Type and Calculation of Variances

Types of Variances

Material variance is the difference between the standard cost of materials that should have been used for the number of units produced and the actual cost of materials used.
Labour variance measures the difference between the budgeted labour cost and the actual labour cost incurred.
Overhead variance looks at the difference between the standard overhead costs and the actual overhead costs incurred.
Sales variance is the difference between the actual sales and the standard (or budgeted) sales. It could be due to changes in selling price or changes in the volume of sales.
Variable cost variance is related to the changes in variable costs due to difference in actual production and budgeted production.
Fixed cost variance looked at the difference in the actual costs from the budgeted fixed costs.

Material Variance: Material Cost Variance can be calculated as (Standard Quantity * Standard Price) - (Actual Quantity * Actual Price).
Labour Variance: Labour Cost Variance can be calculated as (Standard Hours * Standard Rate) - (Actual Hours * Actual Rate).
Overhead Variance: To calculate Overhead Variance, subtract the actual variable overhead from the fixed overhead obtained by multiplying the standard variable overhead rate by the actual activity level.
Sales Variance: Sales Variance can be calculated by subtracting Actual Sales from Budgeted Sales.
Variable cost variance: Variable Cost Variance is usually the sum of direct materials, direct labor, and variable overhead variances.
Fixed cost variance: Fixed Cost Variance can be calculated as Actual Fixed Costs - Budgeted Fixed Costs.

The purpose of variance analysis is to identify discrepancies between actual and budgeted costs in order to probe their causes, and correct them.
Variance analysis plays a crucial role in managerial decision making, as it provides the basis for cost control and performance measurement.
If a variance is unfavorable (actual cost is more than standard cost), it is indicated by an F, while a favorable variance (actual cost is less than standard cost) is indicated by an A.
Variance analysis involves finding the reasons for deviations, taking necessary corrective actions, and adjusting future standards, if necessary.