VARIANCES ANALYSIS PRACTICE QUESTIONS

Question 1
Standard Cost for Product RBT

	£
Materials (10kg x £8 per kg)	80
Labour (5hrs x £6 per hr) ¬	30
Variable O/Hds (5hrs x £8 per hr)	40
Fixed O/Hds (5hrs x £9 per hr)	45
	195

Budgeted Results
Production	10000 units
Sales	7500 units
Selling Price	£300 per unit

Actual Results
Production	8000 units
Sales	6000 units
Materials	85000 kg Cost £700000
Labour	36000 hrs Cost £330900
Variable O/Hds	£400000
Fixed O/Hds	£500000
Selling Price	£260 per unit

Calculate

1. Material total variance
2. Material price variance
3. Material usage variance
4. Labour total variance
5. Labour rate variance
6. Labour efficiency variance
7. Variable overhead total variance and all sub- variances
8. Fixed Production overhead total Variance and all sub-variances
9. Selling price variance
10. Sales volume variance

Question 2

Standard Cost for Product TUH
	£
Materials (10kg x £8 per kg)	80
Labour (5hrs x £6 per hr) ¬	30
Variable O/Hds (5hrs x £8 per hr)	40
Fixed O/Hds (5hrs x £9 per hr)	45
	195

Budgeted Results
Production	11000 units
Sales	7500 units
Selling Price	£300 per unit

Actual Results
Production	9000 units
Sales	7000 units
Materials	85000 kg Cost £700000
Labour	36000 hrs Cost £330900
Variable O/Hds	£410000
Fixed O/Hds	£520000
Selling Price	£260 per unit

Calculate

1. Material total variance
2. Material price variance
3. Material usage variance
4. Labour total variance
5. Labour rate variance
6. Labour efficiency variance
7. Variable overhead total variance and all sub- variances
8. Fixed Production overhead total Variance and all sub-variances
9. Selling price variance
10. Sales volume variance

Question 3

Standard Cost for Product TD
	£
Materials (10kg x £5 per kg)	50
Labour (5hrs x £6 per hr) ¬	30
Variable O/Hds (5hrs x £8 per hr)	40
Fixed O/Hds (5hrs x £9 per hr)	45
	165

Budgeted Results
Production	8000 units
Sales	7500 units
Selling Price	£300 per unit

Actual Results
Production	11000 units
Sales	10000 units
Materials	85000 kg Cost £700000
Labour	36000 hrs Cost £330900
Variable O/Hds	£400000
Fixed O/Hds	£500000
Selling Price	£320 per unit

Calculate

1. Material total variance
2. Material price variance
3. Material usage variance
4. Labour total variance
5. Labour rate variance
6. Labour efficiency variance
7. Variable overhead total variance and all sub- variances
8. Fixed Production overhead total Variance and all sub-variances
9. Selling price variance
10. Sales volume variance

Question 4

Standard Cost for Product WXYZ
	£
Materials (4kg x £8 per kg)	32
Labour (5hrs x £10 per hr) ¬	50
Variable O/Hds (5hrs x £8 per hr)	40
Fixed O/Hds (5hrs x £6 per hr)	30
	152

Budgeted Results
Production	10000 units
Sales	7500 units
Selling Price	£300 per unit

Actual Results
Production	8000 units
Sales	6000 units
Materials	85000 kg Cost £700000
Labour	36000 hrs Cost £330900
Variable O/Hds	£400000
Fixed O/Hds	£500000
Selling Price	£260 per unit

Calculate

1. Material total variance
2. Material price variance
3. Material usage variance
4. Labour total variance
5. Labour rate variance
6. Labour efficiency variance
7. Variable overhead total variance and all sub- variances
8. Fixed Production overhead total Variance and all sub-variances
9. Selling price variance
10. Sales volume variance

Question 5

Standard Cost for Product RTY
	£
Materials (10kg x £8 per kg)	80
Labour (5hrs x £6 per hr) ¬	30
Variable O/Hds (5hrs x £8 per hr)	40
Fixed O/Hds (5hrs x £9 per hr)	45
	195

Budgeted Results
Production	13000 units
Sales	10000 units
Selling Price	£300 per unit

Actual Results
Production	12000 units
Sales	9000 units
Materials	90000 kg Cost £750000
Labour	40000 hrs Cost £350000
Variable O/Hds	£500000
Fixed O/Hds	£600000
Selling Price	£350 per unit

Calculate

1. Material total variance
2. Material price variance
3. Material usage variance
4. Labour total variance
5. Labour rate variance
6. Labour efficiency variance
7. Variable overhead total variance and all sub- variances
8. Fixed Production overhead total Variance and all sub-variances
9. Selling price variance
10. Sales volume variance

