4 Important Types of Variances (With

Diagram) | Variance Analysis

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The following points highlight the four important types of variances. The types are: 1.
Material Variances 2. Labour Variances 3. Overhead Variances 4. Sales Variances.

Variance Type # 1. Material Variances:

In case of materials, the following may be the variances:
(a) Material Cost Variance

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(b) Material Price Variance
(c) Material Usage or Quantity Variance
(d) Material Mix Variance
(e) Material Yield Variance

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(f) Material Revision Variance

(a) Material Cost Variance (MCV):

It is the difference between the standard cost of materials allowed (as per standards laid down) for
the output achieved and the actual cost of materials used.
Thus, it may be expressed as:
Material Cost Variance = Standard Cost of Materials for Actual Output – Actual Cost of Materials
Used

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Or Material Cost Variance = Material Price Variance + Material Usage or Quantity Variance
Or Material Cost Variance = Material Price Variance + Material Mix Variance + Material Yield
Variance.
In order to calculate material cost variance, it is necessary to know:
1. Standard quantity of materials which should have been required (as per standards set) to produce
actual output.

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 Thus, standard quantity of materials is:
Actual Output x Standard Quantity of Materials per unit.
Note. In order to find out standard quantity of materials specified, actual output (and not standard
output) is to be multiplied by standard quantity of materials per unit.
2. Standard price per unit of materials.

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3. Actual quantity of materials used.
4. Actual price per unit of materials.

(b) Material Price Variance (MPV):

It is that portion of the material cost variance which is due to the difference between the standard
cost of materials used for the output achieved and the actual cost of materials used.
In other words, it can be expressed as:
Material Price Variance:
Actual Usage (Standard Unit Price – Actual Unit Price).
Here, Actual Usage = Actual quantity of material (in units) used
Standard Unit Price = Standard price of material per unit
Actual Unit Price = Actual price of material per unit.

(c) Material Usage (or Quantity) Variance (MQV):

It is that portion of the material cost variance which is due to the difference between the standard
quantity of materials specified for the actual output and the actual quantity of materials used.
It may be expressed as:
Material Usage Variance:
Standard Price per unit (Standard Quantity – Actual Quantity).
Note. Standard quantity means quantity of material which should have been used (as per standard
determined) for the actual output achieved.

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Illustration 1:
The standard material required to manufacture one unit of product X is 10 kgs and the standard
price per kg. of material is Rs. 25. The cost accounts records, however, reveal that 11,500 kgs. of
materials costing Rs. 2,76,000 were used for manufacturing 1,000 units of product X. Calculate
material variances.
SOLUTION:
Standard price of material per kg. = Rs. 25
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Standard usage per unit of product X = 10 kgs.

... Standard usage for an. actual output of 1,000 units of product X = 1,000 x 10 kgs. = 10,000 kgs.
Actual usage of material = 11,500 kgs. Actual cost of materials = Rs. 2, 76,000
Actual price of material per kg. = Rs. 2,76,000/11,500 = Rs. 24
(а) Material Cost Variance:
Standard Cost of Material – Actual Cost of Material
Or Standard Usage x Standard Rate – Actual Usage x Actual Rate
10,000 kgs. x Rs. 25 – 11,500 kgs. x Rs. 24
Rs. 2,50,000 – Rs. 2,76,000 = Rs. 26,000 Adverse.
(b) Material Price Variance:
Actual usage (Standard Unit Price – Actual Unit Price)
11,500 kgs. (Rs. 25 – Rs. 24) = Rs. 11,500 Favourable
(c) Material Usage Variance:
Standard Unit Price (Standard Usage – Actual Usage)
Rs. 25 (10,000 kgs. – 11,500 kgs.) = Rs. 37,500 Adverse.
Verification:
Material Cost Variance = Material Price Variance + Material Usage Variance
Rs. 26,000 Adverse = Rs. 11,500 Fav. + 37,500 Adverse
Rs. 26,000 Adverse = Rs. 26,000 Adverse.

(d) Material Mix Variance (MMV):

It is that portion of the material usage variance which is due to the difference between standard and
the actual composition of a mixture. In other words, this variance arises because the ratio of
materials being changed from the standard ratio set. It is calculated as the difference between the
standard price of standard mix and standard price of actual mix.
In case of material mix variance, two situations may arise:
(i) When actual weight of mix and the standard weight of mix do not differ.
In such a case, material mix variance is calculated with the help of the following formula:
Standard Unit Cost (Standard Quantity – Actual Quantity)
Or Standard Cost of Standard Mix – Standard Cost of Actual Mix.
If the standard is revised due to shortage of a particular type of material, the material mix
variance is calculated as follows:
Standard Unit Cost (Revised Standard Quantity – Actual Quantity),
Or Standard Cost of Revised Standard Mix – Standard Cost of Actual Mix.
Illustration 2:
From the following information, calculate the material mix variance.

