Variance Analysis

VARIANCE ANALYSIS

• AYMEN CHOUDHARY (FA09-BBA-021)• MEHROZ ZIA (FA08-BBA-056)• MASAB UMAIR(FA08-BBA-063)• WALEED ABBAS(FA08-BBA-096)

GROUP MEMBERS

DEFINATION TYPES OF VARIANCE ANALYSISSPENDING VARIANCEIDLE CAPACITYQUESTIONS

CONTENTS

In budgeting (or management accounting in general), a variance is the difference between a budgeted, planned or standard amount and the actual amount incurred/sold.

Variances can be computed for both costs and revenues.

The concept of variance is intrinsically connected with planned and actual results and effects of the difference between those two on the performance of the entity or company.

WHAT IS VARIANCE ANALYSIS?

• Variances can be divided according to their effect or nature of the underlying amounts.

• When effect of variance is concerned, there are two types of variances:

1. • When actual results are better than expected results given variance is described as favorable variance. In common use favorable variance is denoted by the letter F - usually in parentheses (F).

TYPES OF VARIANCE ANALYSIS.

1. • When actual results are worse than expected results given variance is described as adverse variance, or unfavourable variance. In common use adverse variance is denoted by the letter A or the letter U - usually in parentheses (A).

• The second typology (according to the nature of the underlying amount) is determined by the needs of users of the variance information and may include e.g.:

1. • Variable cost variances2. o Direct material variances3. o Direct labour variances4. o Variable production overhead variances

CONTD….

• Direct material variance:The direct material total variance is the difference between what the output actually cost and what it should have cost, in terms of material. • Direct labor variance:The direct labour total variance is the difference between what the output should have cost and what it did cost, in terms of labour.

…..

• Variable production variance:The variable production overhead total variance is the difference between what the output should have cost and what it did cost, in terms of variable production overhead. • Fixed production overhead variance:The total fixed production variance is an attempt to explain the under- or over-absorbed fixed production overhead.

…..

Remember that overhead absorption rate =

Budgeted fixed production overhead

Budgeted level of activity

• Sales 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.

….

• A variance due to budget or expense factors.• If actual overhead had been less then budgeted,

the spending variance would be favorable• Any difference between actual and budgeted

fixed overhead would be included as part of the spending variance.

SPENDING CAPACITY

• A variance due to volume or activity factors.• The cause of a capacity variance, whether

favorable or unfavorable should always be determined and possible reasons for the variance discovered

IDLE CAPACITY

1. The Kreiter Company was totally destroyed by the fire during June. However, certain fragments of its cost records were recovered with the following date: idle capacity variance $1,266 favorable: spending variance $779 unfavorable: and applied factory overhear $16,234

• required.:• Budget allowance, based on capacity utilized.• Actual factory overhead.

PRACTICAL QUESTIONS

2. The Henkel company made the following data available from its accounting records and reports:• $600,000 estimated factory overhead\200,000

estimated direct labor hours= $3.00 predetermined factory overhead rate.

• Further analysis indicates that one third of the rate is variable cost oriented.

• During the year, the company worked, 210,000 direct labor hours, and actual FOH expenditures were $631,000

• Required: The spending and idle capacity variance.

…..

ANY QUESTIONS?