VARIANCE ANALYSIS

VARIANCE ANALYSIS

Variance analysis is defined by Ama (2001) as the process of analyzing the total difference between planned and actual performance into its constituent parts, variance analysis can also be defined as a sign post which alerts management to the need for inquiry into cause of off standard results.

Eze and Ani (2009) indicates that the variance analysis involves the analysis of the causes of variance on three major elements of costs viz; material, labor and overhead. The basic variances will be computed by looking at the components of the total cost of material, labor and overheads. These components are quantity and money value for materials while the components of labor and overhead costs are hours worked and money value. Consequently, there are possible ways of analyzing the basic variances;

Material cost variance (MCV)

It is a principal material variance which occurs when the actual material cost is at variance from the standard material cost, in fact, it is the difference between the standard cost for material and actual material costs.

It is determined thus;
MCV= actual cost –standard cost

(AQ X AP) – (SQ – SP)

Where;

AQ= actual quantity

AP = actual price

SQ = standard quantity

SP = standard price

Direct material price variance (DMPV)

This is caused by paying a higher or lower price than the standard price set for material, while the actual quantity hold constant. In equation form, the material price variance is;
DMPV = (AP – SP) AQ

Direct material usage variance (DMUV)

This is caused by using more or less of the standard amount of materials to produce a product or complete a proves where the standard cost holds constant.
In equation form, the material usage variance is
DMUV = (AQ – SQ) SP

Direct labor total variance (DLV)

This is a principal variance. It occurs as a result of the difference between the actual wage pay and standard wage pay.
DLV = (SH X SR) – (AH X AR)

Direct labor rate variance (DLRV)

This is caused by paying a higher or lower rate of pay than standard to produce a product or complete process. The direct labor rate variance is compute by multiplying the difference between the actual direct hour rate paid (AR) and the standard direct labor rate allowed (SR) by the hours of direct labor services required (AH).

In equation form, direct labor rate variance is
DLRV =(AR – SR) AH

Direct labor efficiency variance (DLEV)

It is caused by using more or less of than the standard amount of direct labor hours to produce a product or complete a process. The direct labor efficiency variance is computed by multiplying the difference between the actual direct labor hours required (AH) and the standard direct labor allowed (SH) by the standard direct labor hour rate per hour (SR).

In equation form,
DLEV = (AH –SH) SR

Variable overhead expenditure variance

It is the difference between the actual variable overheads incurred and the allowed variable overhead based on the actual hours worked.
VOEV= Actual variable overhead- (actual labour hour x overhead absorption rate)

Variable overhead efficiency variance

This is the difference between the allowed variance overhead and the absorbed variable overhead.

VOEV= (Actual labour hours – standard labor hours) x variable overhead expenditure rate

Fixed overhead expenditure variance

This is the difference between the actual fixed expenditure attributed and charged to a particular production period and the budget cost allowance for that production period. Alternatively, it is the difference between actual fixed overhead and allowed or budgeted fixed overheads.
Fixed overhead expenditure variance= Actual variable overhead x (actual labour hour x variable overhead absorption rate).

Fixed overhead efficiency variance

This is part of the fixed production overhead volume variance. It is the difference between the actual direct labor hours worked times by the standard hourly absorption rate; and the standard cost absorbed in the production accomplished.

Fixed overhead efficiency variance= Actual labour hours – standard labour hours) x variable absorption rate

Fixed overhead capacity variance :

This is part of the fixed production overhead volume variance. It is the difference between the actual direct labor hours worked times by the standard hourly absorption rate at the budgeted cost allowance for the period.

Fixed overhead capacity variance = (actual hours x fixed overhead absorption rate) – budgeted expenditure