Question 6

Standard Cost for Product RED
	£
Materials (10kg x £7 per kg)	70
Labour (5hrs x £6 per hr) ¬	30
Variable O/Hds (5hrs x £8 per hr)	40
Fixed O/Hds (5hrs x £9 per hr)	45
	185

Budgeted Results
Production	10500 units
Sales	7800 units
Selling Price	£310 per unit

Actual Results
Production	8500 units
Sales	6200 units
Materials	87000 kg Cost £700000
Labour	36000 hrs Cost £330900
Variable O/Hds	£400000
Fixed O/Hds	£550000
Selling Price	£270 per unit

Calculate

1. Material total variance
2. Material price variance
3. Material usage variance
4. Labour total variance
5. Labour rate variance
6. Labour efficiency variance
7. Variable overhead total variance and all sub- variances
8. Fixed Production overhead total Variance and all sub-variances
9. Selling price variance
10. Sales volume variance

Question 7

Standard Cost for Product BUZZ
	£
Materials (3kg x £8 per kg)	24
Labour (5hrs x £10 per hr) ¬	50
Variable O/Hds (5hrs x £9 per hr)	45
Fixed O/Hds (5hrs x £10 per hr)	50
	169

Budgeted Results
Production	10000 units
Sales	7500 units
Selling Price	£300 per unit

Actual Results
Production	8000 units
Sales	6000 units
Materials	85000 kg Cost £700000
Labour	36000 hrs Cost £330900
Variable O/Hds	£400000
Fixed O/Hds	£500000
Selling Price	£260 per unit

Calculate

1. Material total variance
2. Material price variance
3. Material usage variance
4. Labour total variance
5. Labour rate variance
6. Labour efficiency variance
7. Variable overhead total variance and all sub- variances
8. Fixed Production overhead total Variance and all sub-variances
9. Selling price variance
10. Sales volume variance

Question 8

Standard Cost for Product RST
	£
Materials (10kg x £20per kg)	200
Labour (5hrs x £16 per hr) ¬	80
Variable O/Hds (5hrs x £8 per hr)	40
Fixed O/Hds (5hrs x £9 per hr)	45
	365

Budgeted Results
Production	1000 units
Sales	7500 units
Selling Price	£800 per unit

Actual Results
Production	8000 units
Sales	6000 units
Materials	85000 kg Cost £700000
Labour	36000 hrs Cost £330900
Variable O/Hds	£400000
Fixed O/Hds	£500000
Selling Price	£260 per unit

Calculate

1. Material total variance
2. Material price variance
3. Material usage variance
4. Labour total variance
5. Labour rate variance
6. Labour efficiency variance
7. Variable overhead total variance and all sub- variances
8. Fixed Production overhead total Variance and all sub-variances
9. Selling price variance
10. Sales volume variance

Question 9

Standard Cost for Product FGT
	£
Materials (10kg x £8 per kg)	80
Labour (5hrs x £6 per hr) ¬	30
Variable O/Hds (5hrs x £8 per hr)	40
Fixed O/Hds (5hrs x £9 per hr)	45
	195

Budgeted Results
Production	10000 units
Sales	7500 units
Selling Price	£300 per unit

Actual Results
Production	13000 units
Sales	6000 units
Materials	85000 kg Cost £700000
Labour	36000 hrs Cost £330900
Variable O/Hds	£400000
Fixed O/Hds	£500000
Selling Price	£260 per unit

Calculate

1. Material total variance
2. Material price variance
3. Material usage variance
4. Labour total variance
5. Labour rate variance
6. Labour efficiency variance
7. Variable overhead total variance and all sub- variances
8. Fixed Production overhead total Variance and all sub-variances
9. Selling price variance
10. Sales volume variance

Question 10

Standard Cost for Product White Diamond
	£
Materials (7kg x £9 per kg)	63
Labour (6hrs x £9 per hr) ¬	54
Variable O/Hds (6hrs x £6 per hr)	36
Fixed O/Hds (6hrs x £7 per hr)	42
	195

Budgeted Results
Production	12500 units
Sales	8500 units
Selling Price	£500 per unit

Actual Results
Production	15000 units
Sales	8000 units
Materials	8750 kg Cost £85000
Labour	5200hrs Cost £52900
Variable O/Hds	£25500
Fixed O/Hds	£84000
Selling Price	£600 per unit

1. Material total variance
2. Material price variance
3. Material usage variance
4. Labour total variance
5. Labour rate variance
6. Labour efficiency variance
7. Variable overhead total variance and all sub- variances
8. Fixed Production overhead total Variance and all sub-variances
9. Selling price variance
10. Sales volume variance

Sales mix and quantity variances

The sales volume variance can be subdivided into a mix variance if the proportions of products sold are controllable.

