
VARIANCE ANALYSIS: ILLUSTRATION
The following information relates to the production of product Alpha for the month of August
Standard Cost Card
Budgeted production overhead based on
Selling Price
Standard cost
Materials: 5 kilograms × $12.00/kg
Labour: 4 hours × $10.00/hour
Variable overheads: 4 hours × $8.00/hour
Fixed overheads
10,000
$
$60.00
$40.00
$32.00
$28.00
Standard profit
units
$
$300.00
$160.00
$140.00
Actual Data
Actual materials used
Actual Materials cost
Actual production output
Actual wage cost
Actual variable cost
Actual time worked and paid for
Actual fixed costs
Actual SP per unit
Actual sales
52,800
$595,200
9,600
$475,200
$288,000
43,200
$290,000
$310
9,600
kg
units
hours
units
Required
Calculate for the month of August as many variances as the information permits and prepare an
operating statement reconciling actual and standard profit.
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 SOLUTION
MATERIAL VARIANCES
TOTAL MATERIAL COST VARIANCE
Actual cost of materials purchased
minus
Standard quantity of materials for actual activity (kg)
Actual production level × standard material cost per unit
TOTAL COST VARIANCE
Further analysed into
$000s
595.2
$000s
576.0
-19.2
Price Variance
Actual cost of materials purchased
minus
Standard cost of materials purchased
(Standard price × actual quantity purchased)
$000s
595.2
$000s
633.6
Material price variance
38.4
Usage Variance
Actual quantity of materials used (kg)
minus
Standard quantity of materials for actual quantity (kg)
(Standard quantity × actual production level)
Valued at standard price per kg
52,800
48,000
-4,800
$12.00
Material usage variance
-57.6
LABOUR VARIANCES
TOTAL LABOUR COST VARIANCE
Actual wage costs
minus
Standard time worked for actual production (hrs)
(Standard time × actual production level)
TOTAL COST VARIANCE
$000s
475.2
$000s
384.0
-91.2
Further analysed into
2
Rate variance
$000s
Actual wage costs
minus
Standard wage costs
(Standard rate × actual hours attended)
475.2
432.0
Labour rate variance
-43.2
Efficiency Variance
$000s
Actual hours worked (hours)
minus
Standard time worked for actual production (hours)
(Standard time × actual production level)
43,200
Valued at standard price per hour
$000s
$000s
38,400
-4,800
$10.00
Labour efficiency variance
-48.0
VARIABLE OVERHEAD VARIANCES
TOTAL VARIABLE OVERHEAD COST VARIANCE
Actual variable overhead costs
minus
Standard time worked for actual production (hours)
(Standard time × actual production level)
$000s
288.0
$000s
307.2
TOTAL COST VARIANCE
19.2
Further analysed into
Expenditure variance
$000s
Actual variable overhead costs
minus
Standard variable overhead costs
(Standard rate × actual hours attended)
288.0
$000s
345.6
57.6
Efficiency variance
$000s
Actual hours worked (hours)
minus
Standard time worked for actual production (hours)
(Standard time × actual production level)
43,200
$000s
38,400
-4,800
3
Valued at standard price per hour
$8.00
Variable efficiency variance
-38.4
FIXED OVERHEAD VARIANCES
TOTAL FIXED OVERHEAD COST VARIANCE
$000s
290.0
$000s
Actual fixed overhead costs
minus
Standard fixed overhead applied for actual production (units)
(Standard fixed cost × actual production level)
268.8
TOTAL COST VARIANCE
Further analysed into
-21.2
Expenditure variance
Actual fixed overhead costs
minus
Budgeted fixed overhead costs
290.0
280.0
-10.0
Volume variance
Actual production output (units)
minus
Budgeted production output (units)
Valued at standard rate per unit
9,600
10,000
-400
$28.00
Fixed overhead volume variance
-$11.20
SALES VARIANCES
$000s
$000s
Price variance
Actual sales revenue
minus
Expected sales revenue
(Standard selling price × actual sales volume)
Sales price variance
2,976.0
2,880.0
96.0
Volume variance
Actual sales volume (units)
minus
Budgeted sales volume (units)
9,600.00
4
10,000.00
-400.00
$140.00
Valued at standard profit per unit
Sales volume variance
-56.0
Operating Statement for the month of August 2010
Budgeted profit
Sales volume variance
$000s
1,400.0
-56.0
Standard profit on actual sales
Sales price variance
1,344.0
96.0
Cost variances
Material A
- price
- usage
Direct labour
- rate
- efficiency
Variable overheads
- expenditure
- efficiency
Fixed overhead
- expenditure
- volume
- efficiency
Sub total
F
$000s
A
$000s
38.4
57.6
43.2
48.0
57.6
38.4
10.0
11.2
0.0
96.0
208.4
Net variances
-112.4
Actual profit
1,327.6
Actual profit for August
$000s
Sales: 9,600 units × $310
Less: actual costs
Material
Direct labour
Variable overheads
Fixed overhead
Total
595.2
475.2
288.0
290.0
$000s
2,976.0
1,648.4
1327.6
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