The variance analysis formula is an important concept in cost accounting that’s used to measures the difference between the standard level of performance and the actual level of performance achieved by an entity.
Variance analysis helps the management of any business to assess its performance against set standards. You can apply variance analysis to different elements in your business. They include:
- Material Cost Variance
- Direct Labour Variance
- Sales Variance
- Fixed Overhead Variance
- Variable Overhead Variance
Let’s analyze each of the aforementioned in detail.
5 Types of Variance Analysis Formula
Material Cost Variance
This is the difference between the standard cost of materials at the standard quantity and the actual quantity of materials used at actual prices.
MCV = (Standard Quantity Produced x SP) – (AQP x ASP)
Material cost variance is further categorized into direct material price variance and direct material usage variance.
- Direct material price variance = Actual Quantity Produced x (Standard Price – Actual Price)
- Direct material usage variance = Standard Price x (Standard Quantity allowed for use – Actual Quantity used)
Direct Labor Cost
This is another important factor whose variance is determined by businesses, particularly those in the manufacturing sector. It is the difference between standard labor cost and actual labor cost incurred.
= Standard labor rate x Standard quantity) – (Actual labor rate x Actual quantity)
Direct labor cost variance can be further broken down into direct labor rate variance, direct labor efficiency variance, and idle time variance.
- Direct labor rate variance = Actual Hours worked x (Standard Rate/hour – Actual Rate paid per hour)
- Direct labor efficiency variance = Standard Rate x(Standard Hours – Actual Hours worked)
- Idle time variance = Idle time x Standard Rate.
Variable Overhead Variance
This variance measures the difference between the actual overheads incurred and the variable overhead absorbed. The formula is (Standard Rate – Actual Rate) x Actual Output. It is further broadened into variable overhead expenditure and variable overhead efficiency variance and the formulas are:
- Variable Expenditure Variance = (Standard Output x Standard Rate) – (Actual Output x Actual Rate) or (Actual Hours Worked × SVOR) – Actual Variable Overhead cost incurred
- Variable Overhead Efficiency Variance = (Stanard hours Allowed – Actual Hours Worked) x SVOR
SVOR is Standard Variable Overhead Rate
Fixed Overhead Expenditure Variance
This is the variance to measure the difference between standard fixed overhead cost at actual levels of production and actual fixed overhead at the same levels of production.
The formula is (Actual output x Fixed Overhead Absorption Rate)- Actual Fixed overhead.
It can be analyzed into fixed overhead volume and fixed overhead expenditure variance.
- Fixed Overhead expenditure variance = Budgeted Fixed Overhead – Actual Fixed Overhead.
- Fixed overhead volume variance = (Budgeted Hours – Standard Hours Allowed) x FOAR.
Where FOAR is Fixed Overhead Absorbed rate i.e.
FOAR = Budgeted Fixed overhead
Budgeted Labour Hours/units
Fixed overhead volume variance has two subvariances. They are fixed overhead capacity variance and fixed overhead efficiency variance.
Fixed overhead capacity variance = (Budgeted Hours – Actual Hours spent on production) x FOAR per standard time.
Fixed overhead efficiency variance = (Standard Hours – Actual Hours) x FOAR per standard time.
This measures the difference between the actual and budgeted sales level achieved, the formula for sales variance is (Budgeted Quantity x Budgeted Price) – (Actual Quantity x Actual Price.
Sales variance can be further classified into sales price variance and sales volume variance. The formula for the former is (Budgeted Price – Actual Price) x Budgeted Quantity while it is (Budgeted Quantity – Actual Quantity) x Budgeted Price for the latter.
And that concludes the overview of the variance analysis formula.
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