Sales mix variance

This variance indicates the effect on profit of changing the mix of actual sales from the standard mix.

It can be calculated in one of two ways.

• The difference between the actual total quantity sold in the standard mix and the actual quantities sold, valued at the standard margin per unit.
• The difference between actual sales and budgeted sales, valued at (standard profit per unit – budgeted weighted average profit per unit)

Sales quantity variance

This variance indicates the effect on profit of selling a different total quantity from the budgeted total quantity.

It can be calculated in one of two ways.

• The difference between actual sales volume in the standard mix and budgeted sales valued at the standard margin per unit.
• The difference between actual sales volume and budgeted sales valued at the budgeted weighted average profit per unit.

KEY. With all variance calculations, from the most basic (such as variable cost variances) to the more complex (such as mix and yield / mix and quantity variances), it is vital that you do not simply learn formulae. You must understand what your calculations are supposed are supposed to show.

Sales mix and quantity variances

The sales volume variance can be subdivided into a mix variance if the proportions of products sold are controllable.

Sales mix variance

This variance indicates the effect on profit of changing the mix of actual sales from the standard mix.

It can be calculated in one of two ways.

• The difference between the actual total quantity sold in the standard mix and the actual quantities sold, valued at the standard margin per unit.
• The difference between actual sales and budgeted sales, valued at (standard profit per unit – budgeted weighted average profit per unit)

Sales quantity variance

This variance indicates the effect on profit of selling a different total quantity from the budgeted total quantity.

It can be calculated in one of two ways.

• The difference between actual sales volume in the standard mix and budgeted sales valued at the standard margin per unit.
• The difference between actual sales volume and budgeted sales valued at the budgeted weighted average profit per unit.

KEY. With all variance calculations, from the most basic (such as variable cost variances) to the more complex (such as mix and yield / mix and quantity variances), it is vital that you do not simply learn formulae. You must understand what your calculations are supposed are supposed to show.

Materials mix and yield variances

The materials usage variance can be subdivided into a materials mix variance and a materials yield variance if the proportion of materials in a mix is changeable and controllable.
The mix variance indicates the effect on costs of changing the mix of material inputs.
The yield variance indicates the effect on costs of material inputs yielding more or less than expected.
Standard input to produce 1 unit of product X:

		$
Material A	20 kgs x $10	200
Material B	30 kgs x $5	150
		350

In period 3, 13 units of product X were produced from 250 kgs of material A and 350 kgs of material B.
Solution 1: individual prices per kg as variance valuation cases

Mix Variance

                                                     Kgs

Standard mix of actual use:    A: 2/5 x (250+350)     240

                               B: 3/5 x (250+350)     360

                                                      600

                                                     ===

                                      A                      B

Mix should have been              240 kgs                 360 kgs

But was                           250 kgs                 350 kgs

Mix variance in kgs                 10 kgs (A)              10 kgs (F)

x standard cost per kg           x $10                       x $5

Mix variance in $                   $100 (A)               $50 (F)

                                      =====               ===

                                       50 (A)

Total mix variance in quantity is always zero.
Yield variance

                                              A              B

13 units of product X should have used       260 kgs             390 kgs

but actual input in standard mix was              240 kgs      360 kgs

Yield variance in kgs                         20 kgs (F)     30 kgs (F)

x standard cost per kg                          x $10             x $5

                                                $200 (F)                $150 (F)

                                               =====           =====

                                                     $350 (F)

                                                     ====

Solution 2: budgeted weighted average price per unit of input as variance valuation base.
Therefore, Budgeted weighted average price =$350/50 = $7 per kg

•       Mix variance

A              B

13 units of product X should have used          260 kgs                  390 kgs

but did use                                       250 kgs                350 kgs

Usage variance in kgs                         10 kgs (F)             40 kgs (F)

x individual price per kg – budgeted

weighted average price per kg

$ (10 – 7)                                    x $3

$ (5 – 7)                                            ____           x ($2)

                                              $30 (F)                  $80 (A)

                                              ===                      ===

                                                     $50 (A)

                                                     ===

•       Yield variance

A              B

Usage variance in kgs                              10 kg (F)              40 kg (F)

x budgeted weighted average

Price per kg                                    x $7           x $7

                                                $70 (F)               $ 280 (F)

                                                ===           ====

                                                       $350 (F)

                                                       ====

The significance of variances

The decision as to whether or not a variance is so significant that it should be investigated should take a number of factors into account.