Due to shortage of material A, it was decided to reduce consumption of A by 15% and increase that
of material B by 30%.
Solution:
Revised Standard Mix is:
Material A: 200 units – 15% of 200 = 170 units
B: 100 units + 30% of 100 = 130 units
Materials Mix Variance:

(ii) When actual weight of mix differs from the standard weight of mix.
In such a case, material mix variance is calculated as follows:

This formula is necessitated to adjust the total weight of standard mix to the total weight of actual
mix which is more or less than the weight of standard mix.
Illustration 3:
From the data given below, calculate all materials variances.
(e) Material Yield (or Sub-Usage) Variance (MYV):
It is that portion of the material usage variance which is due to the difference between the standard
yield specified and the actual yield obtained. This variance measures the abnormal loss or saving of
materials. This variance is particularly important in case of process industries where certain
percentage of loss of materials is inevitable.
If the actual loss of materials differs from the standard loss of materials, yield variance will arise.
Yield variance is also known as scrap variance.
This loss may result in the following two situations:
(i) When standard and actual mix do not differ:
In such a case, yield variance is calculated with the help of the following formula:
Yield Variance = Standard Rate (Actual Yield – Standard Yield)
Where Standard Rate = Standard Cost of Standard Mix / Net St. Output (i.e, Gross Output – St.
Loss)
(ii) When actual mix differs from standard mix:
In such a case, formula for the calculation of yield variance is almost the same. But since the weight
of actual mix differs from that of the standard mix, a revised standard mix is to be calculated to
adjust the standard mix in proportion to the actual mix and the standard rate is to be calculated from
the revised standard mix as follows:
Standard Rate = Standard Cost of Revised Standard Mix/Net Standard Output
Formula for yield variance in such a case is:
Yield Variance = Standard Rate (Actual Yield – Revised Standard Yield).
Illustration 4:
From the following data, calculate material yield variance:

(f) Material Revision Variance:

Once a standard is set for a period, it is usually followed for that period. But sometimes due to
seriousness of the situation such as a sudden rise in the prices of materials, or due to the short
supply of a particular material, there may be need of revision of standard to cope with the situation.
Standards are revised with the hope that when the current difficulties are over, original standard will
continue to operate. Thus, revision of standards may be for a short period.
Material revision variance is calculated as given below:
Material Revision Variance = St. Price (St. Usage – Revised St. Usage)
For calculation of material usage variance, revised standard usage or quantity will be taken in stead
of standard usage or quantity.
Material usage variance will be calculated as given below:
Material Usage Variance = St. Price (Revised St. Usage – Actual Usage)
In case there is material revision variance, material cost variance will be verified as given
below:
Material Cost Variance = Material Revision Variance + Price Variance + Usage Variance
Illustration 5:
The standard cost of a chemical mixture is as under:
8 tons of material A at Rs. 40 per ton.
12 tons of material B at Rs. 60 per ton.
Standard yield is 90% of input.
Actual cost for a period is as under:
10 tons of material A at Rs. 30 per ton
20 tons of material B at Rs. 68 per ton
Actual Yield is 26.5 tons.
Compute all materials variances.

 
Variance Type # 2. Labour Variances:
Labour variances can be analysed as follows:
(a) Labour Cost Variance (LCV)
(b) Labour Rate (of Pay) Variance (LRV)
(c) Total Labour Efficiency variance (TLEV)
(d) Labour Efficiency Variance (LEV)
(e) Labour Idle Time Variance (LITV)
(f) Labour Mix Variance or Gang Composition Variance (LMV or GCV)
(g) Labour Yield Variance or Labour Efficiency Sub-variance. (LYV or LESV)
(h) Substitution Variance.
These variances are like material variances and can be defined as follows:

(a) Labour Cost Variance:

It is the difference between the standard cost of labour allowed (as per standard laid down) for the
actual output achieved and the actual cost of labour employed. It is also known as wages variance.
This variance is expressed as:
Labour Cost Variance = Standard Cost of Labour – Actual Cost of Labour.

(b) Labour Rate (of Pay) Variance:

It is that portion of the labour cost variance which arises due to the difference between the standard
rate specified and the actual rate paid.
It is calculated as follows:
Rate of Pay Variance = Actual Time Taken (Standard Rate – Actual Rate).

