Variances Analysis
Variances are the differences between actual results and expected results. Expected results are the standard costs and standard revenues.
Price, rate and expenditure variances measure the difference between the actual amount of money paid and the amount of money that should have been paid for the actual quantity of materials or the actual number of hours of labor or variance overheads. Usage and efficiency variances measure the difference between the actual physical quantity of materials used or hours taken and the quantities that should have been used or taken for the actual volume of production. These physical differences are then converted to money values by applying the appropriate standard cost.
Basic variance analysis such as this should be well understood by this stage since they were covered in section 2 costing. However it may be important to remind you of the following:
Knowledge brought forward from Costing
The selling price variance is a measure of the effect on expected profit of a different selling price to the standard selling price. It is computed as the difference among the standard revenue from the actual quantity of goods sold and the actual revenue.
The sales volume variance is the difference between the actual units sold and the budgeted quantity, valued at the standard profit or contribution per unit. In other words, it measures the increase or decrease between standard and actual profit and contribution as a result of the sales volume being higher or lower than budgeted.
Price, rate and expenditure variances measure the difference between the actual amount of money paid and the amount of money that should have been paid for the actual quantity of materials or the actual number of hours of labor or variable overheads used. Note that if materials are valued at standard cost, the materials price variance is calculated on purchases in the period but if they are valued at actual cost the variance is calculated on materials used in production in the period.
Usage and efficiency variances are quantity variances.
They measure the difference between the actual physical quantity of materials used or hours taken and the quantities that should have been used or taken for the actual volume of production. These physical differences are then converted into money values by applying the appropriate standard cost.
The idle time variance is simply a number of hours of idle time valued at the standard rate per hour.