standard cost is determined only on the basis of a technical estimate and on a rational basis.
iii) For the purpose of Comparison: The very purpose of standard cost is to aid the comparison with actual costs.
iv) Based for price fixing: The prices are fixed in advance and hence the only variation basis is the standard cost.
Estimates are predetermined costs which are based on historical data and is often not very scientifically determined. They usually compiled from loosely gathered information and therefore, they are unsafe to use them as a tool for measuring performance.
Standard costs are predetermined costs which aims at what the cost should be rather then what it will be.
Both the standard costs and estimated costs are used to determine price in advance and their purpose is to control cost. The following are some of the important differences between standard cost and estimated cost:
Standard costing is a technique of cost accounting which compares the ‘standard cost’ of each product or service, with the actual cost, to determine the efficiency of the operation. When actual costs differ from standards the difference is called variance and when the size of the variance is significant a detailed investigation will be made to determine the causes of variance, so that remedial action will be taken immediately. Thus, standard costing involves the following steps:
1. Setting standard costs for different elements of costs
2. Recording of actual costs
3. Comparing between standard costs and actual costs to determine the variances
4. Analysing the variances to know the causes thereof, and
5. Reporting the analysis of variances to management for taking appropriate actions wherever necessary
1. Cost Control: The most important objective of standard cost is to help the management in cost control. It can be used as a yardstick against which actual costs can be compared to measure efficiency. The management can make comparison of actgual costs with the standard costs at periodic intervals and take corrective action to maintain control over costs.
2. Management by Exception: The second objective of standard cost is to help the management in exercising control over the costs through the principle of exception. Standard cost helps to prescribe standards and the attention of the management is drawn only when the actual performance is deviated from the prescribed standards. It concentrates its attention on variations only.
3. Develops Cost Conscious Attitude: Another objective of standard cost is to make the entire organisation cost conscious. It makes the employees to recognise the importance of efficient operations so that costs can be reduced by joint efforts.
4. Fixation of Prices: To help the management in formulating production policy and helps in fixing the price quotations as well as in submitting tenders of various products. This can be done with accuracy with standard cost than the actual costs. It also helps in formulating production policies. Standard costs removes the reflection of abnormal price fluctuations in production planning.
5. Fixing Prices and Formulating Policies: Another object of standard cost is to help the management in determining prices and formulating production policies. It also helps the management in the areas of profit planning, product-pricing and inventory pricing etc.
6. Management Planning: Budget planning is undertaken by the management at different levels at periodic intervals to maximise the profit through different product mixes. For this purpose it is more convenient using standard costing than actual costs because it is done on scientific and rational manner by taking into account all technical aspects.
Variance is the difference between budgeted and the actual level of activity. Since, as explained earlier, profitability of a business depends both on costs and sales, it will be Cost variance is the difference between ` what should have been the cost' (popularly termed as standard cost) and `what has been the cost ` (i.e. actual cost). In case the actual costs is less than the standard cost, the variance is termed as `favourable'. However, if the actual cost is more than the standard costs, variance is termed as `adverse' or `unfavourable'.
Sales variance is the difference between `what should have been the sales' (popularly) termed as Budgeted sales) and `what have been the sales ` (i.e. the actual sales). In case the amount of actual sales is more than the budgeted sales, the variance is termed as 'favourable'. However, if the amount of actual sales is less than the budgeted sales, the variance is termed as `adverse' or `unfavourable'. Thus, variances may be classified into two categories:
Cost Variances is of the following types
Direct expenses constitute an insignificant portion of the total cost of the product. Hence, direct expense variance is generally not calculated. If it is desired to calculate the direct expense variance, it can be computed in the same way as the variable overhead variance is calculated, since in most cases direct expenses are variable.
Three types of direct material variances are explained here.
The first one is Direct Material Cost Variance (DMCV) which is equal to the difference between the standard cost of direct materials specified for the output achieved and the actual cost of direct materials used. The standard cost of materials is computed by multiplying the standard price with the standard quantity for actual output, and the actual cost is computed by multiplying actual price with the actual quantity.
