USE AT YOUR OWN RISK

MANAC – II
VARIANCE ANALYSIS Variances are to be calculated for each department separately. The standard/Budgeted values means the Budgeted Values for actual Output. This Budget is called Flexible Budget ( How to Prepare?) Variances are always the difference between values actually used and Budgeted values for actual output. All variances are in Dollars/Rupees. Any Variance = Some Quantity * Some Price – Another quantity*another price. For any Case, follow the following steps: 1) identify causes for the variance 2) Hold some Department to be responsible for it. 3) Suggest remedial, if possible

2 Golden Rules:
Cost Control is always done on Actual Output Inefficiency of one department should never be attributed/overlapped to another department.

VARIANCE

OUTPUT INPUT

SALES Variance

MATERIAL Variance

LABOUR Variance

OVERHEAD Variance

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MATERIAL VARIANCE:

AQ – ACTUAL Quantity SQ – Standard Quantity AP – ACTUAL Price SP – Standard Price SM – Standard Mix AM – ACTUAL Mix MATERIAL VARIANCE

PRICE VARIANCE AQ@AM*(AP – SP)

QUANTITY/USAGE VARIANCE SP*(AQ@AM-SQ@SM)

MIX VARIANCE SP*(AQ@AM-AQ@SM)

YIELD VARIANCE SP*(AQ@SM-SQ@SM)

AO AO AO AO

AQ AM AP AQ AM SP Price Variance AQ SM SP Mix Variance SQ SM SP Yield Variance Yield + Mix = Usage/Quantity Variance

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LABOUR VARIANCE:

AH – ACTUAL Hours SH – STANDARD Hours AM – ACTUAL Mix SM – STANDARD Mix AR – ACTUAL Rate SR – STANDARD Rate LABOUR VARIANCE

RATE VARIANCE AH@AM*(AR – SR)

HOURS VARIANCE SR*(AH@AM-SH@SM)

MIX VARIANCE SR*(AH@AM-AH@SM)

EFFICIENCY VARIANCE SR*(AH@SM-SH@SM)

AO AO AO AO

AH AM AR AH AM SR Rate Variance AH SM SR Mix Variance SH SM SR Efficiency Variance Efficiency + Mix = Hours Variance

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Over Head Variance
1) 2) 2 way method – If only Units produces is given 3 way method – If Units as well as hours( Labour/Machine) are

given Following are the variables involved Budgeted Fixed Over Head – BFOH Budgeted Variable Over Head Rate per Hour– $/Hour - BVOHR-H Budget Variable OverHead Rate per unit - $/Unit - BVOHR-U Budgeted Volume to be produced– BV Actual Fixed Over Head – AFOH Actual Variable Over Head – AVOH Actual Volume produced-AV Actual Labour Hours – ALH Fixed Absorption Rate – FAR = (BFOH / BV) Budget Equation
2 Way Analysis

BFOH + BVOHR-U * Units

Fixed Actual Budgeted over head for actual output AFOH Fixed Spending Variance BFOH

Variable AVOH Variable Spending variance AV * BVOHR-U

Fixed Volume Variance Absorbed FAR * AV AV * BVOHR-U

Variable Volume variance = ZERO

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USE AT YOUR OWN RISK
OVERHEAD VARIANCE - 3 Way Analysis Budgeted Fixed Over Head – BFOH Budgeted Variable Over Head Rate per Hour– $/Hour - BVOHR-H Budget Variable Over Head Rate per unit - $/Unit - BVOHR-U Budgeted Volume to be produced– BV Actual Fixed Over Head – AFOH Actual Variable Over Head – AVOH Actual Volume produced-AV Actual Labour Hours – ALH Fixed Absorption Rate – FAR = (BFOH / BV)

Fixed Actual Budgeted over head for actual output at Actual Hours AFOH Fixed Spending Variance BFOH

Variable AVOH Variable Spending variance ALH * BVOHR-H

Fixed Efficience Variance = ZERO Budgeted over head for actual output at Budgeted hours BFOH AV * Budgeted Hours/Unit * BVOHR-H

Variable Efficiency Variance

Fixed Volume Variance Absorbed FAR * AV AV * Budgeted Hours/Unit * BVOHR-H

Variable Volume variance = 0

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SALES Variance
FOR SALES VARIANCE – ALWAYS TAKE THE ORIGINAL BUDGET. DO NOT RESCALE IT FOR ACTUAL OUTPUT. ASQ – ACTUAL SALES QUANTITY BSQ – BUDGETED SALES QUANTITY – From Fix Budget – refer Page 7 AM – ACTUAL Mix BM – BUDGETED Mix AC – ACTUAL Contribution BC – BUDGETED Contribution

SALES VARIANCE

SALES PRICE VARIANCE Actual Sales Qty*(Actual Sales Price – Budgeted Sales Price)

SALES QUANTITY VARIANCE Actual Sales Qty@ Budgeted Contribution – Budgeted Sales Qty @ Budgeted Contribution

MIX VARIANCE BC*(ASQ@AM-ASQ@BM)

VOLUME VARIANCE BC*(ASQ@BM-BSQ@BM)

MARKET SHARE Actual market Size*(Budgeted Market Share - Actual Market Share)

MARKET SIZE Budgeted Market Share * (Budgeted Market Size - Actual market Size) No One is Responsible for this variance

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BUDGETS
FIX BUDGET
Budgeted Quantity * Budgeted Price - Budgeted variable Cost/Unit * Budgeted Quantity Budgeted Contribution/unit * Budgeted Quantity - Budgeted Fixed Cost Budgeted Profit---------------------------------------------------------

A

ACTUAL BUDGET
ACTUAL SALES Quantity * ACTUAL SALES PRICE - Actual variable Cost/Unit * ACTUAL Sales Quantity ACTUAL Contribution/unit * ACTUAL Sales Quantity - ACTUAL Fixed Cost ACTUAL Profit--------------------------------------------------------

B

FLEXIBLE BUDGET
ACTUAL SALES Quantity * Budgeted Price - Budgeted variable Cost/Unit * ACTUAL SALES Quantity Budgeted Contribution/unit * ACTUAL SALES Quantity - Budgeted Fixed Cost Budgeted Profit for ACTUAL SALES-------------------------------

C

ACTUAL FIXED COST – BUDGETED FIXED COST = SPENDING VARIANCE

RECONCILIATION : - SUM OF ALL VARIANCES, except Over Head Volume Variance and Sales Volume Variance should give ACTUAL PROFIT – BUDGETED PROFIT FOR ACTUAL OUTPUT ( B – C )
SALES VOLUME VARIANCE = BUDGETED PROFIT – Budgeted Profit for Actual Output ( A – B ) USE AT YOUR OWN RISK 7