Price and quality aspect of variance, Cost Accounting

Price and Quality Aspect of Variance

At this point it is serious to understand that all variance has two aspects, a price aspect and a quantity aspect: these two aspects combine to produce a cost variance. It is demonstrated below as:

Cost element

Price variance

Quantity Variance

Direct Labour



Direct Materials



Variable Overheads



Fixed Overheads



As an example:

Direct labour cost variance = Direct labour Rate Variance + Direct Labour Efficiency Variance

Also, Direct Material cost variance = Direct Material Price variance + Direct Labour usage variance

Note that the operating profit variance it follows is then the sum of all the cost labour, variable overheads, material, fixed overheads variances and sales variances. Keep in mind that the operating profit variance is simply the difference between the actual and budgeted profit.  After that you need to note that budgeted figures do not form part of the double entry system, and hence the budgeted profit variance does not enter the ledger accounts.  The other purpose why the operating profit variance is not entered in the ledgers is such it is a resultant figure that is a sum of all the other variances.

Posted Date: 2/7/2013 6:19:27 AM | Location : United States

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