Formula for Computation:
Direct Material Cost Variance = Total Standard cost for Actual Output – Total Actual Cost for actual output
Total Standard = (Standard Price x Std. Qty. for Actual Output) - (Actual Price x Actual Quantity)
If standard output and actual output are different as in this case, the variances are to. be calculated keeping in view the actual output. The information regarding standard output (which is different from standard quantity) is thus not relevant.
Direct Material Cost Variance is further of two types-
DMPV is concerned with that portion of the direct material cost variance which is due to the difference between the standard price specified and the actual price paid. Formula for computation-
Direct Material Price Variance =Actual Quantity x Standard price – Actual Price
(DMPV)
If the actual price is more than the standard price, the variance would be adverse and in case the standard price is more than the actual price, it would result in a favourable variance.
The reasons for price variance may be as under:
i) Fluctuations in market prices:
a) Market trends may be bullish or bearish.
b) Increase or decrease in prices on account of agreement between various suppliers or on account of Government intervention.
ii) Buying efficiency or inefficiency
iii) High or low costs of transportation and carriage of goods.
iv) Changes in or laxity in pursuing purchase policy: Superior or inferior (non-standard) material might have been purchased; Purchases might have been effected in small quantities instead of in bulk or vice versa; Substitute and cheaper materials might have been used.
v) Emergency purchase- placing rush orders for immediate delivery at the prevalent price.
vi) Fraud in purchases and loss of discounts.
vii) Incorrect: setting of standards.
DMUV is that portion of direct material cost variance which is due to the difference between the standard quantity specified (for the output achieved) and the actual quantity used.
Formula for computation
Direct Material Usage Variance = Standard Rate x( Standard Quantity for a total output-Actual Quantity)
The actual quantity, if more than the standard quantity, would cause an unfavourable variance and vice-versa
One of the reasons for material usage variance is change in the composition of the materials mix. It results from a variation in the material mix used in production. Thus, if a larger proportion of the more expensive material is used than that laid down in the standard mix, materials usage will reflect a higher cost than the standard. Contrarily, the use of cheaper materials in large proportions will indicate a lower cost of materials usage than the standard.
It is that portion of the material usage variance which is due to the difference between the standard and actual composition of a mixture of materials. In other words, this variance arises due to a change in the ratio of actual material mix from the standard ratio of material mix. It is calculated as the difference between the standard price of standard mix and the standard price of actual mix.
Material Mix Variance = Standard Price (Revised Standard Quantity – Actual Quantity) i.e.
SP (RSQ - AQ)
Revised Standard Quantity (RSQ)
= Total of Actual quantities of all types of material( TAQ) X Standard quantity of each material
Total of Standard quantities of all types of material (TSQ)
Yield variance is the difference between the standard yield specified and the actual yield obtained. In other words, the difference between actual yield of materials in manufacture and the standard yield (i.e. expected yield from a given standard input) valued at standard output price is known as materials yield variance. This variance is of great significance in processing industries, in which the output of one process becomes the input of the next process till the finished product is obtained at the final stage. The analysis of this variance helps effective control over usage. A low actual yield is unfavourable yield variance which indicates that consumption of materials was more than the standard. A high actual yield indicates efficiency, but a constant high yield is a pointer for the revision of the standard.
Material Yield Variance = Standard cost per unit (Actual yield – Standard yield) i.e. SC p.u.
(AY-SY)
The reason for direct material usage variance may be as under:
i) Inefficiency, lack of skill or faulty workmanship resulting in more consumption of raw materials.
ii) Lack of proper unkeep and maintenance of plant and equipment, and frequent breakdown during production process leading to wastage of material
iii) Non-consideration of product design and method of processing, etc. which fixing standards.
iv) Incorrect processing of materials resulting in wastages.
v) Non-recording of returns of material to stock (or stores) or inter-transfers from one job to another.
vi) Improper inspection and supervision of workmen resulting in adverse quantity variance due to careless handling and processing.
vii) Too strict supervision or inspection resulting in excessive rejections of materials.
viii) Substitution of specified materials with unspecified materials causing greater consumption of the latter. Price variance could be favourable because unspecified material is likely to be cheaper
ix) Incorrect setting of standards, leading to variations.
x) Excessive wastage, scrap, Spoilage, Shrinkage, leakage, etc. causing an adverse usage variance.
