Unit 13: Variance Analysis – II

After having studied the first part of variance analysis consisting of material and labour
variances. Let us proceed to analysis of variances relating to overheads. Now the
overheads variance analysis is different from variance analysis relating to materials and
labour. Here the overheads and inputs are already determined. These pre determined
overheads and inputs are called the standard. The overhead is considered in terms of
predetermined rate and is applied to the input. There can be different bases for the
absorption of overheads e.g., labour hours, machine tools, output (in units), etc.

Overhead variances may be classified into fixed and variable overhead variances and
fixed overhead variance can be further analysed according to the courses. In case of
variable overheads, it is assured that variable overheads vary directly with production so
that any change in expenditure can affect costs. Some authors say that a variance may
arise through inefficiency, but as these costs are usually very small per unit of output, it is
to be ignored and any variance in variable overhead is attributed to expenditure variance.
Considering the fixed overheads cost, the difficulty arises in determining standard
overhead rates. This is so because this is dependent on the volume or level of activity.
Any change in volume or level of activity causes a change in the overhead rate.
Therefore the fixing the volume or level of activity is a crucial aspect in determining
standard overhead rate. Now if the management decides to change the normal volume or
level of activity, without a corresponding change in the fixed amount of overheads, then a
change occurs in the overhead rate. Here it may be noted that in the case of material or
labour variances, the volume decision does not in any way influence the fixation of
standard rate. So to resolve this problem, normally the Budget is used in place of the
standard.

Another important thing to be noted in case of overhead analysis is that different writers
use different modes of computation of overhead variance and also different
terminologies. E.g. spending variance is same as expenditure variance and volume
variance is same as capacity variance.
After having discussed the preliminary aspect of overhead variance, now we go about the
analysis of the overhead cost variances.

Classification of Overhead Variance

The term overhead includes indirect material, indirect labour and indirect expenses. It
may relate to factory, office and selling and distribution centres. Overhead variance can
be classified as sown in the following diagram:

Overhead Cost Variance

Variable Overhead Cost Variance Fixed Overhead Cost Variance

Expenditure Volume
Variance Variance

Efficiency Capacity Calender

Variance Variance Variance

Overhead cost variance is the difference between standard cost of overhead absorbed in
the output achieved and the actual overhead cost. Simply, it is the difference between
total standard overheads absorbed and total actual overheads incurred. Therefore, the
formula for overhead cost variance is as follows:

Overhead Cost Variance = Total Standard Overheads – Total Actual Overheads

(OHCV)

The overhead cost variance may be divided into variable overhead cost variance and
fixed overhead cost variance. Fixed cost variance may be further divided as fixed
expenditure variance and fixed volume variance. Fixed volume variance may again be
sub-divided into efficiency variance, capacity variance and calendar variance. Let us
study, how these variances are calculated.

1. Variable Overhead Cost Variance (V.OH.C.V): This variance is the difference

between the standard variable overhead and the actual variable overhead. The formula is:

Variable Overhead Cost Variance

= Standard Variable overhead for actual output – Actual Variable Overhead

Where,
Standard Variable Overhead
= Standard hours allowed for actual output X Standard Variable Overhead Rate

Standard Variable Overheads

Standard Variable Overhead Rate = ----------------------------------------
Standard Output

It is stated earlier that there are two basic variances, price and volume. If volume does
not affect the cost per unit the only variance to be calculated is price variance known as
the variable overhead variance. But when assumed that variable overheads do not move
directly with output, the variable overhead variances are to be calculated on similar lines
as to fixed overhead variances which you will study later. In this unit, we are assuming
that variable overheads do change directly with the output and infact it is the practice that
many firms follow and by a number of writers on the subject.

Variable overhead cost variances arise due to the following reasons:

i) Advance payment of overheads

ii) Outstanding overheads during the current period
iii) Payment of past outstanding overheads during the current period
 iv) Incurring of abnormal overheads like repairs to machinery due to break down,
expenses due to spoilage, defective workmanship or excessive overtime work,
etc.

