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Chapter 7
Variance Analysis
Prepared by
Diane Tanner
University of North Florida
Variance Analysis
 Often performed separately for each of the four
manufacturing costs

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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
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
Labor Variances
P
A
S
S
Q
A
A
S
Labor Price
(Rate) Variance
Rate per hour is
more or less than
allowed.
Total Labor
Variance
Labor Quantity
(Efficiency) Variance
Incurred too many
or less than allowed
hours.
Labor Price Variance
+
Labor Quantity Variance
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.
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
Isolation of Material Variances
Quantity Variance
Price Variance
Computed on the entire
quantity purchased
Computed only on the
quantity used
The material price
variance is isolated at
the purchase date.
Why?
As a purchasing manager,
I need the price variance
sooner so that I can better
identify purchasing problems.
I need to know as early
as possible to make
product pricing
or quantity changes
Material Variances
P
Q
A
S
S
Ap
Ap
A
u
S
S
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
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.
Variable Overhead Variances
Actual
VOH
Cost
Actual
DLH x
Std Rate
VOH Spending
Variance
VOH
Flexible
Budget
VOH Efficiency
Variance
VOH Flexible
Budget Variance
Applied
VOH
VOH Production
Volume Variance
VOH Production
Volume Variance
Total VOH Variance
This is the underapplied or overapplied
variable overhead amount.
Fixed Overhead Variances
Actual
FOH
Cost
FOH
Static
Budget
FOH Spending
Variance
FOH
Flexible
Budget
FOH Efficiency
Variance
FOH Flexible
Budget Variance
Applied
FOH
FOH Production
Volume Variance
FOH Production
Volume Variance
Total FOH Variance
This is the underapplied or overapplied
fixed overhead amount.
Applied Overhead
Overhead costs are applied to products and services
using a predetermined overhead rate (POHR).
Variable OH rate =
Fixed OH rate =
Estimated VOH
Estimated Activity
Estimated FOH
Estimated Activity
Applied VOH = [VOHR × Actual Activity]
Applied FOH = [FOHR × Actual Activity]
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
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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.
Behavioral Considerations
Standard costs and variance
analysis can
1) Provide very useful control
measures
2) Aid in performance
evaluations
3) Cause dysfunctional
behavior among employees
and managers
The End
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