For producing one unit of a product, the materials standard is:
Material X : 6 kg. @ Rs. 8 per kg., and
Material Y : 4 kg. @ Rs. 10 per kg.
In a week, 1,000 units were produced the actual consumption of materials was:
Material X : 5,900 kg. @ Rs. 9 kg., and
Material Y : 4,800 kg. @ Rs. 9.50 per kg.
Compute the various variances.
Standard cost of materials of 1,000 units:
Material X: 6,000 kg. @ Rs. 8 = Rs. 48,000
Material Y: 4,000 kg. @ Rs. 10 = Rs. 40,000
Total 88,000
Actual cost:
Material X 5,900 kg. @ Rs. 9 = 53,100
Material Y 4,800 kg. @ Rs. 9.50 = 45,600
Total 98,700
Total materials cost variance 10,700 (A)
Analysis
Material Price Variance:
Actual Quantity (Standard Price - Actual Price)
X = 5900 (Rs. 8 - Rs. 9) =5,900 (A)
Y = 4800 (Rs. 10 - Rs. 9.50) = Rs. 2,400 (F)
3,500 (A)
Material Usage Variance: Standard Price X (Standard Quantity - Actual Quantity)
X = Rs. 8 (6,000 - 5,900) = Rs. 800 (F)
Y = Rs. 10 (4,000 - 4,800) = Rs. 8,000 (A)
7,200 (A)
Verification –
Verification
Material Cost Variance = Materials price variance [Rs. 3,500 (A)] + Material Usage Variance
10,700 (A) = 3500 (A) + 7200 (A)
Material Mix Variance = SP (RSQ – AQ)
For Material X = Rs. 8 (6420 – 5900)
= Rs. 4160 (F)
For Material Y = 10 (4280 – 4800)
= Rs. 5200 (A)
Rs. 4160 (F) + Rs. 5200 (A) = Rs. 1040 (A)
Note: RSQ = TAQ/ TSQ × SQ
For X = 10700/10 × 6 = 6420 kg.
For Y 10700/10 ×4 = 4280 kg.
Material Yield Variance = SC per unit × (AY – SY)
= 88(1,000 – 1,070)
= Rs. 6,160
SC per unit = TSC / SY
= 88/1
= 88 per unit
TSC = Standard cost of material X and material Y
= (6 × Rs. 8) + (4 × Rs. 10)
= Rs. 48 + Rs. 40
= Rs.88
AY given in question i.e. 1000 kg.
New SY = Old SY/ TSQ × TAQ
= 1/10 x10700
= 1070 kg.
DIRECT LABOUR VARIANCES-
The deviations in cost of direct labour may occur because of two main factors:
(i) difference in actual rates and standard rates of labour, and
(ii) the variation in actual time taken by workers and the standard item prescribed for performing a job or an operation.
Labour variances are very much similar to material variances and they can be very easily calculated by applying the same techniques as used in calculation of material variances. (The readers can work out the various formulae for Direct Labour Variances by simply putting the word `time' in place of `qty'. in the formula meant for Direct Material Variances.) The various labour variances may be put as under.
It is the difference between the standard direct wages specified for the activity achieved and the actual direct wages paid.
Formula for computation.
Direct Labour Cost Value =Standard cost for Actual Ouptut – Actual Cost
DCLV = (Standard Rate X Standard Time for actual Ouput) – (Actual Rate x Actual Time)
OR
LCV = (SH x SR) – (AH x AR)
The direct labour cost variance may arise on account of difference in either rate of wages or time. Thus, it may be further analysed as
(i) Rate variance, and
(ii) Time or Efficiency variance
Direct Labour (Wages) Rate Variance
It is that portion of direct labour (wages) variance which is due to the difference between the standard or specified rate of pay and actual rate paid.
Direct Labour Rate = Actual time x (Standard Rate - Actual Rate) Variance (DLRV)
LRV = AH x (SR – AR)
If the actual rate is higher than the standard rate, it shall result in an unfavourable variance and vice versa.
