COMPREHENSIVE ILLUSTRATION OF VARIANCE ANALYSIS

Assume that the company manufactures smoked crabs in its Smoking Department with the following
ingredients on a per lot basis:

Material standard:
3,000 pounds of crabs at P5 per pound P15,000
Labor standard:
40 hours at P15 per hour 600
Variable overhead standard:
5 hours at P150 per machine hour 750
(P150 = budgeted monthly variable OH of P15,000 at Budgeted activity
of 100 machine hours)
Fixed overhead standard:
8 hours at P140 per hour of move or wait time 1,120
(P140 = budgeted monthly Fixed overhead of P28,000 at a budgeted
activity of 200 hours)
Total standard Smoking Dept. cost for 1 lot of smoked crabs P17,420

Actual data for the month in the Smoking Department:

Number of lots produced (47,500 pounds) 20 lots

Pounds of crabs purchased 61,400
Pounds of crabs used 60,450
Price per pound of crabs purchased P5.05
Direct labor hours incurred 1,000
Total direct labor cost incurred P14,350
Total variable overhead cost P19,000
Machine hours incurred 87
Total fixed overhead cost P30,000
Hours of move/ wait time incurred 140
SOLUTIONS:

MATERIAL VARIANCES

Actual Cost (AP x AQ)

P5.05 x 60,45 lbs. P305,272.50

MPUV = P3,022.50 UF
Adjusted cost (SP x AQ)
P5.00 x 60,450 P302,250

MQV = P2,250 UF
Standard Cost (SP x SQ)
20 lots x 3,000 lbs. = 60,000 P300,000
P5.00 x 60,000

Total Variance P5,272.50 UF

Materials Price Usage Variance (MPUV) = indicates whether the amount paid for material was below or
above the standard price.

Materials Quantity Variance (MQV) = indicates whether the actual quantity used was below or above
the standard quantity allowed for the actual output.

LABOR VARIANCES

Actual Cost (AP x AQ)

P14.35 x 1,000 mh P14,350

LRV = P650 F
Adjusted cost (SP x AQ)
P15 x 1,000 P15,000

LEV = P300 UF
Standard Cost (SP x SQ)
20 lots x 40 hrs per lot = 800 P12,000
hrs
P15 x 800

Labor Rate Variance (LRV) = shows the difference between the actual wages paid to labor for the period
and the standard wages for all hours worked.

Labor Efficiency Variance (LEV) = shows the difference between the actual hours worked and the
standard hours allowed for the production achieved results.
For Variable Factory Overhead (VOH)

A. One Variance method

Actual VOH Cost (AP x AQ)

P19,000

Total variance P4,000 UF

Applied VOH (SP x SQ)
Applied VOH rate x Std Quantity P15,000
Of Input allowed on Actual
Output Achieved
20 lots at 5mh per lot x P150

B. Two variance method

Total variance is further analyzed into:
a) VOH Spending Variance
b) VOH Efficiency Variance

Actual VOH Cost (AP x AQ)

P19,000

VOH Spending variance

P5,950 UF
Budgeted VOH based on actual P13,050
input (SP x AQ) P150 x 87 mh

VOH Efficiency variance

P1,950 F
Applied VOH (SP x SQ)
Applied VOH rate x Std Quantity
of input allowed on actual
output achieved
20 lots at 5 mh per lot x P150 P15,000

VOH Spending Variance – difference of actual VOH and the Budgeted VOH based on actual input activity
rate are often caused by price difference, paying higher or lower prices than standard prices allowed.

VOH Efficiency Variance – difference of budgeted VOH based on actual input activity and applied VOH
quantifies the effect of using actual input which is higher than the standard for the production achieved.
 I. If FOH is recorded separately as to variable and fixed

For FIXED Factory Overhead (FFOH)

One variance method:

Actual FFOH cost (lump amount)

P30,000

Total variance P7,600 UF

Applied FFOH (SP x SQ)
Applied FFOH rate x Std Quantity P22,400
Of Input allowed on Actual
Output Achieved
20 lots at 8 hrs per lot x P140

Two variance method:

Total variance is further analyzed into:

a) FFOH Spending Variance

b) FFOH Efficiency Variance

Actual FFOH Cost (AP x AQ)