Illustration 1

From the following information, calculate the variable overhead variance::

Standard output : 400 Units
Actual output : 500 Units
Standard variable overheads : Rs.1800
Actual variable overheads : Rs.2000

Solution
Variable Overhead Variance
= Standard Variable overhead for actual output – Actual Overhead

Where,
Standard Variable Overheads
= Standard hours allowed for actual output X Standard Variable Overhead Rate

Standard Variable Overheads

Standard Variable Overhead Rate = ----------------------------------------
Standard Output

Rs.1800
= --------------- = Rs.4.50
400 units

Variable Overhead Variance = (500 Units X Rs.4.50) – Rs.200

 = Rs.2250 – Rs.200
= Rs.250(F)

Let us take another illustration and calculate variable overhead variance.

Illustration 2

Budgeted production for a month : 3000 kgs.

Budgeted variable overheads : Rs.15600
Standard time for one kg. of output : 20 hours
Actual production in the month : 250 kgs.
Actual overheads : Rs.14000
Actual hours : 4500 hours

Solution
Variable Overhead Variance
= Standard Variable overhead for actual output – Actual Variable Overhead

Standard Variable Overheads

Standard Variable Overhead Rate = ----------------------------------------
Standard Output

Rs.15600
= --------------- = Rs.2.60
3000 kgs
6000hrs. ( ------------- X 1 kg )
20hrs

Variable OH Variance= (4500 hrs X Rs.2.60) – Rs. 14000

= Rs.11700 – Rs.14000
= Rs. 2300 (A)
Fixed Overhead Variances

The treatment of these variances differ from that of variable overhead variable because of
the fact that the fixed overheads are incurred anyway and do not vary with change in
production levels. These have to be apportioned to production on a basis. Now the
standard recovery rate is fixed by considering the budgeted fixed overhead by budgeted
or normal volume, regardless of actual activity. It also can be on the basis of
managements idea of normal volume, which may considerably differ from actual volume
or even actual time taken. So when overheads are actually incurred, they may be over
recovered or under-recovered. This over or under recovery is known as the variance.
Now this variance can be on the basis of output (in units) or standard time.

1. Fixed Overhead Variance It is also called fixed overhead cost variance by

some writers, and represents the total fixed overhead variance. Actually it is the
difference between the Standard fixed overhead charged on the basis of actual fixed
overhead.

Symbolically we can express it as:

Fixed Overhead Variance = Standard Fixed Overhead – Actual Fixed Overheads

= Std. hours for X Std. fixed – Actual Fixed O.H.
actual output O.H. rate

Fixed Overhead Variance may be further subdivided into tow:

A) Fixed overhead volume variance
B) Fixed overhead expenditure variance

A) Fixed Overhead Volume Variance: Also called as activity variance by some

writers, this is the difference between the Budgeted hours based on normal volume and
the standard hours for actual output. Now the variance occurs because all the overheads
cannot actually be absorbed or may be over absorbed in some cases.

Symbolically we can compute this variance as follows:

Fixed overhead volume variance

= Standard Rate of recovery of fixed overheads X (Standard hours – Budgeted hours)

Where,
Budgeted fixed overheads
Standard rate of recovery of fixed overheads = ----------------------------------
Budgeted hours

Fixed overhead volume variance can be sub-divided into:

i) Fixed overhead efficiency variance

ii) Fixed overhead calendar variance
iii) Fixed overhead capacity variance

i) Fixed Overhead Efficiency Variance: This is the difference between actual hours
taken to complete a work and standard hours that should have been taken to complete a
work and standard hours that should have been taken to complete the work. It measures
the efficiency of performance. Symbolically we can express it as

Fixed overhead efficiency variance

= Standard fixed rate of recovery X (Standard Hours– Actual hours)
of overheads for actual output

ii) Fixed Overhead Calender Variance: This variance arises due to the actual time
consumed, expressed in terms of hours or days as the case may be, being different from
standard time that should have been taken. In other words, it is due to the difference
between the number of working days in the budgeted period and the number of actual
working days in the period to which the budget is applied. This variance is obtained by
multiplication of the standard rate of recovery of fixed or overhead by difference between
revised budgeted hours and budgeted hours.