• The type of standard being used
• Interdependence between variances
• Controllability
• Materiality

Interdependence between variances

The cause of one (adverse) variance may be wholly or partly explained by the cause of another (favourable) variance.

• Material price or material usage and labour efficiency
• Labour rate and material usage
• Sales price and sales volume

Reasons for variances

Reasons for variances
Material price

• (F) – unforseen discounts received, greater care taken in purchasing, change in material standard
• (A)– price increase, careless purchasing, change in material standard.

Material usage

• (F) – material used of higher quality than standard, more effective use made of material
• (A) – defective material, excessive waste, theft, stricter quality control

Labour rate

• (F) – use of workers at rate of pay lower than standard
• (A) – wage rate increase

Idle time

• Machine breakdown, non-availability of material, illness

Labour efficiency

• (F) – output produced more quickly than expected because of work motivation, better quality of equipment or materials
• (A) – lost time in excess of standard allowed, output lower than standard set because of deliberate restriction, lack of training, sub-standard material used.

Overhead expenditure

• (F) – savings in cost incurred, more economical use of services.
• (A) – increase in cost of services used, excessive use of services, change in type of services used

Overhead volume

• (F) – production greater than budgeted
• (A) – production less than budgeted

Selling price variance

Selling price variance
The selling price variance is a measure of the effect on expected profit of a different selling price to standard selling price. It is calculated as the difference between what the sales revenue should have been for the actual quantity sold, and what it was.

	$
Revenue from 900 units should have been (x $150)	135,000
But was (x $140)	126,000
Selling price variance	9,000 (A)

Sales volume variance
The sales volume variance is the difference between the actual units sold and the budgeted quantity, valued at the standard profit per unit. In other words it measures the increase or decrease in standard profit as a result of the sales volume being higher or lower than budgeted.

Budgeted sales volume	1,000 units
Actual sales volume	900 units
Variance in units	100 units (A)
x standard margin per unit (x $ (150 – 102) )	x $48
Sales volume variance	$4,800 (A)

KEY. Don’t forget to value the sales volume variance at standard contribution marginal costing is in use.

Operating Statement

Operating statements

The most common presentation of the reconciliation between budgeted and actual profit is as follows.

                                                 $              $

Budgeted profit before sales and admin costs                                X

Sales variances - price                          X

               - volume                                                   X

                                                                                  X

Actual sales minus standard cost of sales                                       X

Cost variances                                             $              $

(F)            (A)

Material price                                             X

Material usage etc                                         __                    X

                                               X               X            X

Sales and administration costs                            X

Actual profit                                                             X

Variances in a standard marginal costing system

• No fixed overhead volume variance
• Sales volume variances are valued at standard contribution margin (not standard profit margin)

The fixed production overhead variances

The fixed production overhead variances are calculated as follows:
Fixed production overhead variance
This is the difference between fixed production overhead incurred and fixed production overhead absorbed (= the under- or over-absorbed fixed production overhead)

	$
Overhead incurred	25,000
Overhead absorbed (1,000 units x $24)	24,000
Overhead variance	1,000 (A)

Fixed production overhead expenditure variance
This is the difference between the budgeted fixed production overhead expenditure and actual fixed production overhead expenditure

	$
Budgeted overhead (1,200 x $24)	28,800
Actual overhead	25,000
Expenditure variance	3,800 (F)

Fixed production overhead volume variance
This is the difference between actual and budgeted production volume multiplied by the standard absorption rate per unit.

	$
Actual production at std rate (1,000 x $24)	24,000
Budgeted production at std rate (1,200 x $24)	28,800
	4,800 (A)

Fixed production overhead volume efficiency variance
This is the difference between the number of hours that actual production should have taken, and the number of hours actually worked (usually the labour efficiency variance), multiplied by the standard absorption rate per hour.

Labour efficiency variance in hours	200 hrs (A)
Valued @ standard rate per hour	x $6
Volume efficiency variance	$1,200 (A)

Fixed production overhead volume capacity variance
This is the difference between budgeted hours of work and the actual hours worked, multiplied by the standard absorption rate per hour

Budgeted hours (1,200 x 4)	4,800 hrs
Actual hours	4,200 hrs
Variance in hrs	600 hrs (A)
x standard rate per hour	x $6
	$3,600 (A)

KEY. The fixed overhead volume capacity variance is unlike the other variances in that an excess of actual hours over budgeted hours results in a favourable variance and not an adverse variance as it does when considering labour efficiency, variable overhead efficiency and fixed overhead volume efficiency. Working more hours than budgeted produces an over absorption of fixed overheads, which is a favourable variance.

Sales variances