(c) Total Labour Efficiency Variance:

It is that part of labour cost variance which arises due to the difference between standard labour cost
of standard time for actual output and standard cost of actual time paid for.
It is calculated as follows:
Total Labour Efficiency Variance (TLEV)
= Standard Rate (Standard Time for Actual Output – Actual Time paid for)
Total labour efficiency variance is calculated only when there is abnormal idle time.

(d) Labour Efficiency Variance:

It is that portion of labour cost variance which arises due to the difference between the standard
labour hours specified for the output achieved and the actual labour hours spent.
It is expressed as:
Labour Efficiency Variance = Standard Rate (Standard Time for Actual output – Actual Time
Worked). Here standard time for actual output means time which should be allowed for the actual
output achieved.
Actual Time worked means actual labour hours spent minus abnormal idle hours.
Illustration 6:
Calculate variances from the following data:

SOLUTION:
First, we calculate standard rate, actual rate, standard time and actual time which are not directly
given in the question.
Standard wages per man per month = Rs. 200
Standard working days in a month = 20

... Standard rate per day = Rs. 200/20 = Rs. 10

Actual wages per man per month = Rs. 198
Actual working days in a month = 18

... Actual rate per day = Rs. 198/18 = Rs. 11

Standard man days for an output of 5,000 units = 100 x 20 = 2,000 man days

... Standard man days for the actual output of 4,800 units = 2,000/ 5,000 x 4,800 = 1,920 man-days.
Actual man days = men x working days = 90 x 18 = 1,620 man days.
(a) Labour Cost Variance:
Labour Cost Variance = Standard Cost of Labour – Actual Cost of Labour.
For. 5,000 units Standard cost of labour = 100 workers @ Rs. 200 = Rs. 20,000.

... For the actual output of 4,800 units, Standard cost of labour = 20,000/5,000 x 4,800 = Rs. 19,200.
Actual Cost of Labour = 90 workers @ Rs. 198 = Rs. 17,820.

... Labour Cost Variance = Rs. 19,200 – Rs. 17,820 = Rs. 1,380 Favourable
(b) Rate of Pay Variance:
Actual Time (Standard Rate – Actual Rate)
1,620 man days (Rs. 10 – Rs. 11) = Rs. 1,620 Unfavourable
(c) Labour Efficiency Variance:
Standard Rate (Standard Time – Actual time)
Rs. 10 (1,920 man days – 1,620 man days) = Rs. 3,000 Favourable

(e) Labour Idle Time Variance:

It is calculated only when there is abnormal idle time. It is that portion of labour cost variance
which is due to the abnormal idle time of workers. This variance is shown separately to show the
effect of abnormal causes affecting production like power failure, breakdown of machinery,
shortage of materials etc. While calculating labour efficiency variance, abnormal idle time is
deducted from actual time expended to ascertain the real efficiency of the workers.
Labour idle time variance is expressed as:
Idle Time Variance = Abnormal Idle Time x Standard Rate
Idle Time Variance = St. Rate (Actual Hours Worked – Actual Hours Paid)
Total Labour Cost Variance = Labour Rate of Pay Variance + Total Labour Efficiency Variance
Total Labour Efficiency Variance = Labour Efficiency Variance + Labour Idle Time Variance
Illustration 7:
Using the following information, calculate labour variances:
Gross direct wages = Rs. 3,000
Standard hours produced = 1,600
Standard rate per hour = Rs. 1.50
Actual hours paid 1,500 hours, out of which hours not worked (abnormal idle time) are 50.

Illustration 8:
The standard output of ‘X’ is 25 units per hour in a manufacturing department of a company
employing 100 workers. The standard wage rate per labour hour is Rs. 6.
In a 42 hour week, the department produced 1,040 units of X despite the loss of 5% of the time paid
due to abnormal reason. The hourly rates actually paid were Rs. 6.20, Rs. 6 and Rs. 5.70
respectively to 10, 30 and 60 workers. Compute relevant variances.
Solution:
Basic Calculations:
Standard output of 100 workers working for one hour in a manufacturing department is 25 units.

