Variance analysis

What is variance analysis?
⦁ Variance analysis can help companies manage projects, productions

or operational expenses by monitoring planned versus actual costs.
⦁ Variance analysis is the comparison of predicted and actual outcomes.
⦁ For example, a company may predict a set amount of sales for the
next year and compare its predicted amount to the actual amount of
sales revenue it receives. Variance measurements might occur
monthly, quarterly or yearly, depending on individual business
preferences.
The more frequently a company measures these variances, the more likely it
may be to discover trends in its data.
Type of analysis to calculate variance :

⦁ Purchase variance
⦁ Sales variance
⦁ Overhead variance
⦁ Material variance
⦁ Labor variance
⦁ Efficiency variance
Key terms for variance analysis

1)Overhead costs
Overhead costs can refer to a business's operating expenses, like rent for an
office space or insurance costs. Companies may audit their operating
expenses to save money and help decrease overhead costs.
2)Budgets:
Budgets are financial plans that companies can use to allocate spending
internally and prevent overspending. Like overhead costs, businesses may
revise budgets as needed to ensure they meet set goals.
3)Variable price and rate variance:
Variable price and rate variance refer to the changes in the cost for a product
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or service. They can be unpredictable, and companies might change these
cost values to reflect current consumer demands or supply rates.
4)Variable quantity and efficiency variance:
Variable quantity and efficiency variance refer to fiscal differences between
a company's actual input of materials and labor and the amount of overall
allowed material and labor input.
5)Fixed budget variance: Fixed budget variance refers to the fiscal
differences between fixed overhead costs included in company budgets and
the actual amount of overhead costs for a variance period.
6)Fixed volume variance: Fixed volume variance is the fiscal differences
between the amounts of fixed overhead costs a company applies during a
variance period and the fixed amount of recorded overhead costs in a
company's budget.
Related: Guide to Overhead
Types of variance analysis

The type of variance analysis you perform depends on the information
you're examining.
1. Material variance
The material variance helps companies identify where they may be using
more materials than they actually need. For example, if a company reorders
materials because of quality concerns, the additional costs may show
variance in the analysis.
The company might use this information to determine whether to continue
using the same material supplier or search for a new one.
Formulas to find individual and overall variances for material
variance:
1. Quantity variance = (Actual quantity x Standard price) − (Standard
quantity x Standard price)
2. Price variance = (Actual quantity x Standard price) − (Actual
quantity x Actual price)
3. Overall variance = Quantity variance + Price variance
2. Labor variance
The labor variance helps businesses identify how efficiently they use labor
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and the effectiveness of their pricing. For example, if a company calculates
variance and finds inefficiencies or higher labor pricing, it might consider
making changes for the upcoming fiscal year.This information may help the
company further streamline its operations and save money.
Formulas involved in finding individual and overall variances for labor
variance:
1. Rate variance = (Actual hours x Actual rate) − (Actual hours x
Standard rate)
2. Efficiency variance = (Actual hours x Standard rate) − (Standard
hours x Standard rate)
3. Overall variance = Rate variance + Efficiency variance
3. Fixed overhead variance
The fixed overhead variance helps a company identify differences between
its budgeted overhead costs, which it may determine based on production
volumes, and the number of used overhead costs.
For example, if a company wants to revisit its budget plans, it might use
fixed overhead variance to determine whether it can reduce its current
allotted budget. This information may help the company save or allocate
money to other areas of the business.
Formulas involved in calculating fixed overhead variance:
1. Budgeted fixed overhead cost = Denominator level of activity x
Standard rate
2. Budget variance = Actual fixed overhead cost − Budgeted fixed
overhead cost
3. Fixed overhead cost applied to inventory = Standard hours x Standard
rate
4. Volume variance = Budgeted fixed overhead cost − Fixed overhead
cost applied to inventory
5. Overall variance = Budget variance + Volume variance
Examples of variance analysis
Material variance example
Feminine Fashionista, a clothing company, is interested in calculating its
overall material variance. It has an actual quantity of 30,000 pieces of fabric
at a standard price of Rs.0.65 per fabric and a standard quantity of 25,000
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pieces of fabric at an actual price of Rs.0.50 per fabric. calculating its
quantity variance:
Quantity variance = (30,000 x 0.65) − (25,000 x 0.65) = 19,500 − 16,250 =
Rs.3,250
Next, the company uses those numbers to calculate the price variance:
Price variance = (30,000 x 0.65) − (30,000 x 0.50) = 19,500 − 15,000 =
Rs.4,500
Finally, adding the quantity variance of $3,250 and the price variance of
$4,500 provides Feminine Fashionista with the overall variance:
Overall variance = Rs.3,250 + Rs.4,500 = Rs.7,750
overall material variance = Rs.7,750
Labor variance example

Bluelow Builders, a construction company, wants to calculate its overall
labor variance. The company's actual hours are 5,000 at an actual rate of
Rs.15 per hour, and its standard hours are 4,800 at a standard rate of Rs.12
per hour.
Rate variance = (5,000 x 15) − (5,000 x 12) = 75,000 − 60,000 = Rs.15,000

Efficiency variance = (5,000 x 12) − (4,800 x 12) = 60,000 − 57,600 =
2,400
Finally, adding the rate variance of 15,000 and the efficiency variance of
2,400 provides
Bluelow Builders with its overall variance:
Overall variance = 15,000 + 2,400 = 17,400
The labor variance outcome of Rs.17,400 may be unfavorable if the
company didn't expect to spend that additional money on labor costs.
Fixed overhead example

Wheeler PR is a marketing and public relations agency that wants to find its
overall fixed overhead variance. The organization's level of activity is 8,000
hours at a standard rate of Rs.10 per hour and 6,300 standard hours at an
actual fixed overhead cost of Rs.82,200.
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Budgeted fixed overhead cost = 8,000 x 10 = Rs.80,000
The company then calculates its budget variance:
Budget variance = 82,200 − 80,000 = Rs.2,200
Next, Wheeler PR finds the fixed overhead cost applied to inventory:

Fixed overhead cost applied to inventory = 6,300 x 10 = 63,000
Volume variance = 80,000 − 63,000 = 17,000
Overall variance = 2,200 + 17,000 = 19,200
Wheeler PR determines that it has an overall fixed overhead variance of

Rs.19,200.

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What is variance analysis?

⦁ Variance analysis can help companies manage projects, productions

Type of analysis to calculate variance :

Key terms for variance analysis

Types of variance analysis

Labor variance example

Rate variance = (5,000 x 15) − (5,000 x 12) = 75,000 − 60,000 = Rs.15,000

Fixed overhead example

Next, Wheeler PR finds the fixed overhead cost applied to inventory:

Wheeler PR determines that it has an overall fixed overhead variance of

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