Symbolically it can be expressed as:

Fixed Overhead Calender Variance

= Standard Rate of Recovery of fixed overheads (per hour) (Revised Budgeted
Hours – Budgeted Hours)
or
= (Actual no. of working days – Standard no. of working days) X Standard rate of
recovery of fixed overheads (per day)

The calendar variances arises due to the extra holidays declared to celebrate the
anniversary of the firm or on the death of a national leader or any other reason. It arises
only in exceptional circumstances as normal holidays are taken into account while setting
the standards. When there is no change in the working days then there should be no need
for a calendar variance. Generally, this variance is adverse, but sometimes it shows
favoruable variance where there are extra working days.

iii) Fixed Overhead Capacity Variance: This variance arises due to difference between
Revised Budgeted Hours and the actual hours taken multiplied by the standard rate of
recovery of fixed overheads.

Symbolically we can express this as:

Fixed overhead capacity variance

= Standard rate of recovery of fixed overheads X (Actual hours – Revised
 Budgeted hours)

Where,
Revised Budgeted Hours = Standard hours per day X Actual no. of days

This variance arises when there is difference between utilization of plant capacity of
planned and actual utilization of plant capacity. It may be due to the factors like idle
time, strikes, power failure etc. This variance can be both favourable a well as
unfavourable. If the actual hours worked is more than revised budgeted hours it is
favourable and vice versa.

Check:

Fixed overhead volume variance

= Fixed overhead efficiency variance + Fixed overhead capacity variance + Fixed
overhead calendar variance

Note: When there is no calendar variance, the calculation of capacity variance has to be
modified as follows:
Capacity variance = Standard Rate of recovery of fixed overheads X (Actual hours –
Budgeted Hours)

Check

Fixed overhead Volume Variance = Efficiency Variance + Capacity Variance

A) Fixed Overheads Expenditure Variance: Now his variance actually measures the
difference between the expenditure that is actually incurred and the budgeted fixed
overheads. It is also known as budget variance or spending variance.
Illustration 3

The following information is given to you:

Budget Actual
Production (units) 10,000 10,400
Fixed overheads (Rs.) 20,000 20,400
Man hours 20,000 20,100

Calculate the following:

i) Fixed overhead variance
ii) Expenditure variance
iii) Fixed overhead volume variance
iv) Fixed overhead efficiency variance
v) Fixed overhead capacity variance

Solution:
Budgeted Fixed overheads
Standard rate of recovery of fixed overhead = ----------------------------------------
Budgeted hours
Rs. 20,000
= ---------------- = Rs. 1
20,000

Budgeted hours
Standard hours for actual output = ----------------------- X Actual output
Budgeted output

20,000
= ------------- X 10,400
10,000
 = 20,800 hours

i) Fixed overhead variance =

(Std. hours for actual output X Std. fixed O.H. rate) – Actual Fixed overheads

= (20,800 hours X Rs. 1) – Rs.20,400

= Rs. 20,800 – Rs. 20,400
= Rs. 400 (F)

ii) Expenditure Variance = Budgeted F. OH – Actual F. OH

= Rs.20,000 – 20,400
= Rs.400 (A)

iii) Fixed overhead volume variance =

Std. Recovery rate of FOH X (Std. hours for actual output – Budgeted hours)
= Rs. 1 X (20,800 – 20,000)
= Rs.800 (F)

iv) Fixed overhead Efficiency Variance =

Std. Recovery rate of F.OH X (Std. hours for actual output – Actual hours)
= Rs.1 X (20,800 – 20,100)
= Rs.700 (F)

v) Fixed overhead capacity variance =

Std. rate of recovery of F.OH X (Actual hours – Budgeted hours)
= Rs.1 X (20,100 – 20,000)
= Rs.1.00 (F)

Check:
Fixed O.H. Volume Variance = Efficiency Variance + Capacity Variance
Rs.800(F) = Rs.700(F) + Rs.100(F)
Illustration 2:

ABC Company Ltd. has furnished you the following information for the month of
January 2005:
Budget Actual
Output (units) 15,000 16,250
Working days 25 26
Hours 30,000 33,000
Fixed overheads (Rs.) 45,000 50,000

You are required to calculate fixed overhead variances.

Solution:

Budgeted hours 30,000

Standard hours per unit = ----------------------- = --------------- = 2 hours
Budgeted output 15,000

Standard hours per actual output = 16,250 units X 2 hrs

= 32500 hrs.

