VARIANCE ANALYSIS

P R E S E N T E D B Y: GURLEEN KAUR M B A ( 3 RD S E M )

VARIANCE
Variance represents the difference between actual and

budgeted values (Revenue and Expense).

It helps in analyzing the financial performance of the total

business unit or various responsibility centers.

CALCULATING VARIANCES
Although

the main focus is on comparing actual performance with the budget, competent operating manager nevertheless adopt a continuous improvement or Kaizen mentality. Some companies merely report about the amount of variances but not the reasons behind those variances. Thorough analysis identifies the cause of variances and organization unit responsible for that. Effective systems identify variances to the lowest level of management.

TYPES OF VARIANCES

Total Variance

Nonmanuf acturing costs Marketing

Manufact uring Costs

Sales

Administr ation

R&D

Variable Costs

Fixed Costs

Volume

Selling Price

Material

Direct Labor

Variable Overhead

Market Share

Industry Volume

REVENUE VARIANCE
In this we calculate selling price, volume and mix

variances.
This is calculated for each product line and product line

results are aggregated to calculate the total variance.

Positive variance is favorable which means we have

higher profit than budgeted, and negative variance is unfavorable.

1) SELLING PRICE VARIANCE

It is calculated by multiplying the difference between

actual price and standard price with the actual volume. Example: For Product A: Volume =1,00,000 units Actual Price=5 Rs Standard Price=4.50Rs So, Selling Price Variance= (5-4.50)*100000 =50,000 Rs. (favorable)

2) MIX AND VOLUME VARIANCE

Volume variance results from selling different number of

units.
Mix variance results from selling a different proportion of

products from that assumed in the budget.

Often mix and volume variances are not separated.

 Mix and Volume variance=(Actual volume Budgeted

volume)*Budgeted unit contribution

Example:

For product A: Actual volume is 10000units Budgeted volume is 12000units Budgeted contribution is 2Rs per unit In that case we have Rs. 4000(unfavorable)profit

SEPERATING MIX VARIANCE FROM VOLUME VARIANCE

Mix variance for each product is found from the following

equation:
Mix variance=[(Actual volume of sales)-(Total actual volume of sales*Budgeted proportion)*Budgeted unit contribution]

EXAMPLE(MIX VARIANCE)

Budget mix Budgeted at actual Actual Product proportion volume sales

Unit Difference contributio Variance (4)-(3) n (5)-(6) -50 50 nil 0.2 0.9 nil -10 45 nil 35

A
B C

1/3 1/3 1/3

150 150 150 450

100 200 150 450

Total

 Volume variance can be calculated by subtracting the mix

variance from the combined mix and volume variance.

It can be calculated for each product as follows:

Volume variance= [(Total actual volume of sales)*(Budgeted percentage)-(Budgeted sales)]*(Budgeted unit contribution)

EXAMPLE(VOLUME VARIANCE)

Product

Budget mix at actual Budgeted volume Volume

150 100

Difference (2)-(3) 50

Unit Variance contribution (5)-(6) 0.2 10

B
C Total

150
150 450

100
100 300

50
50

0.9
1.20

45
60 $115

EXPENSE VARIANCE
Fixed costsVariance between actual and budgeted fixed

costs are obtained by subtracting since these cost are not affected by volume of sales or production.
Variable costs Variable cost varies directly and

proportionately with volume. The budgeted variable manufacturing costs must be adjusted to the actual volume of production.

EXAMPLE(FIXED COST VARIANCE)

Actual

Budget $75 55 $75 50

Favorable or Unfavorable Variances (5)

Fixed overhead Selling expense

Administrative expense

30 $160

25 $150

(5) $(10)

Total

EXAMPLE(VARIABLE MANUFACTURING EXPENSE VARIANCE)

1 2 3 4
5 6 7

Product

B $84 18

C $300 20

Material Labor
Overhead (variable)

$75 15

Total $459 53

Budget $470 65

Favorable or Unfavorabl e Variances $(11) (12)

30
$120

30
$132

40
$360

100
$612

90
$625

10
$(13)

Total

VARIANCE IN PRACTICE
TIME PERIOD OF COMPARISON

FOCUS ON GROSS MARGIN

EVALUATION STANDARD

Predetermined standard 2. Historical standard 3. External standard

1.

LIMITATIONS OF VARIANCE ANALYSIS

WHY THE VARIANCE OCCURRED

APPLICABLE ONLY IN FREQUENT INTERVALS

PERFORMANCE OF ONE DEPARTMENT OFFSET

BY SECOND DEPARTMENT DONT SHOW FUTURE ACTIONS

THANK YOU!!!