... St. time per unit = 100 hours/25 units = 4 hours

St. time for actual output of 1,040 units @ 4 hours = 4,160 hours
St. labour cost of actual output cost, rate of Rs. 6 = 4,160 x Rs. 6 = Rs. 24,960

Total Labour Efficiency Variance:

= St. Rate (St. Time for Actual Output – Actual Time Paid)
= Rs. 6 (4,160 hours – 4,200 hours) = Rs. 240 Adverse
Labour Efficiency Variance:
= St. Rate (St. Time for Actual Output – Actual Time Worked)
= Rs. 6 (4,160 hours – 3,990 hours)
= Rs. 1,020 Fav.
Idle Time Variance:
= St. Rate (Actual Hours Worked – Actual Hours Paid)
= Rs. 6 (3,990 – 4,200)
= Rs. 1,260 Adverse
Labour Cost Variance:
= St. Labour Cost – Actual Labour Cost
= Rs. 24,960 – Rs. 24,528
= Rs. 432 Fav.
Verification:
Labour Cost Variance = Labour Rate Variance + Total Labour Efficiency Variance
Rs. 432 Fav. = Rs. 672 Fav. + Rs. 240 Adverse = Rs. 432 Fav.
or Labour Cost Variance = Rate Variance + Efficiency Variance + Idle Time Variance
Rs. 432 Fav. = Rs. 672 Fav. + Rs. 1,020 Fav. + Rs. 1,260 Adverse = Rs. 432 Fav.
Labour Efficiency Variance can be split into:
(i) Labour Mix Variance or Gang Composition Variance
(ii) Labour Yield Variance or Labour Efficiency Sub-Variance.

(f) Labour Mix Variance or Gang Composition Variance:

It is like materials mix variance and is a part of labour efficiency variance. This variance shows to
the management as to how much of the labour cost variance is due to the change in the composition
of labour force.
It is calculated as follows:
(i) If there is no change in the standard composition labour force and total time expended is equal to
the total standard time, the formula is
Labour Mix Variance = Standard Cost of Standard Composition (for Actual Time Taken) – Standard
Cost of Actual Composition (for Actual Time Worked)
Or Labour Mix Variance = Total Actual Labour Hours (Standard Actual per hour of Standard Mix –
Standard Rate per Hour of Actual Mix)
(ii) If the standard composition of labour force is revised due to shortage of a particular type of
labour and the total time expended is equal to the total standard time, the formula is:
Labour Mix Variance = Standard Cost of Revised Standard Composition (for Actual Time Taken) –
Standard Cost of Actual Composition (for Actual Time Worked)

Illustration 9:
From the following data, calculate labour variances:
The budgeted labour force for producing product A is:
20 Semi-skilled workers @ p. 75 per hour for 50 hours
10 Skilled workers @ Rs. 1.25 per hour for 50 hours
The actual labour force employed for producing A is:
22 Semi-skilled workers @ p. 80 per hour for 50 hours.
8 Skilled workers @ Rs. 1.20 per hour for 50 hours.

(g) Labour Yield Variance:

It is like material yield variance and arises due to the difference between yield that should have been
obtained by actual time utilised on production and actual yield obtained.
It can be calculated as follows:
Standard Labour Cost per unit [Actual Yield in units – Standard Yield in units expected from the
actual time worked on production].

(h) Substitution Variance:

This is a variance in labour cost which arises due to substitution of labour when one grade of labour
is substituted by another. This is denoted by difference between the actual hours at standard rate of
standard worker and the actual hours at standard rate of actual worker.
This can be denoted as under:
Substitution Variance = (Actual Hours x Std. Rate for Std. Worker) – (Actual Hours x Std. Rate for
Actual Worker)
Illustration 10:
A gang of workers usually consists of 10 men, 5 women and 5 boys in a factory. They are paid at
standard hourly rates of Rs. 1.25, Re. 0.80 and Re. 0.70 respectively. In a normal working week of
40 hours the gang is expected to produce 1,000 units of output.
In a certain week, the gang consisted of 13 men, 4 women and 3 boys. Actual wages were paid at
the rates of Rs. 1.20, Re. 0.85 and Re. 0.65 respectively. Two hours per week were lost due to
abnormal idle time and 960 units of output were produced. Calculate various labour variances.
Solution:
Wages Revision Variance:
Sometimes, it becomes necessary to calculate wages revision variance to show to the management
the effect of revision on account of award or settlement with trade unions.
It is calculated as follows:
Standard labour cost of actual output at original standard rate—Standard labour cost of actual
output at current standard rate.
Illustration 11:
The original standard rate of pay in a factory was Rs. 4 per hour. Due to settlement with trade
unions, this rate of pay per hour is increased by 15%. During a particular period, 5,000 actual hours
were worked whereas work done was equivalent to 4,400 hours. The actual labour cost was Rs.
24,000. Calculate labour variances.
Illustration 12:
Trishul Industries turns out only one article, the prime cost standards for which have been
established as follows:

The production schedule for the month of July, 2006 required completion of 5,000 pieces. However,
5,120 pieces were actually completed.
Purchases for the month of July 2006 amounted to 30,000 lbs. of material at the total invoice price
of Rs. 1,35,000.
Production records for the month of July, 2006 showed the following actual results.

Calculate appropriate material and labour variances.