The reasons for direct labour rate variance may be as under:
Direct Labour Efficiency (Time) Variance
It is that portion of the direct labour variance which is due to the difference between the standard labour hours specified for the activity achieved and the actual. labour hours expended. Formula for computation
Labour Efficiency Variance = Standard Wage Rate (Standard Hours of Production – Actual Hours Worked)
LEV = SR x (SH – AHW)
This could be attributed to efficiency of workers. That is why, this variance is known as Labour Efficiency Variance.
The total of labour rate and efficiency variance is equal to labour cost variance.
LABOUR COST VARIANCE = LABOUR EFFICIENCY VARIANCE + LABOUR RATE VARIANCE
LCV = LEV + LRV
Labour efficiency variance may be caused by the following:
Labour efficiency variance is sub-divided into the following variances:
(i) Idle time variance
(ii) Labour mix variance
(iii) Labour yield variance (or Labour revised-efficiency variance)
This variance which forms a portion of wages efficiency variance, is represented by the standard cost of the actual hours for which the workers remain idle due to abnormal circumstances.
Labour Idle Time Variance (LITV) = (Actual hours paid for x Standard rate) – (Actual hours worked x Standard rate)
Idle Hours x Standard rate.
LABOUR MIX VARIANCE
It is also known as Gang Composition Variance. This is a sub-variance which arises due to change in the composition of a standard gang or combination of labour force.
Labour mix variance =
(Actual hours at standard rate of actual gang – Actual hours at standard rate of standard gang)
Standard rate (Revised standard labour hours - Actual labour hours)
LMV = (RSH – AHW) x SR
Revised labour hours =Total actual time x Standard time
Total Standard time
This is due to the difference in the standard output specified and the actual output obtained. This is computed as follow
Labour yield variance =
Standard labour cost unit (Actual output – Standard output)
(Standard loss of actual total input – Actual loss) x Average standard rate per unit.
LYV = SC p.u. (AY – SY)
Note: AY will never change. SY will calculate for actual mix of hour as under:
New SY = Old SY/ TSH x TAH
If the actual output is more than standard output, it is favourable variance and vice versa.
A factory, working for 50 hours a week, employs 100 workers on a job work.
The standard rate is `1 an hour and standard output is 200 units per gang hour.
During a week in June, ten employees were paid at 80 p. an hour and five at `1.20 an hour. Rest of the employees were paid at the standard rate.
Actual number of units produced was 10,200
Calculate labour cost variances.
(i) Cost Variance
Standard Cost – Actual Cost
Rs.5,100 – Rs.4,950 = Rs.150 (F)
Workings:
(a) Calculation of Actual Cost:
85 workers for 50 hours @ Rs.1 per hour = 4,250
10 workers for 50 hours @ 80 p. per hour = 400
5 workers for 50 hours @ Rs.1.20 per hour = 300
Total actual cost 4,950
(b) Calculation of Standard Rate:
Standard cost per (gang hour)= 100 × 50 × Rs.1 = Rs.5000
Standard production (per gang hour) = 100 × 200 × 50 = 10000 unit
Standard rate per unit =
5000/10000Rs.
= 50 p. per unit.
(c) Calculation of Standard Cost:
Actual production × Standard rate = 10,200 units × 50 p. per unit = Rs.5,100
(ii) Rate Variance:
As the actual wage rate has deviated from the standard in respect of only 15 workers from out of a total of 100 workers, wages rate variance would be calculated only in respect of these 15 workers.
Actual Hours (Standard Rate – Actual Rate)
Therefore,
500 Hours (Rs.1 – 80 p.) = Rs.100 (F)
250 Hours (Rs.1 – Rs.1.20) = Rs.50 (A)
Thus, the total rate variance is Rs.50 (F).
(iii) Efficiency Variance:
Efficiency variance is indicated by the fact that, as compared with standard production of 10,000 units (200 units × 50 hours), the actual production is 10,200 units
Standard Rate (Standards Hours – Actual Hours)
Rs.1 (5,100 - 5,000) = Rs.100 favourable.
Calculation of Standard Hours= 10200 10000 5000 × = 5,100 hours.