P30,000

FFOH Spending variance

P2,000 UF
Budgeted FFOH cost (SP x P28,000
capacity)
P140 x 200 hrs or simply
The amount of budget at lump
sum

FFOH volume variance P5,600

UF
Applied VOH (SP x SQ)
Applied VOH rate x Std Quantity
of input allowed on actual
output achieved
20 lots at 5 mh per lot x P150 P22,400
Applied FFOH- is related to the standard or predetermined application rate and the standard hours
allowed for the actual output. Standard hours allowed is 8 hrs per lot and actual lots is 20, therefore,
standard hours allowed is 160 (8 x 20 lots) at P140 per hour.

Standard input allowed for the achieved production level- measures capacity utilization for the period.

FFOH Spending variance – difference of actual fixed overhead and the budgeted fixed overhead based
on budgeted input of activity at actual output achieved.

FFOH Volume variance - difference between budgeted and applied fixed overhead. It is caused solely by
producing at a level that differs from that used to compute the predetermined fixed overhead rate.

To summarize variances that will equal to a four-variance method:

Actual Factory Overhead

Variable P19,000
Fixed 30,000 P49,000
Applied Factory Overhead
VOH P150 x 100 (20 lots of 5mh) P15,000
FFOH P140 x 160 (20 lots of 8 mh) 22,400 P37.400
Total Overhead variance P11,600 UF

VOH Spending variance P5,950 UF

VOH Efficiency variance 1,950F P4,000 UF
FFOH Spending variance 2,000 UF
Volume variance 5,600 UF P7,600 UF
Total Overhead variance P11,600 UF

II. If FOH is not recorded separately as to variable and fixed

One variance method

Actual Cost (VOH + FFOH)

P49,000

Total variance P11,600 UF

Applied OH (SP x SQ)
Combined OH rate x Std. input P37,400
allowed for actual production
achieved
Total Applied overhead:

VOH 20 lots x 5mh = 100mh at P150 per mh = P15,000

FFOH 20 lots x 8 hrs = 160 at P140 22,400

Total applied factory overhead P37,400

Applied Overhead is equal to the sum of

VOH rate at standard hours allowed based on actual production achieved + FFOH rate at standard hours
allowed based on actual production achieved.

Two variance method:

Total variance is further analyzed into:

a) Overhead Spending Variance

b) Overhead Efficiency Variance or Volume variance

Actual OH Cost (AP x AQ)

P49,000

Budget variance P6,000 UF

Budgeted OH based on P43,000
Standard input allowed for
output achieved *

Volume variance P5,600 UF

Applied OH ** P37,400

*Budgeted OH

VOH 20 lots x 5mh = 100mh at P150 per mh = P15,000

FFOH based on the budgeted lump sum 28,000

Total applied factory overhead P43,000

**VOH 20 lots x 5mh = 100mh at P150 per mh = P15,000

FFOH 20 lots x 8 hrs = 160 at P140 22,400

Total applied factory overhead P37,400

Budget variance – difference of total actual overhead costs and the Budgeted OH based on standard
input allowed for actual output achieved.

Volume variance – difference between total budgeted overhead based on the standard input allowed for
the actual output achieved and the total applied overhead.

Three Variance Method

It is the Two Variance method further analyzed into Overhead Spending Variance, Overhead Efficiency
Variance and Volume variance.

Actual OH Cost (AP x AQ)

P49,000

OH Spending Variance P7,950

UF
Budgeted OH based on Actual P41,050
input activity (budgeted)*

OH Efficiency variance P1,950

UF
Budgeted OH based on Volume Variance
Standard input allowed for P5,600 UF
output achieved P43,000

Total Applied OH P37,400

*Budgeted OH based on actual input activity

VOH P150 x 87 mh = P13,050

FFOH based on the budgeted lump sum 28,000

Total P41,050

Overhead spending variance – is the difference of total actual overhead and budgeted overhead at the
actual hours of activity.

Overhead Efficiency variance – is related solely to variable overhead and is the difference between total
budgeted overhead at the actual input activity and total budgeted overhead at the standard input
allowed (output activity).

Volume variance - is the amount the same as in the two variance method and also in the four variance
method.