Illustration 13:
From the following records of Bonus-crew Ltd., you are required to compute the material and
labour variances:
1 tonne of material input yields a standard output of 1 lakh units.
Number of employees is 200.
The standard wage rate per employee per day is Rs. 6.
Standard price of material is Rs. 20 per kg.
Actual quantity of material issued by production department 10 tonnes.
Actual price of material is Rs. 21 per kg.
Actual output is 9 lakh units.
Actual wage rate per day is Rs. 6.50.
Standard daily output per employee is 100 units.
Total number of days worked is 50.
Idle time paid for and included above is ½ day. (C.A.—Inter)
SOLUTION:
(а) Material Cost Variance:
Standard Cost of Materials – Actual Cost of Materials
or Standard Quantity x Standard Unit Cost – Actual Quantity x Actual Unit Cost
= 9,000 kilos x Rs. 20 – 10,000 kilos x Rs. 21
= Rs. 1,80,000 – Rs. 2,10,000 = Rs. 30,000 Adverse.
Standard quantity for 1,00,000 units is 1 tonne or 1,000 kilos, hence standard quantity for 9,00,000
units is 9,000 kilos.
(b) Material Price Variance:
Actual Quantity (Standard Unit Price – Actual Unit Price)
10,000 kilos (Rs. 20 – Rs. 21) = Rs. 10,000 Adverse,
(c) Material Usage Variance:
Standard Unit Cost (Standard Quantity – Actual Quantity)
Rs. 20 (9,000 kilos – 10,000 kilos) = Rs. 20,000 Adverse.
Labour Variances:
(a) Labour Cost Variance:
Standard Cost of Labour – Actual Cost of Labour
or Standard Time x Standard Rate – Actual Time x Actual Rate
= 9,000 man days x Rs. 6 – 10,000 man days x Rs. 6.50
= Rs. 54,000 – Rs. 65,000 = Rs. 11.000 Adverse.
Standard time for 100 units is 1 man day, thus standard time for actual output of 9,00,000 units is
9,000 man days. Every employee has worked for 50 days, so 200 employees have actually worked
for 10.000 man days (i.e., 50 x 200).
(b) Labour Rate Variance:
Actual time (Standard Rate – Actual Rate) 10,000 man days (Rs. 6 – Rs. 6.50) = Rs. 5,000 Adverse.
(c) Labour Efficiency Variance:
Standard Rate (Standard Time – Actual Time) Rs. 6 (9,000 man days – 9,900 man days) = Rs. 5,400
Adverse.
Here actual time is that time which is worked in the factory. Idle time of 200 workers day per
worker has not been utilised on production. Therefore, this time has been excluded from 10,000
man days worked to get the actual time utilised.
(c) Idle Time Variance:
Idle Time x Standard Rate
100 man days x Rs. 6 = Rs. 600 Adverse
Every worker has not worked for ½ day, so idle time for 200 workers is 100 man days.

Variance Type # 3. Overhead Variance:

Overhead cost variance can be defined as the difference between the standard cost of overhead
allowed for the actual output achieved and the actual overhead cost incurred. In other words,
overhead cost variance is under or over absorption of overheads.
The formula for the calculation is:
Overhead Cost Variance:
Actual Output x Standard Overhead Rate per unit – Actual Overhead Cost or Standard Hours for
Actual Output x Standard Overhead Rate per hour – Actual Overhead Cost Overhead cost variance
can be classified as:
(1) Variable Overhead Variance
(2) Fixed Overhead Variance.