Yield Variance:
Standard labour cost per unit of output (SY – AY)
0.50 (10,000 – 10,200) = Rs.100 (F)
Verification:
Cost Variance = Rate Variance + Efficiency Variance
Rs.150 (F) = 50 (F) + Rs.100 (F)
OVERHEAD VARIANCES-
The total overhead cost variance is the difference between the standard cost of overhead allowed for the actual output achieved and the actual overhead cost incurred. In other words, overhead cost variance is the under or over absorption of overheads.
However before we proceed to study these variances, we should aware about the basic terms used in the computation of overhead variance:
(i) Standard overhead rate (per unit) = Budgeted overhead / Budgeted output in units
(ii) Standard overhead rate (per hour) = Budgeted overhead / Budgeted hours
(iii) Standard hours for actual output = Budgeted hours x Actual output / Budgeted output
(iv) Standard output for actual hours = Budgeted output (in units) x Actual hours / Budgeted hours
(v) Absorbed (or Recovered) overhead = Standard Rate per hour × Actual Output Or standard rate per unit × standard hours for actual output
(vi) Budgeted overhead = Budgeted output × Std. overhead rate per unit Or Budgeted hours × Std. overhead rate per hour
(vii) Standard overhead = Std. output for actual time × Std. overhead rate per unit Or Actual hours × Std. overhead rate per hour
(viii) Actual overhead = Actual output × Actual overhead rate per unit Or Actual overhead = Actual output × Actual overhead rate per unit
The term overhead includes indirect material, indirect labour and indirect expenses. Overheads may relate to factory, office, or selling and distribution departments
[Actual Output × Standard Overhead Rate Per Unit] – Actual Overhead Cost
[Standard Hours for Actual Output × Standard Overhead Rate Per Hour] – Actual Overhead Cost
It is the difference between the standard overheads for actual output (i.e. recovered overheads) and actual overheads. It is the total of both fixed and variable overhead variances.
Overhead Cost variance = Recovered Overheads - Actual Overheads Variable Overhead
Cost Variance (VOCV) It is the difference between standard variable overheads for actual output ( or recovered variable overheads) and actual variable overheads.
. However, for the purposes of variance analysis, we can broadly divide the overhead cost variance into two categories as shown below:
Ovrhead Cost Variances-
Each of these variances are discussed below:
It is the difference between the standard variable overhead cost allowed for the actual output achieved and the actual variable overheads. Normally this variance is represented by expenditure (cost) variance only because variable overhead cost will vary in proportion to production so that only a change in expenditure can cause such variance.
VOCV = Recovered Variable Overheads - Actual Variable Overheads.
Variable Overhead Variance =
(Standard Variable Overhead Rate × Actual Output) - Actual Variable Overheads
(Standard Hours for Actual Output × Standard Variable Overhead Rate) – Actual Variable Overheads
(Standard Rate × Actual output) – (Actual Rate × Actual output)
(i) Variable Overhead Expenditure Variance (VOExV)
(Actual Hours × Standard Variable Overhead Rate per Hour) – Actual Variable Overhead
Actual Hours (Standard Variable Overhead Rate per Hour – Actual Variable Overhead Rate per Hour)
(ii) Variable Overhead Efficiency Variance (VOEfV) =
Standard Time for Actual Production × Standard Variable Overhead Rate per Hour) – Actual Hours Worked × Standard Variable Overhead Rate per Hour).
OR Standard Variable Overhead on Actual Production – Standard Variable Overhead for actual time.
OR Recovered Overheads – Standard Overheads
It is better to compute variance related to variable overhead on the basis of hours rather then on the basis of units.
Illustration
The following data is obtained from the books of a manufacturing company regarding variable overheads:
Budgeted production for January 300 units
Budgeted variable overhead Rs.7,800
Standard time for one unit 20 hours
Actual production for January 250 units
Actual hours worked 4,500 hours
Actual variable overhead Rs.7,000
Solution
Variable Overhead Variance = Standard Cost – Actual Cost
= Rs.6,500 – Rs.7,000 = Rs.500 (A)
(a) Standard variable overhead cost of actual output
= 250 units × Rs.26 per unit = Rs.6,500
(b) Standard variable cost per unit
Rs 7800/300. = or Rs.26 per unit
Sometimes, a little refinement is introduced in the calculation of variable overhead variance and, therefore, the computation is as follows:
(i) Variable Overhead Expenditure Variance
= Actual Cost – Standard overheads on hours worked
Rs.7,000 – Rs.5,850 = Rs.1,150 (A)
(a) Standard variable overhead on hours worked is—
4,500 hours × Rs.1.30 per hour = Rs.5,850
(b) Standard variable overhead per hour
=Rs. 7800 /300 x 20
= Rs.1.3
(ii) Variable Overhead Efficiency Variance
= Standard variable overhead on hours worked – Standard variable overhead on actual output.