Budgeted overheads
Standard fixed overhead rate (per hour) = ----------------------------
Budgeted hours

Rs.45,000
= ----------------- = Rs.1.50
30,000

i) Fixed overhead variance =

 (Std. hours for actual output X Std. fixed O.H. rate) – Actual Fixed overheads

= (32,500 hours X Rs.1.50) – Rs.50,000

= Rs. 48,750 – Rs. 50,000
= Rs. 1250 (A)

ii) Fixed Overhead Expenditure Variance = Budgeted F. OH – Actual F. OH

= Rs.45,000 – Rs.50,000
= Rs.5000 (A)

iii) Fixed overhead volume variance =

Std. Recovery rate of FOH X (Std. hours for actual output – Budgeted hours)
= Rs. 1 X (20,800 – 20,000)
= Rs.800 (F)

iv) Fixed overhead Volume Variance =

Std. Fixed OH Recovery rate X (Std. hours for actual output – Actual hours)
= Rs.1.50 X (32,500 – 30,000)
= Rs.1.50 X 2500
= Rs.750 (A)

v) Fixed overhead calender variance =

Std. rate of recovery of F.OH X (Revised budgeted hours – Budgeted hours)
= Rs.1.50 X (31,200 – 30,000)
= Rs.1800 (F)

Revised budgeted hours = Std. hours per day X Actual no. of days
30,000
= ----------- X 26 = 31,200 hours
25
v) Fixed overhead capacity variance =
 Std. Fixed OH Recovery rate X (Actual hours – Revised Budgeted hours)
= Rs.1.50 X (33,000 – 31,200)
= Rs.1.50 X 1800
= Rs.2700 (F)

Check:
i) Fixed O.H. Variance =
Efficiency Variance + Efficiency Variance + Capacity Variance + Calender Variance

Rs.1250(A) = Rs.5000(A) + Rs.750(A) + Rs.2700(F) + Rs.1800(F)

Rs.1250(A) = Rs.1250(A)

ii) Fixed Volume Variance =

Efficiency Variance + Calender Variance + Capacity Variance
Rs.3750 (F) = Rs.750(A) + Rs.1800(F) + Rs.2700(F)
Rs.3750(F) = Rs.3750(F)

Fixed Overhead expenditure variance =

Budgeted fixed overheads – Actual fixed overheads

Now check:
Fixed overhead variance =
Fixed overhead expenditure variance + Fixed overhead volume variance

Exercises:
You are given the following data relating to two factories of a company. You are
required to compute all the overhead variance:

I II
Budgeted Actual Budgeted Actual
Hours 2000 18700 20000 16500
Variable 48000 46000 25000 26000
Overheads
Fixed 40000 39000 27000 29000
Overheads

You are also given that the actual hours taken in case of both departments exceeded by
10%

(Ans. I II
V.O.H.V. = Rs.5200(A) Rs.7250(A)
F.O.A.V. = Rs.5000(A) Rs.8750(A)
F.O.Vl.V. = Rs.6000(A) Rs.6750(A)
F.O.E.V. = Rs.3400(A) Rs.2025(A)
F.O.C.V. = Rs.2600(A) Rs.4725(A)
F.O.Ex.V. = Rs.1000(F) Rs.2000(A)

Sales Variances
The Variances so far we learnt relate to cost of goods manufactured viz., material, labour
and overheads. The purpose of variance analysis is complete unless sales variance is
included in the presentation of information to management. Sales Variances are
calculated by two methods viz., sales value method (or Turnover Method) and sales
margin or profit method. Sales variances arise due to the changes in price and changes in
sales volume. A change in value may be due to the change in quantity or a change in
sales mix.

Sales variance can be understood with the help of the following chart:
 Sales Variances

Sales Value Variance Sales Margin Variance

Sales Price Sales Volume Sales Price Sales Volume

Variance Variance Variance Variance

Sales Quantity Sales Mix Sales Mix Sales Quantity

Variance Variance Variance Variance

Sales variance may be studies under two heads, namely Sales Value Variance and Sales
Mix or Profit variances. Again Sales Value Variance is subdivided into Sales Price
Variance and Sales Volume Variances. Sales Volume Variance may again be subdivided
into Sales Quantity Variance and Sales Mix Variance. Similarly, Sales Margin Variances
may be divided into Sales Price Variance and Sales Volume Variance. Sales volume
Variance is subdivided into Sales Mix Variance and Sales Quantity Variance. Now, let
us study there Sales Variances in detail.

