Variance Analysis
Topic Six
by Dr. Ong Tze San
tzesan@econ.upm.edu.my
Standard Costs
Standards are benchmarks or “norms”
for measuring performance. Two types
of standards are commonly used.
Quantity standards
specify how much of an
input should be used to
make a product or
provide a service.
Cost (price)
standards specify
how much should be
paid for each unit
of the input.
Setting Standard Costs
Accountants, engineers, purchasing
agents, and production managers
combine efforts to set standards that
encourage efficient future production.
Setting Direct Material Standards
Price
Standards
Quantity
Standards
Final, delivered
cost of materials,
net of discounts.
Summarized in
a Bill of Materials.
Setting Direct Labor Standards
Rate
Standards
Time
Standards
Often a single
rate is used that reflects
the mix of wages earned.
Use time and
motion studies for
each labor operation.
Setting Variable Overhead Standards
Rate
Standards
Activity
Standards
The rate is the
variable portion of the
predetermined overhead
rate.
The activity is the
base used to calculate
the predetermined
overhead.
Price and Quantity Standards
Price and quantity standards are
determined separately for two reasons:
 The purchasing manager is responsible for raw
material purchase prices and the production manager
is responsible for the quantity of raw material used.
 The buying and using activities occur at different times.
Raw material purchases may be held in inventory for a
period of time before being used in production.
A General Model for Variance Analysis
Variance Analysis
Price Variance
Quantity Variance
Difference between
actual price and
standard price
Difference between
actual quantity and
standard quantity
A General Model for Variance Analysis
Variance Analysis
Price Variance
Quantity Variance
Materials price variance
Labor rate variance
VOH spending variance
Materials quantity variance
Labor efficiency variance
VOH efficiency variance
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
(AQ × AP) – (AQ × SP)
(AQ × SP) – (SQ × SP)
AQ = Actual Quantity
AP = Actual Price
SP = Standard Price
SQ = Standard Quantity
Variances:
Using the Factored Equations
Materials price variance
MPV = AQ (AP - SP)
Materials quantity variance
MQV = SP (AQ - SQ)
Labor rate variance
LRV = AH (AR – SR
Labor efficiency variance
LEV = SR (AH - SH)
Variable manufacturing overhead spending variance
VMSV = AH (AR - SR)
Variable manufacturing overhead efficiency variance
VMEV = SR (AH - SH)
Exh.
10-9
A Statistical Control Chart
Warning signals for investigation
Favorable Limit
•
Desired Value
•
•
•
•
•
•
Unfavorable Limit
1
2
3
4
5
6
7
Variance Measurements
•
8
•
9