1. Variable Overhead Variance:

It is the difference between the standard variable overhead cost allowed for the actual output
achieved and the actual variable overhead cost. This variance is represented by expenditure variance
only because variable overhead cost will vary in proportion to production so that only a change in
expenditure can cause such variance. It is expressed as:
Actual Output x Standard Variable Overhead Rate – Actual Variable Overheads or St. Hours for
Actual Output x St. Variable Overhead Rate per hour – Actual Variable Overheads
Some accountants also find out variable overhead efficiency variance just like labour efficiency
variance. Variable overhead efficiency variance can be calculated if information relating to actual
time taken and time allowed is given.
In such a case variable overhead variance can be divided into two parts as given below:
(а) Variable Overhead Expenditure Variance or Variable Overhead Budget Variance
= Actual hours worked x Standard variable overhead rate per hour – Actual variable overhead or
Actual Hours (Standard Variable Overhead Rate per Hour – Actual Variable Overhead Rate per
Hour)
Variable overhead expenditure variance is calculated in the same way as labour rate variance is
calculated.
(b) Variable Overhead Efficiency Variance:
= Standard time for actual production x Standard variable overhead rate per hour – Actual hours
worked x Standard variable overhead rate per hour or Standard Variable Overhead Rate per Hour
(Standard Hours for Actual Production – Actual Hours)
Variable overhead efficiency variance resembles labour efficiency variance and is calculated like
labour efficiency variance.
Illustration 14:
From the following data, calculate variable overhead variances:
2. Fixed Overhead Variance:
It is that portion of total overhead cost variance which is due to the difference between the standard
cost of fixed overhead allowed for the actual output achieved and the actual fixed overhead cost
incurred.
The formula for the calculation of this variance is:
Actual Output x Standard Fixed Overhead Rate per Unit – Actual Fixed Overheads, or Standard
Hours Produced x Standard Fixed Overhead Rate per Hour – Actual Fixed Overheads (Standard
Hours Produced = Time which should be taken for actual output i.e., Standard Time for Actual
Output)
Or Fixed Overheads Absorbed – Actual Fixed Overheads
This variance is further analysed as under:
(а) Budget or Expenditure Variance:
It is that portion of the fixed overhead variance which is due to the difference between the budgeted
fixed overheads and the actual fixed overheads incurred during a particular period.
It is expressed as:
Expenditure Variance = Budgeted Fixed Overheads – Actual Fixed Overheads Expenditure
Variance = Budgeted Hours x Standard Fixed Overhead Rate per Hour – Actual Fixed Overheads.
(b) Volume Variance:
It is that portion of the fixed overhead variance which arises due to the difference between the
standard cost of fixed overhead allowed for the actual output and the budgeted fixed overheads for
the period during which the actual output has been achieved. This variance shows the over or under
absorption of fixed overheads during a particular period.
If the actual output is more than the budgeted output, there is over-recovery of fixed overheads and
volume variance is favourable and vice versa if the actual output is less than the budgeted output.
This is so because fixed overheads are not expected to change with the change in output.
This variance is expressed as:
Volume Variance = Actual Output x Standard Rate – Budgeted Fixed Overheads
or Standard Rate (Actual Output – Budgeted Output)
or Volume Variance = Standard Rate per hour (Standard Hours Produced — Actual Hours)
Standard hours produced means number of hours which should have been taken for the actual
output as per the standard laid down.
Volume variance can be further subdivided into three variances as given below:
(i) Capacity Variance:
It is that portion of the volume variance which is due to working at higher or lower capacity than
the budgeted capacity. In other words, this variance is related to the under and over utilisation of
plant and equipment and arises due to idle time, strikes and lock-out, break-down of the machinery,
power failure, shortage of materials and labour, absenteeism, overtime, changes in number of shifts.
In short, the variance arises due to more or less working hours than the budgeted working hours.
It is expressed as:
Capacity Variance = Standard Rate (Revised Budgeted Units – Budgeted Units)
or Capacity Variance = Standard Rate (Revised Budgeted Hours – Budgeted Hours)
(ii) Calendar Variance:
It is that portion of the volume variance which is due to the difference between the number of
working days in the budget period and the number of actual working days in the period to which the
budget is applicable. If the actual working days are more than the standard working days, the
variance will be favourable and vice versa if the actual working days are less than the standard days.
It is calculated as:
Calendar Variance = Increase or decrease in production due to more or less working days at the rate
of budgeted capacity x Standard rate per unit.
(iii) Efficiency Variance:
It is that portion of the volume variance which is due to the difference between the budgeted
efficiency of production and the actual efficiency achieved.
This variance is related to the efficiency of workers and plant and is calculated as:
Standard Rate per unit (Actual Production (in units) – Standard Production (in units)) or Standard
Rate per hour (Standard Hours Produced — Actual Hours)
Here, standard production or hours means budgeted production or hours adjusted to increase or
decrease in production due to capacity or calendar variance.
Suppose, budgeted production is 10,000 units, 5% capacity is increased and factory works for 27
days instead of 25 days during the month.
Standard production in this case should be 11,340 units calculated as follows:

Total Overhead Cost Variance can be analysed as follows:

Two Variance, Three Variance and Four Variance Methods of Analysis Overhead Variances:
Analysis of overhead variance can also be made by two variance, three variance and four variance
methods. The analysis of overhead variances by expenditure and volume is called two variance
analysis. When the volume variance is further analysed to know the reasons of change in output, it
is called three variance analysis.
Change in output occurs due to:
(i) Change in capacity i.e., change in working hours per day giving rise to capacity variance.
(ii) Change in number of working days giving rise to calendar variance.
(iii) Change in the level of efficiency resulting into efficiency variance.
Thus, three variance analysis includes:
(i) Expenditure variance
(ii) Volume variance further analysed into :
(a) Capacity variance,
(b) Calendar variance, and
(c) Efficiency variance.
Four Variance Analysis includes:
(j) Expenditure Variance or Spending Variance
(ii) Variable Overhead Efficiency Variance
(iii) Fixed Overhead Capacity Variance
(iv) Fixed Overhead Efficiency Variance.
Illustration 15:
From the following data, calculate overhead variances:
Illustration 16:
From the following data, calculate overhead variances:

Actual man hours per day = 5,500

Actual output per man hour = 1.9

... Actual output = 27 x 5,500 x 1.9 = 2,82,150 units.