Sales Value Variance

This Variance is also called Sales revenue variance. This is the net variance of sales as a
whole. It is the difference between budgeted sales and actual sales. The formula for
computing this variance is:

Sales Value Variance = Actual Sales – Budgeted Sales

If actual sales are more than the budgeted sales a favourable variance would be reported
and vice versa. This variance is on account of difference in price or volume of sales. It is
further subdivided into two variances as – (i) Sales price variance and (ii) Sales volume
variance.

(i) Sales Price Variance

This variance measures the impact of change in selling price on the turnover as a whole.
It is measured by the difference between Standard sales and Actual sales.

The formula is:

Sales Price Variance =

Actual Quantity Sold X (Actual Selling Price – Standard Selling Price)
Or
Sales Price Variance = Actual Sales – Standard Sales

(ii) Sales Volume Variance

This variance measures the impact of changes in quantum of products sold. Sales volume
variance is the difference between the standard sales and budgeted sales. If the standard
sales are more than the budgeted sales, it gives rise to favourable variance and vice versa.
The formula is:

Sales Volume Variance = Standard Sales – Budgeted Sales.

Or
= Standard Price X (Budgeted Quantity – Actual Quantity)

Where,
Standard Sales = Standard Price X Actual Sales

This variance may arise due to unexpected competition, ineffective advertising, lack of
proper supervision, etc.

In the case of multi product situations, Sales Volume Variance can be further subdivided
into (i) Sales Quantity Variance and (ii) Sales Mix Variance. These two sub-variance
can be calculated as follows:
(i) Sales Quantity Variance

It is the difference between the Budgeted Sales and Revised standard sales. The formula
is:
Sales Quantity Variance = Revised Standard Sales – Budgeted Sales
Or
= (Revised Standard Quantity – Budgeted Quantity) X Std. Price

Where,
RSQ = Total actual Quantity X Standard Ratio of Units

(ii) Sales Mix Variance

This variance arises when the proportion of actual sales mix. It is the difference between
Revised Standard Sales and Standard Sales. The formula is:

Sales Mix Variance = Actual Sales – Revised Sales

Or
= (Actual Quantity – Revised Standard Quantity) Std. price of each product

Where,
RSQ = Total Actual Quantity X Standard Ratio of units

Check
Sales Value Variance = Price Variance + Volume Variance
Sales Volume Variance = Sales Mix Variance + Sales Quantity Variance

Illustration

You are given the following data. Compute Sales Variance based on Turnover.
Product A B C Total
Budget Units 3000 2000 1000
Price (Rs.) 30 20 10
Total (Rs.) 90000 40000 10000 140000
Actual Units 3500 2400 500
Price (Rs.) 35 25 5
Total (Rs.) 122500 60000 2500 185000

Solution

1,40,000
1) Standard Price per Unit of Standard Mix = -------------- = Rs.23.33
6,000

2) Revised Standard Sales = Total Actual Sales X Std. Ratio

: A – 6400 X 3/6 = 3200
: B – 6400 X 2/6 = 2133
: C – 6400 X 1/6 = 1067

3) Standard Ratio of Units = A:B:C = 3000 : 2000 : 1000

= 3:2:1

4) Computation of Standard Sales = Standard Price X Actual Sales

Product A B C Total
Units 3500 2400 500 6400
Price(Rs.) 30 20 10
Total (Rs.) 105000 48000 5000 158000

1) Sales Value Variance = Actual Sales – Budgeted Sales

Product A B C Total
Budgeted Sales (Rs.) 90000 40000 10000 140000
Actual Sales (Rs.) 122500 60000 2500 185000
Variance (Rs.) 32500 (F) 20000 (F) 7500 (A) 45000(F)

3) Sales Price Variance = Actual Sales – Standard Sales

Product A B C Total
Budgeted Sales (Rs.) 10500 48000 5000 158000
Actual Sales (Rs.) 122500 60000 2500 185000
Variance (Rs.) 17500 (F) 12000 (F) 2500 (A) 27000 (F)

