COST VARIANCE

Cost Variance



Cost Variance

Calculation of Smithton Inc. Variances:

Budgeted

D.M.

6

D.L

5

F.OH

2.5

Total

13.5

S.P

20

Profit

6.5

8450

Units

1300

Actual

Variance

Revenue

20,000

D.M.

6,500

6.5

-0.5

D.L

5,250

5.25

-0.25

F.OH

3,100

3.1

-0.6

Total

14,850

14.85

-1.35

S.P

20,000

Profit

5,150

3,300

Units

1,000

Direct Material Variances

The differences from original budget figures and actual figures must be examined in order to understand what changes occurred and what can be done to rectify the situation—namely, to reduce or eliminate the variation.

In variance analysis (accounting) direct material total variance is the difference between the actual cost of actual number of units produced and its budgeted cost in terms of material. Direct material total variance can be divided into two components:

* the direct material price variance,

* the direct material usage variance.

Direct Labor Variance

Direct labour cost variance is the difference between the standard cost for actual production and the actual cost in production.

There are two kinds of labour variances. Labour Rate Variance is the difference between the standard cost and the actual cost paid for the actual number of hours. Labour efficiency variance is the difference between the standard labour hour that should have been worked for the actual number of units produced and the actual number of hours worked when the labour hours are valued at the standard rate.

Cost Variances for Variable Overhead:

The formulas for splitting the flexible budget variance for variable overhead into a “price” variance and an “efficiency” variance are the same as the formulas for direct materials and direct labor. The “price” variance for variable overhead is called the variable overhead spending variance:

 Spending variance = PV = AQ x (AP - SP)

 Efficiency variance = EV = SP x (AQ - SQ)

Where AP is the actual overhead rate used to allocate variable overhead, and SP is the budgeted overhead rate. The “Q's” refer to the quantity of the allocation base used to allocate variable overhead, so that AQ is the actual quantity of the allocation base used during the period, and SQ is the standard quantity ...