(1) Fixed Overhead Variance:
Actual Output x Standard Rate – Actual Overheads
2,82,150 x Rs. 1.50 – Rs. 3,77,500 = Rs. 4.23,225 – Rs. 3,77.500 = Rs. 45,725 Favourable.
(2) Expenditure Variance:
Budgeted Overheads – Actual Overheads
Rs. 3,75,000 – Rs. 3,77,500 = Rs. 2,500 Unfavourable.
(3) Volume Variance:
Actual Output x Standard Rate – Budgeted Overheads
2,82,150 units x Rs. 1.50 – Rs. 3,75,000
= Rs. 4,23,225 – Rs. 3,75,000 = Rs. 48,225 Favourable
(4) Capacity Variance:
Standard Rate (Revised Budgeted Units – Budgeted Units)
Revised Budgeted Units:

Volume Variance = Capacity Variance + Calendar Variance + Efficiency Variance

Rs. 48,225 (Favourable) = Rs. 40,500 (Fav.) + Rs. 30,000 (Fav.) – Rs. 22,275 (Unfav.)
= Rs. 48,225 Favourable = Rs. 48,225 Favourable.
Illustration 17:
The following information has been obtained from the records of a manufacturing
organization using the standard costing system.
You are required to calculate the following overhead variances:
(i) Variable overhead variance
(ii) Fixed overhead variance
(a) Expenditure variance
(b) Volume variance
(c) Efficiency variance
(d) Calendar variance.
Also prepare a statement reconciling the Standard Fixed Overheads worked out by using the
Standard Overhead Rate and the Actual Fixed Overheads.

(i) Variable Overhead Variance:

Actual output x Standard variable overhead rate – Actual variable overhead
3,800 x Rs. 3 – Rs. 12,000 = Rs. 600 Adverse
(ii) Fixed Overhead Variance:
Actual output x Standard fixed overhead rate – Actual fixed overhead
3,800 x Rs. 10 – Rs. 39,000 = Rs. 1,000 Adverse
(a) Expenditure Variance:
Budgeted fixed overhead – Actual fixed overhead
Rs. 40,000 – Rs. 39,000 = 1,000 Favourable
(b) Volume Variance:
Standard fixed overhead rate per unit (Actual output – Budgeted output)
Rs. 10 (3,800 – 4,000) =Rs. 2,000 Adverse
(c) Efficiency Variance:
Standard fixed overhead rate per unit (Actual production – Standard production in actual days)
Rs. 10 (3,800 units – 4,200 units) = Rs. 4,000 Adverse
(Standard production for 21 actual working days @ 200 units per day = 4,200 units)
(d) Calendar Variance:
Standard fixed overheads per day (Actual days – Budgeted days)
Rs. 2,000 (21 – 20) = Rs. 2,000 Favourable

Note:
For reconciliation efficiency variance and calendar variance have been taken which are part of
volume variance. Therefore, volume variance has not been considered for reconciliation purpose.
An Alternative Method of Analysis of Fixed Overhead Variance:
Some accountants analyse fixed overhead variance into three classifications as given below:
(a) Expenditure Variance
(b) Efficiency Variance
(c) Volume Variance.
(a) Expenditure Variance:
It is that portion of fixed overhead variance which is due to the difference between the budgeted
fixed overhead and the actual fixed overhead incurred during a particular period.
(b) Efficiency Variance:
It is that portion of fixed overhead variance which is due to the difference between the standard
recovery of fixed overhead and the standard fixed overhead for actual hours.
It is calculated as follows:
Standard fixed overhead rate per hour (Standard hours for actual production – Actual hours).
(c) Volume Variance:
It is that portion of fixed overhead variance which is due to the difference between the standard
fixed overhead for actual hours and the budgeted hours.
It is calculated as given below:
Standard fixed overhead rate per hour (Actual hours – Budgeted hours)
The analysis of fixed overhead variance according to the above method is made clear in the
example given below:
Variance Type # 4. Sales Variances:
The analysis of variances will be complete only when the difference between the actual profit and
standard profit is fully analysed. It is necessary to make an analysis of sales variances to have a
complete analysis of profit variance because profit is the difference between sales and cost.
Thus, in addition to the analysis of cost variances, i.e., materials cost variance, labour cost variance
and overheads cost variance, an analysis of sales variances should be made. Sales variances may be
calculated in two different ways. These may be computed so as to show the effect on profit or these
may be calculated to show the effect on sales value.
The first method of calculating sales variances is profit method of calculating sales variances and
the second is known as value method of calculating sales variances. Sales variances showing the
effect on profit are more meaningful, so these would be considered first.
Profit Method of Calculating Sales Variances:
The sales variances according to this method can be analysed as:

(1) Total Sales Margin Variance (TSMV):

Actual Profit – Budgeted Profit
or Actual Quantity of Sales x Actual Profit per unit- Budgeted Quantity of Sales x Budgeted Profit
per unit

(2) Sales Margin Variance (SMV) due to Selling Price:

It is that portion of total sales margin variance which is due to the difference between the actual
price of quantity of sales effected and the standard price of those sales.
It is calculated as:
Standard Costing and Variance Analysis:
Actual Quantity of Sales (Actual Selling Price per unit – Standard Selling Price per unit).

(3) Sales Margin Variance (SMV) due to Volume:

It is that portion of total sales margin variance which arises due to the number of articles sold being
more or less than the budgeted quantity of sales.
It is calculated as:
Standard Profit per unit (Actual Quantity of Sales – Budgeted Quantity of Sales)
Sales margin variance due to volume can be divided into two parts as given below:
(i) Sales margin variance due to sales mixture.
(ii) Sales margin variance due to sales quantities.
Sales Margin Variance (SMV) due to Sales Mixture (SM):
It is that portion of sales margin variance due to volume which arises because of different
proportion of actual sales mix. It is taken as the difference between the actual and budgeted
quantities of each product of which the sales mixture is composed, valuing the difference of
quantities at standard profit. It is calculated as given below:
Standard Profit per unit (Actual quantity of sales – Standard proportion for actual sales) or Standard
Profit – Revised Standard Profit.
Sales Margin Variance (SMV) due to Sales Quantities (SQ):
It is that portion of sales margin variance due to volume which arises due to the difference between
the actual and budgeted quantity sold of each product.
It is calculated as:
Standard Profit per unit (Standard proportion for actual sales – Budgeted quantity of sales) or
Revised Standard Profit – Budgeted Profit.
Value Method of Calculating Sales Variances:
Sales variances calculated according to value method show the effect on sales value and enable the
sales manager to know the effect of the various sales efforts on his overall sales value figures.
Sales variances according to this method may be as follows:
(1) Sales Value Variance (SVV):
It is the difference between the standard value and the actual value of sales effected during a period.
It is calculated as:
Sales Value Variance = Actual Value of Sales – Budgeted Value of Sales.
Sales value variance arises due to one or more of the following reasons:
(1) Actual selling price may be higher or lower than the standard price. This is expressed in sales
price variance.
(ii) Actual quantity of goods sold may be more or less than the budgeted quantity of sales. This is
expressed in sales volume variance.
(iii) Actual mix of various varieties sold may differ from the standard mix. This is expressed in sales
mix variance.
(iv) Revised standard sales quantity may be more or less than the budgeted quantity of sales. This is
expressed in sales quantity variance.
(2) Sales Price Variance (SPV):
It is that portion of sales value variance which arises due to the difference between actual price and
standard price specified.
The formula for the calculation of this variance is:
Sales Price Variance = Actual Quantity Sold (Actual Price – Standard Price)
(3) Sales Volume Variance (S.Vol. V):
It is that portion of the sales value variance which arises due to difference between actual quantity
of sales and standard quantity of sales.
The variance is calculated as:
Sales Volume Variance = Standard Price (Actual Quantity of Sales – Budgeted Quantity of Sales)
Sales volume variance can be divided into two parts as follows:
(a) Sales Mix Variance (SMV):
It is a part of sales volume variance and arises due to the difference in the proportion in which
various articles are sold and the standard proportion in which various articles were to be sold.
It is calculated as:
Sales Mix Variance = Standard Value of Actual Mix – Standard Value of Revised Standard Mix.
(b) Sales Quantity Variance (SQV):
It is that part of sales volume variance which arises due to the difference between revised standard
sales quantity and budgeted sales quantity.
It is calculated as:
Standard Selling Price (Revised Standard Sales Quantity – Budgeted Sales Quantity).
Illustration 18:
From the following particulars calculate all sales variances according to (A) Profit Method
and (B) Value Method.