4.a) Sales Quantity Variance =

(Revised Standard Quantity – Budgeted Quantity) X Standard price unit of std. mix

A : (3200–3000) X Rs.30 = 6000 (F)

B : (2133–2000) X Rs.20 = 2660 (F)
C : (1067–1000) X Rs.10 = 6000 (F)
--------------
Total = Rs.9330 (F)
--------------

b) Sales Mix Variance = (Actual Quantity – Revised Standard Quantity ) X Std. price

A : (3200–3500) X Rs.30 = 9000 (F)

B : (2400–2133) X Rs.20 = 5340 (F)
C : ( 500–1067) X Rs.10 = 5670 (F)
--------------
Total = Rs.8670 (F)
--------------
Check:

Sales Revenue Variance = Sales Price Variance + Sales Volume Variance

45000 (F) = 27000 (F) + 18000 (F)

Sales Volume Variance = Sales Quantity Variance + Sales Mix Variance

18000 (F) = 9330 (F) + 8670 (F)
= 18000 (F)

Sales Margins or Profit Variances Method

These can also be called profit variances, as sales margin is nothing but profit. Now, this
variance is very essential as management takes key decisions based on profitability.
Individually the cost variances or revenue variance (sales variances as based on turnover)
cannot convey any clear meaning. But profit variances do so.

Sales Margin Variance

This can also be called as ‘Overall profit variance’. This represents the difference
between the Budgeted Sales margin or Budgeted Profit and Actual Sales Margin or
Actual Profit. The formula is:

Sales Margin Variance = Budgeted Sales Margin – Actual Sales Margin

Sales Margin Variance can be subdivided into:

1. Sales Price Variance and
2. Sales Volume Variance

1. Sales Price Variance (Based as Margins)

This variance arises due to the difference between the Standard Price of quantity of sales
and actual price of sales. In other words, it is the difference between Standard Profit and
Actual Profit.

Sales Price Variance = Standard Profit – Actual profit

Or
= Actual Quantity (Standard Profit per unit – Actual Profit per unit)

Where,
Std. profit = A.Q X Std. profit per unit

If the actual profit is greater than the standard profit, the variance is favourable and vice
versa. This variance can arise due to the following reasons:

(i) Rise in price levels net anticipated earlier

(ii) Fall in price due to availing discounts and bulk buying
(iii) Intense competition not foreseen earlier

2. Sales volume Variance (based on Margins)

This variance arises due to quantity of goods being sold differing from quantity of goods
budgeted to be sold. Now this can arise due to
- Intense competition unforeseen earlier or inefficiency of sales personnel

Symbolically this can be represented as:

Sales Volume Variance = Standard profit per unit (Standard Quantity – Actual Quantity)

If the actual quantity is greater than standard quantity, the variance is favourable and vice
versa. This variance can be further sub-divided in case of multi-product selling units
into:-
 (i) Sales Quantity variance
(ii) Sales Mix Variances

(i) Sales Quantity Variance

This is the difference between budgeted profit and revised standard profit.
Symbolically:

Sales Quantity Variance =

Standard profit per unit X (Standard quantity – Revised Standard Quantity)

RSQ = Total AQ X Standard ratio

If RSQ is greater than SQ, the variance is favourable and vice versa.

(ii) Sales Mix Variance

This arises due to the proportion of these items constitution the standard mix different
from the actual proportion. It is difference between Revised Standard Profit and Standard
Profit.
Symbolically;

Sales Mix Variance =

Standard Profit per unit X (Revised Standard quantity – Actual quantity)

If the actual quantity is more than RSQ, the variance is favourable and vice versa.