Rs.5,850 – Rs.6,500 = Rs.650 (F)
(iii) Variable Overhead Total Variance
= Expenditure Variance + Efficiency Variance
Rs.1,150 (A) + Rs.650 (F) = Rs.500 (A)
This is the same as variable overhead variance already arrived at.
Causes of variance :
This variance may be due to advance payment of expenses, or outstanding expenses or payment of past outstanding expenses during this period, or on account of certain abnormal expenses incurred such as, repairs of machinery due to breakdown, expenses clue to spoilage or defective workmanship or excessive overtime work, etc.
FIXED OVERHEAD VARIANCE
Fixed overhead represents all items of expenditure which are more or less remain constant irrespective of the level of output or the number of hours worked.
Fixed Overhead Cost Variance (FOCV)
It is the difference between standard fixed overheads for actual output (or Recovered Overheads) and actual fixed overheads.
FOCV = Recovered Fixed Overheads - Actual Fixed Overheads
Standard overhead produced means hours which should have been taken for the actual output.
Fixed overhead variance may broadly be divided into:
(i) Expenditure variance and
(ii) Volume variance.
This is also known as budget variance. This is obtained by comparing the total overhead cost actually incurred against the budgeted overhead cost i.e
Budgeted fixed overhead – Actual fixed overhead
(Budgeted hours × Std. fixed overhead rate) – Actual fixed overhead
If the actual overheads are more, it shall result in an adverse variance and vice versa. This variance gives a measure of efficiency of spending.
Causes of variance : Difference between actual and recovered. fixed overheads may be on account.
(i) a higher or lower amount of fixed overheads, compared to budgeted fixed overheads, might have been incurred for the same production during the same period.
(ii) the same amount of fixed overheads might have been incurred for a high or lower production than the budgeted production during the same period.
Computation of Overhead Variances.
The difference between overhead absorbed on actual output and those on budgeted output is termed as volume variance. This variance shows the over or under absorption of fixed overheads during a particular period. If the actual output is more than the standard output, there is over-recovery of fixed overheads and volume variance is favourable and vice versa if the actual output is less than the standard output.
Volume Variance (FOVV)= (Actual output × Standard rate) – Budgeted fixed overheads
OR Standard rate (Actual output - Standard output)
OR Standard rate per hour (Standard hours produced - Budgeted hours)
OR (Absorbed overhead – Budgeted overhead)
N.B.: Standard hour produced means number of hours which should have been taken for the actual output as per the standard laid down
VERIFY:-
F.O. COST VARIANCE = F.O. EXPENDITURE VARIANCE + F.O. VOLUME VARIANCE
It arises due to the difference between the output actually achieved and the output which should have been achieved in the actual hours worked. This variance will be favourable it the actual production is more than the standard production in actual hours.
Fixed Overhead Efficiency Variance (FOEfV)=
Standard Fixed Overhead Rate per hour [Standard Production – Actual Production]
It is that portion of the volume variance which is due to working at higher or lower capacity than the standard capacity. It is related to the under or over utilisation of plant and equipment. If the capacity utilization is more than the budgeted capacity, the variance is favourable, otherwise it will be adverse. It is represented as:
F. O. Capacity Variance=
Standard rate ( Standard quantity – Budgeted quantity)
This variance indicates the difference in capacity utilization due to working for more or less number of days than the budgeted one. The computation of this variance is done by using the following formula.
Fixed Overhead Revised Capacity Variance (FORCV) =
Standard Rate [Standard Quantity – Revised Budgeted Quantity]
It is that portion of the volume variance which is due to the difference between the number of working days anticipated in the budget period and the actual working days in the period to which the budget is applied. If the actual working days exceed standard days, the variance will be favourable and vice-versa.
