1. Variance Analysis Chapter 7 Prepared by Diane Tanner
University of North Florida

2. Are all favorable variances good?
Variance Analysis
Often performed separately for each of the four manufacturing costs
Direct labor variances
Direct materials variances
Variable manufacturing overhead variances
Fixed manufacturing overhead variances
Are all favorable variances good?
Unfavorable Variance
 actual cost > standard
Favorable Variance
 actual cost < standard

3. Causes of Labor Variances
Two causes
Price (P)
Paid too much per hour or paid less than expected per hour
Quantity (Q)
Used too many DL hours or used fewer DL hours than expected

4. Labor Quantity Variance
Labor Variances P Q
A S S
A A S
Labor Price (Rate) Variance
Labor Quantity (Efficiency) Variance
Rate per hour is more or less than allowed.
Incurred too many or less than allowed hours.
Total Labor Variance
Labor Price Variance +
Labor Quantity Variance

5. Responsibility for Labor Variances
Production supervisors make work assignments,
monitor the efficiency of employees,
authorize pay raises, and terminate employees.
I am responsible for the labor rate and labor efficiency variances.

6. Causes of Material Variances
Two causes
Price (P)
Paid too much or paid less than expected for material per unit
Quantity (Q)
Used too much or used less than expected

7. Isolation of Material Variances
Price Variance
Computed on the entire quantity purchased
Quantity Variance
Computed only on the quantity used
The material price variance is isolated at the purchase date. Why?
I need to know as early as possible to make product pricing
or quantity changes
As a purchasing manager,
I need the price variance sooner so that I can better identify purchasing problems.

8. P Q A S S S A A A S Material Variances Total Material Varianceu
Material Price Variance
Material Quantity Variance
Indicates if materials cost more or less per material unit than allowed.
Indicates if more or less materials were used.
Total Material Variance
Material Price Variance +
Material Quantity Variance

9. Responsibility for Material Variances
You used too much material because of poorly trained workers and shoddy equipment maintenance, and you are a lousy scheduler! You make me overnight the material making it cost more, causing unfavorable price variances.
I am not responsible for this unfavorable material quantity variance.
You purchased cheap material, so my people had to use more of it.
Production
Manager
Purchasing
Manager

10. Variable Overhead Variances
Actual VOH Cost
Actual DLH x Std Rate
VOH Flexible Budget
Applied VOH
VOH Spending Variance
VOH Efficiency Variance
VOH Production Volume Variance
VOH Flexible Budget Variance
VOH Production Volume Variance
Total VOH Variance
This is the underapplied or overapplied variable overhead amount.

11. Fixed Overhead Variances
Actual FOH Cost
FOH Static Budget
FOH Flexible Budget
Applied FOH
FOH Spending Variance
FOH Efficiency Variance
FOH Production Volume Variance
FOH Flexible Budget Variance
FOH Production Volume Variance
Total FOH Variance
This is the underapplied or overapplied fixed overhead amount.

12. Applied VOH = [VOHR × Actual Activity]
Applied Overhead
Overhead costs are applied to products and services using a predetermined overhead rate (POHR).
Estimated VOH
Variable OH rate =
Estimated Activity
Estimated FOH
Fixed OH rate =
Applied VOH = [VOHR × Actual Activity]
Applied FOH = [FOHR × Actual Activity]

13. Overhead Variance Responsibility
Spending variances
Production supervisor – if he selects specific OH items
Purchasing manager – if he works with supplier on cost
Efficiency variances
Production supervisor – controls use of overhead items
Production volume variance
No one is responsible  We know why it exists.
Exists because the volume of production/sales is less/more than budgeted

14. Predictable Variances
Variances that always have zero balances
VOH production volume variance
Amount allowed per activity on the flexible budget is the same as the VOH applied
FOH efficiency variance
It is not possible to reduce a FOH cost simply by being more efficient.

15. Behavioral Considerations
Standard costs and variance analysis can
Provide very useful control measures
Aid in performance evaluations
Cause dysfunctional behavior among employees and managers

16. The End