Illustration

A toy company gives you the following data for a month. You are required to calculate
the variance based on profit
Toy Budgeted Actual
Quantity Rate Cost per unit Quantity Rate
A 900 50 45 1000 55
B 650 100 85 700 95
C 1200 75 65 110 78

Solution:

Statement of Budged Profit and Actual Profit per unit

Toy SQ SP (Rs.) Total Cost per Total Profit Total
sales unit cost unit per unit profit
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
A 900 50 45000 45 40500 5 4500
B 650 100 65000 85 55250 15 9750
C 1200 75 90000 65 78000 10 12000
2750 200000 173750 26250
Actuals
A 1000 55 55000 45 45000 10 10000
B 700 95 66500 85 59500 10 7000
C 1100 78 85800 65 71500 13 14300
2800 207300 176000 31300

Revised Standard Quantity (RSQ) = Total Actual Quantity X Std. Ratio

= 2800 X (18:13:24)
18
A = 2800 X ----- = 916
55

13
B = 2800 X ----- = 662
55
 24
C = 2800 X ----- = 1222
55

Calculation of Profit Variances

1) Sales Margin Variance = Budgeted Profit – Actual Profit

Toy Budgeted Profit (Rs.) Actual Profit (Rs.) Variance (Rs.)
A 4500 10000 5500 (F)
B 9750 7000 2750(A)
C 12000 14300 2300 (F)
Total 26250 31300 5050 (F)

2) Sales Price Variance = Standard Profit – Actual Profit

Where,
Standard Profit = Actual Quantity X Profit per unit
Toy Standard Profit (Rs.) Actual Profit (Rs.) Variance (Rs.)
A 5000 10000 5500 (F)
B 10500 7000 3500 (A)
C 11000 14300 3300 (F)
Total 26250 31300 4800 (F)

3) Sales Volume Variance =

Standard Profit per unit X (Standard Quantity – Actual Quantity)
Toy Std. profit X Std. quantity (Rs.) Actual Quantity (Rs.) Variance (Rs.)
A 5 X 900 1000 500 (F)
B 15 X 650 700 1000 (F)
C 10 X 1200 1100 1000 (A)
Total 250 (F)
4) Sales Quantity Variance =
Standard profit per unit X (Standard Quantity – Revised Standard Quantity)

Toy Std. profit X Std. quantity RSQ Variance (Rs.)

A 5 X 900 - 916 80 (F)
B 15 X 650 - 662 180 (F)
C 10 X 1200 - 1222 220 (F)
Total 480 (F)

II Sales Mix Variance =

Standard profit per unit X (Revised standard quantity – actual quantity)
Toy Std. profit (Rs.) X Revised std. quantity - Actual quantity Variance (Rs.)
A 5X 916 1000 420 (F)
B 15 X 662 700 570 (F)
C 10 X 122 1100 1220 (A)
Total 230 (A)

Check
Sales Volume Variance = Sales Quantity Variance + Sales Mix Variance
250 (F) = 480 (F) + 230 (A)

Sales Margin Variance = Sales Price Variance + Sales Volume Vaiance

5050(F) = 4800 (F) + 250 (F)

CONTROL RATIOS
Now Standard costing is used by the management of an organisation as a control
technique – variance computed would given ideal to the management to study the extent
of variation from the standards as are set by them. These variances are expressed in
monetary terms and do not per se give any idea of trends over a period of time.
Therefore, in order to study trends, Control Ratios are used, which are computed using
data used for variance analysis and give an idea to the management of an organisation
about the trends over a period at a time or from period to period.

The main Control Ratios are:

Standard Hours for Actual Production

1. Activity Ratio = -------------------------------------------------- X 100
Standard Hours for Budgeted Production

Available Working Days

2. Calender Ratio = ---------------------------------- X 100
Budgeted Working Days

Standard Hours for Actual Output

3. Efficiency Ratio = ----------------------------------------------- X 100
Actual Hours

Budgeted Hours
4. Standard Capacity Usage Ratio = ------------------------------------ X 100
Maximum Possible Hours
 Actual Hours Worked
5. Capacity Utilisation Ratio = -------------------------------------- X 100
Maximum possible hours in
Budgeted period

Disposition of Variances

The organisation, where standard costing system is not in use, accounting records contain
only actuals and there will be no variances. When standard costing system is used then
accounting records contain both standard costs and actual costs. The variances arise at
the end of the accounting period and the management should take corrective measures for
the disposal of variances. The accountants suggests several methods for treating the
variances which were as follows:

1. Allocate the Variances to Inventories

According to this method the variances are distributed over stocks of raw materials, wage
costs, overheads or finished stock valued at cost.
Now when this happens the real costs only enter the account books and consequently are
reflected in the financial statements. The adjustment of variances is made only in the
general ledger and not in subsidiary books. The distribution of variances is not done to
products. As variances are not actuals. Losses should not be taken to profit and loss
account. The standard costs and variances that are observed are displayed for control
purposes to the management.