It is calculated as:
FO Calender Variance = Standard rate (Revised budgeted units – Budgeted units)
Increase or decrease in production due to more or less working days at the rate of revised capacity × Standard rate per unit
Budgeted Output 10,000 units
Budgeted Overheads Rs. 10,000
Fixed 6,000
Variable 4,000
Actual Overheads 12,000
Variable 6,000
Actual output 8,000 units
Let us calculate the various overhead variances. It will be appropriate to make the following basic calculations before computing the various Overhead Variances.
Standard/Budgeted Overhead Rate per Unit = Budgeted Overheads/ Budged Output
Rs. 10,000/10000 = Re.1
Standard/Budgeted Fixed = Budgeted Overheads/ Budgeted output
Overhead Rate per Unit Budged Output
= Rs. 6,000/10000
= Re. 60
Standard/Budgeted Variable Overhead Rate per unit = Budgeted Variable Overheads
Budged Output
= Rs. 4,000/10000
= Re. 0.40
Various Overhead Variances can now be calculated
OCV = Recovered Overheads - Actual Overheads
= Rs. 1 x 8,000 -12,000 = 4,000 (Adverse)
VOCV = Recovered Variable Overheads -Actual Variable Overheads
= 8,000 x Re. 0,40 - Rs. 6,000
= 3,200 = 6,000
= 2,800 (Adverse)
FOCV = Recoverd Fixed Overheads Actual Fixed Overheads
= 8,000 x Re. 0.60 - Rs. 6,000
= Rs. 4,800 - Rs. 6,000
= Rs. 1,200 (Adverse)
Calculate different overhead variances from the following standard and actual data:
Standard Overhead rate:
Variable Rs. 3.00 per unit
Fixed (Rs. 36,000 / 3,000) Rs. 12.00
Rs. 15.00
Actual data during the period:
Output 2,400 units Overhead:
Variable Rs. 6,000
Fixed Rs. 28,000
Rs. 34,000
Fixed Overhead Variance may be classified as shown in the following chart:
Sales are affected by two factors
(i) the selling price and
(ii) the quantum of sales fhe variations in the standards set and actuals for the purpose may be mainly due to change in market trends. Normally, if the selling price increases, the volume of sales will be lower than the standard. It may result in a favourable variance as to price and unfavourable variance as to quantity. It is to be borne in mind that higher price here is to be viewed as a favourable variance (higher price paid for material, it will be recalled, causes an adverse variance) and lower volume of sales is to be viewed a unfavourable (in case of materials, it is the other way around, i.e. lower usage of materials than the standard causes a favourable variance).
It is well known that demand and supply position in the market decides the quantity of sales as well as the selling price. The variations may be on account of control lab : as well as non-controllable factors. changes in market conditions and demand by customers¬ are, of course, beyond the control of management, but certain factors like urn ably high prices are controllable, and an effort should be made to check adverse variations due to these factors.
Sales variances can be understood with the help of the following chart
Sales Value Variance
The difference between budgeted sales and actual sales results in Sales Value variance. The Formula is:
Sales Value Variance = Budgeted Sales - Actual Sales
If actual sales are more than the budgeted sales, a favourable variance would reported and vice versa.
The difference in value may be on account of difference in price or volume of sales which is therefore analysed further.
It can be calculated like material price variance. It is on account of the difference in actual selling price and the standard selling price for actual quantity of sales. The formula is:
Actual quantity sold X (Standard Price - Actual Price) OR
Price Variance = Standard Sales - Actual Sales
It can be calculated like material usage variance. Budgeted sales may be different from the standard sales. In other words, budgeted quantity of sales at standard price may vary from the actual quantity of sales at standard prices. Thus, the variance is a result of difference in budgeted and actual quantities of goods sold. The formula is:
Standard Price X (Budgeted Quantity - Actual Quantity)
Volume Variance = Budgeted Sales - Standard Sales
If the standard sales are more than the budgeted sales, it would cause a favourable variance and vice versa
The total, of price and volume variances would be equal to sales value variance.
By: NIHARIKA WALIA ProfileResourcesReport error
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