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Cost accounting variance analysis

Cost accounting variance analysis

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Cost Accounting - Variance Analysis

When the actual cost differs from the standard cost, it is called variance. If the actual cost is less

than the standard cost or the actual profit is higher than the standard profit, it is called favorable

variance. On the contrary, if the actual cost is higher than the standard cost or profit is low, then

it is called adverse variance.

Each element of cost and sales requires variance analysis. Variance is classified as follows:

Direct Material Variance

Direct Labor Variance

Overhead Variance

Sales Variance

Direct Material Variance

Material variances can be of the following categories:

Material Cost Variance

Material Price Variance

Material Usage Variance

Material Mix Variance

Material Yield Variance

Material Cost Variance

Standard cost of materials for actual output – Actual cost of material used

Material price variance + Material usage or quantity variance

Material price variance + Material mix variance + Material yield variance

Material Price Variance

Actual usage ( Standard Quantity Price – Actual Unit Price)

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

Material Usage or Quantity Variance

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Material usage or Quantity variance : Standard price per unit (Standard Quantity – Actual

Quantity )

Material Mix Variance

Material mix variance arises due to the difference between the standard mixture of material and

the actual mixture of Material mix.

Material Mix variance is calculated as a difference between the standard prices of standard mix

and the standard price of actual mix.

If there is no difference between the standard and the actual weight of mix, then:

Standard unit cost (Standard Quantity – Actual Quantity )

Standard Cost of Standard Mix – Standard cost of Actual Mix

Sometimes due to shortage of a particular type of material, standard is revised; then:

Standard unit cost (Revised Standard Quantity – Actual Quantity)

Standard cost of revised Standard Mix – Standard Cost of Actual mix

If the actual weight of mix differs from the standard weight of mix, then:

Standard cost of revised standard mix ×

Total weight of actual mix mixTotal weight of revised standard mix

Material Yield Variance

When the standard and the actual mix do not differ, then

Yield Variance = Standard Rate × (Actual Yield – Standard Yield)

Standard Rate =

Standard cost of standard mix Net standard output (i.e.Gross output−Standard loss)

Direct Labor Variance

Direct labor variances are categorized as follows:

Labor Cost Variance

Labor Rate of Pay Variance

Total Labor Efficiency Variance

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Cost Accounting - Variance Analysis When the actual cost differs from the standard cost, it is called variance. If the actual cost is less than the standard cost or the actual profit is higher than the standard profit, it is called favorable variance. On the contrary, if the actual cost is higher than the standard cost or profit is low, then it is called adverse variance. Each element of cost and sales requires variance analysis. Variance is classified as follows: Direct Material Variance Direct Labor Variance Overhead Variance Sales Variance Direct Material Variance Material variances can be of the following categories: Material Cost Variance Material Price Variance Material Usage Variance Material Mix Variance Material Yield Variance Material Cost Variance Standard cost of materials for actual output – Actual cost of material used Or Material price variance + Material usage or quantity variance Or Material price variance + Material mix variance + Material yield variance Material Price Variance Actual usage ( Standard Quantity Price – Actual Unit Price) Actual Usage = Actual Quantity of material (in units) used Standard Unit Price = Standard Price of material per unit Actual U ...
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