2. Transfer to Profit and Loss Account

According to this method the stocks of inventories work in progress and finished goods
are valued at standard cost and variances are transferred to the P & L A/c. Now this
method ensures that valuation of stock is done uniformly and variances are transferred
thereby revealing the extent of variation to the management.
3. Transfer to the Reserve Account
Under this method, variances are carried formal to the next financial year as deferred
item by crediting the same to a reserve account to be set off in the subsequent year or
years. The favourable and adverse variances may cancel each other in the course of
reasonable time. This method is useful in cases where reasonable fluctuations occurs and
the variance may be disposed off during the course of time.

4. Combination of (1) and (2) methods

Though the above first two methods easy to follow, management upon their needs choose
a combination of the above two methods. The variances which are controllable and arise
out of over sight or carelessness of officials can be transferred to profit and loss a/c, the
uncontrollable can be absorbed by the cost of inventories.

EXERCISES

1) Explain how the variance analysis relating to overheads differ from that relating
to material and labour

2) In what ways can we analyse sales variances. Explain in detail.

3) Write short notes as the following:

i) Variable overhead expenditure variance

ii) Fixed overhead volume variance
iii) Fixed overhead calendar variance
iv) Variable overhead efficiency variance
v) Sales margin variance
vi) Sales price variance (based on turnover)
vii) Sales volume variance
4) A Company manufacturing two products operates standard costing system. The
Standard overhead content of each product in cost centre 101 is Product A Rs.
2.40 (8 direct hours @ Rs. 0.30 per hour) Product B Rs. 1.80 (6 direct labour
hours @ Rs.0.30 per hour. The rate of Rs. 0.30 per hour is arrived at as follows:
Budgeted overhead RS.570
Budgeted Direct Labour Hours 1,900

For the month of October the following data was recorded for cost centre 101
Output of Product A 100 Units
Output of Product B 200 Units
No opening or closing stock
Actual Direct labour hours working 2,320
Actual overhead incurred Rs.640
a. You are required to calculate total overhead variance for the month of October
b. Show its division into
i. Overhead Expenditure Variance
ii. Overhead Volume Variance
iii. Overhead Efficiency Variance

5) In a factory the standard units of production for the year were fixed at 1,20,000
units and estimated overhead expenditure were estimated to be:
Rs.
Fixed 12,000
Variable 6,000
Semi-variable 1,800
Actual production during April of the year was 8000 units. Each month has 20
working days. During the months in question there was one statutory holiday.
Actual overhead amounted to:
Fixed 1190
Variable 6000
 Semi-variable 192
Semi variable charges are considered to include 60% expenses of fixed nature.
Find out expenditure, volume, calendar variances.

6) Standard Actual
No. of working days 20 22
Man hours per day 8000 8400
Output per man hour in unit 1.0 0.9
Overhead Cost (Rs.) 1,60,000 1,68,000
Calculate Overhead Variances:
a) Overhead Cost Variances
b) Overhead Efficiency Variances
c) Overhead Capacity Variance
d) Overhead Calender Variance

7) The sales manager of a company engaged in the manufacture and sale of three
products P, Q and R gives you the following information for the month of
October, 1982.
Budgeted Sales
Product Units Sold Selling Price per Unit
P 2000 Rs.012
Q 2000 Rs.8
R 2000 Rs.5
Actual Sales
P 1500 units for Rs.15000
Q 2500 units for Rs.17500
R 3500 units for Rs.21,000
You are required to calculate the following variances:
a) Sales Price Variance
b) Sales Volume Variance
C) Sales Quantity Variance
 d) Sales Mix Variance
e) Sales Revenue Variance

8) From the following Budgeted and Actual figures, calculate the variances in
respect of profit.
Budget
Sales 2000 units @ Rs.15 each 30000
Cost of sales @ Rs.12 each 24000
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Profit 6000
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Actual
Sale 1900 unit @ Rs.14 each 26,600
Cost of sales @ Rs.10 each 19,000
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Profit 7,600
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