• A variance is the difference between an actual result and an expected result.

• Variance analysis is the process by which the total difference between standard and actual results is analysed.
• When actual results are better than expected results, we have a favourable variance (F). If actual results are worse
than expected results, we have an adverse variance (A).
• The selling price variance measures the effect on expected profit of a selling price different to the standard selling
price. It is calculated as the difference between what the sales revenue should have been for the actual quantity
sold, and what it was.
• The sales volume variance measures the increase or decrease in expected profit as a result of the sales volume
being higher or lower than budgeted. It is calculated as the difference between the budgeted sales volume and the
actual sales volume multiplied by the standard profit per unit.
• The material total variance is the difference between what the output actually cost and what it should have cost,
in terms of material. It can be divided into the following two sub-variances.
• The material price variance is the difference between what the material did cost and what it should have cost.
• The material usage variance is the difference between the standard cost of the material that should have been
used and the standard cost of the material that was used.
• The labour total variance is the difference between what the output should have cost and what it did cost, in
terms of labour. It can be divided into two sub-variances.
• The labour rate variance is the difference between what the labour did cost and what it should have cost.
• The labour efficiency variance is the difference between the standard cost of the hours that should have been
worked and the standard cost of the hours that were worked.
• The variable production overhead total variance is the difference between what the output should have cost and
what it did cost, in terms of variable production overhead. It can be divided into two sub-variances.
• The variable production overhead expenditure variance is the difference between the amount of variable
production overhead that should have been incurred in the actual hours actively worked, and the actual amount of
variable production overhead incurred.
• The variable production overhead efficiency variance is the difference between the standard cost of the hours
that should have been worked for the number of units actually produced, and the standard cost of the actual
number of hours worked.
• Fixed production overhead total variance is the difference between fixed production overhead incurred and fixed
production overhead absorbed. In other words, it is the under– or over absorbed fixed production overhead.
• Fixed production overhead expenditure variance is the difference between the budgeted fixed production
overhead expenditure and actual fixed production overhead expenditure.
• Fixed production overhead volume variance is the difference between actual and budgeted production/volume
multiplied by the standard absorption rate per unit.
• Fixed production overhead volume efficiency variance is the difference between the number of hours that actual
production should have taken, and the number of hours actually taken (that is, worked) multiplied by the standard
absorption rate per hour.
• Fixed production overhead volume capacity variance is the difference between budgeted hours of work and the
actual hours worked, multiplied by the standard absorption rate per hour.

The reasons for variances

Variance Favourable Adverse Calculation
Material  Unforeseen discounts  Price increase Price $
received  Careless purchasing Based on actual purchases
price  Greater care in purchasing  Change in material What should it have cost? X
 Change in material standard What did it cost? (X)
standard  External factors X
 External factors (inflation, (inflation, exchange
exchange rates etc) rates etc)
 Higher quality material

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 Material  Material used of higher  Defective material Usage Kgs
quality than standard  Excessive waste Based on actual production
usage  More effective use made  Theft What should have been used? X
of material  Stricter quality control What was used? (X)
 Errors in allocating  Errors in allocating X
 material to jobs  material to jobs Difference valued at $X
standard cost per kg
Labour rate  Use of workers at a rate of  Wage rate increase Rate $
pay lower than standard  Wage inflation Based on actual hours paid
 Wrong budgeting  Higher skilled What should it have cost? X
 Lower skilled employees employees What did it cost? (X)
X
Labour  Output produced more  Lost time in excess of Efficiency Hrs
quickly than expected, standard allowed. Based on actual production
efficiency because of work  Output lower than How long should it have taken? X
motivation. standard set because How long did it take? (X)
 Better quality of of lack of training, sub- X
equipment or materials. standard material etc. Difference valued at $X
 Better learning rate.  Errors in allocating standard rate per hour
 Errors in allocating time to time to jobs.
jobs  Lower skilled
 Higher skilled employees employees
Idle time  Possible if idle time has  Machine breakdown. Idle time Hrs
been built into the budget  Non-availability of Hours worked X
material. Hours paid (X)
 Illness or injury to X
worker. Difference valued at $X
standard rate per hour
**Overhead  Savings in costs  Increase in cost of Based on actual hours
 incurred  services worked $
expenditure  More economical use  Excessive use of What should it have cost? X
 of services services What did it cost? (X)
 Change in type of X
services
 used
Overhead  Production or level of  Production or level of Budgeted units X
activity greater than activity less than Actual units (X)
volume budgeted. budgeted X
Difference valued at $X
OAR per unit
Fixed  Production or level of  Production or level of Budgeted hrs worked X
activity greater than activity less than Actual hrs worked (X)
overhead budgeted budgeted X
capacity Difference valued at X OAR per hour

Selling price  Unplanned price increase  Unplanned price For the quantity sold
reduction What revenue should have been
generated X
Actual revenue (X)
X
Sales volume  Additional demand  Unexpected fall in Units
demand Budgeted sales X
 Production difficulties Actual sales (X)
X
Difference valued at standard
profit per unit X

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Operating statements in an absorption cost environment:

Particulars $ $ $
Budgeted profit XXX
Sales variances: price XXX
volume XXX XXX
Actual sales minus the XXX
standard cost of sales
Cost variances:
(F) (A)
XXX XXX
Material price XXX XXX
Material usage XXX XXX
Labour rate XXX XXX
Labour efficiency XXX XXX
Labour idle time XXX XXX
Variable overhead expenditure XXX XXX
Variable overhead efficiency XXX XXX
Fixed overhead expenditure XXX XXX
Fixed overhead volume XXX XXX
XXX (XXX) XXX/(XXX)
Actual profit XXX

Operating statements in a marginal cost environment:

Particulars $ $ $
Budgeted profit XXX
Budgeted fixed production costs XXX
Budgeted contribution XXX
Sales variances: price XXX
volume XXX XXX
Actual sales minus the standard XXX
variable cost of sales
Cost variances:
(F) (A)
Material price XXX XXX
Material usage XXX XXX
Labour rate XXX XXX
Labour efficiency XXX XXX
Labour idle time XXX XXX
Variable overhead expenditure XXX XXX
Variable overhead efficiency XXX XXX
XXX (XXX) XXX/(XXX)
Actual contribution XXX
Budgeted fixed production costs XXX
Expenditure variance XXX
Actual fixed production XXX
overhead XXX
Actual profit

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