Variance Analysis: Definition, Types And Examples

Describe about the Variance Analyis?

A budget can be defined as the quantitative expression of a plan which is defined for a specific period of time. The strategic plans of the business units can be expressed in the form of a budget. It is used to forecast the future expenses and income (Maher, Weil and Stickney, 2015).

A flexible budget can be defined as the budget that will adjust with the changes in the volume of activity. The flexible budget restructures itself on the basis of the level of activity. Thus it serves as an effective tool for evaluating the performance of the managers. The model of flexible budget can be used to determine the financial results at the various activity levels (Smith, 2002).

A static budget does not change with the change in the actual volume of output. But a flexible budget can change with the change in the level of activity. A static budget is prepared assuming that all the other conditions affecting the budget will remain unaltered. But in case of flexible budget it can be prepared at the different levels of the activity (Oliver, 2015). The application of static budget is limited and it is an ineffective tool for controlling the cost. On the other hand, the flexible budget has wide application and serves as an effective tool for controlling cost (Berger, 2011).

 The variance analysis is done to investigate the variations in the financial performance from the standards that has been defined by the budget of the organization. The types of variance analysis are as follows –

1. Sales volume variance
2. Sales mix variance
3. Sales Price variance
4. Sales Quantity variance
5. Direct material price variance
6. Direct material usage variance
7. Direct labor rate variance
8. Direct labor efficiency variance
9. Variable overhead spending variance
10. Variable overhead efficiency variance (Needles, Powers & Crosson, 2011)

In a manufacturing organization, there is variance in the operational activities with the changes in the volume of production. The change in the volume of production will change the material volume, labor hours and cost of production. Thus for a manufacturing organization it is essential to use a flexible budget to meet with the changing need of the production (Davoren, 2015).

Direct Material Price Variance

	Budgeted cost of cakes	Actual cost of cakes
Flour	$                                                   1.25	$                            1.05
Yeast	$                                                   0.05	$                            0.05
Sugar	$                                                   0.25	$                            0.25
Eggs	$                                                   0.75	$                            0.55
Butter	$                                                   0.15	$                            0.15
Frosting	$                                                   0.95	$                            0.75
Production Payroll	$                                                   4.50	$                            4.50
Total material cost	$                                                   7.90	$                            7.30
Actual Quantity	2700
Budgeted Quantity	2500
Direct Material Price variance	(Actual price – Standard Price ) * Actual Quantity
	$                                         (1,620.00)	Favorable

	Budgeted cost of cakes	Actual cost of cakes
Flour	$                                                          1.25	$                            1.05
Yeast	$                                                          0.05	$                            0.05
Sugar	$                                                          0.25	$                            0.25
Eggs	$                                                          0.75	$                            0.55
Butter	$                                                          0.15	$                            0.15
Frosting	$                                                          0.95	$                            0.75
Production Payroll	$                                                          4.50	$                            4.50
Total material cost	$                                                          7.90	$                            7.30
Actual Quantity	2700
Budgeted Quantity	2500
DM Quantity Variance	$                                                  1,580.00	UnFavorable

Budgeted cost of Labor per hour	$9.00
Actual cost of labor per hour	$9.25
Budgeted Hours of Production	1250
Actual Hours of Production	1400
Actual cost	$12,950.00
Standard cost of actual hours	$12,600.00
Variance	Actual cost – Standard cost of Actual hours	Unfavorable
	$350.00

Budgeted rate per hour of direct labor	$9.00
Actual Hours	1400
Budgeted Hours	1250
Direct Labor Efficiency variance	$1,350.00	Unfavorable

Actual Hours worked	1400
Actual overhead rate	$          1.79
Standard overhead rate	$          0.25
Variable overhead Spending Variance	$  2,150.00	Unfavorable

Standard direct labor hours allowed	1250
Actual direct labor hours	1400
Standard variable overhead rate	$       0.25
Variable Overhead Efficiency variance	$  (37.50)	Favorable

References

Berger, A. (2011). Standard Costing, Variance Analysis and Decision-Making (pp. 1-13).

Davoren, J. (2015). The Advantages of a Flexible Budget. Small Business – Chron.com. Retrieved 12 February 2015, from https://smallbusiness.chron.com/advantages-flexible-budget-57105.html

Maher, M., Weil, R., & Stickney, C. (2015). Managerial Accounting: An Introduction to Concepts, Methods and Uses (pp. 300-500).

Needles, B., Powers, M., & Crosson, S. (2011). Principles of accounting. Mason, Ohio: Cengage Learning.

Oliver, L. (2015). The Cost Management Toolbox: A Manager’s Guide to Controlling Costs and … (pp. 55-100).

Smith, G. (2002). Managerial Accounting for Libraries and Other Not-for-profit Organizations (pp. 90-110).