Commerce - Management Accounting presentation on Control Ratios and Variances (variance analysis)

1. Advanced Managerial Accounting
Deeya Sapra
M.Com (Ist Semester)
Hindu College

2. CONTROL RATIOS a
MANAGERIAL USAGE OFVARIANCES

3. VARIANCE ANALYSIS
Variance analysis is the process of
analyzing variances by sub-dividing
the total variance in such a way that
management can assign responsibility
for any off standard performance.
According to C.I.M.A., London,
Terminology, variance analysis is “the
process of computing the amount of
variance and isolating the causes of
variance between actual and
standard.”

4. Variance analysis can be summarized as an analysis of the difference
between planned and actual numbers. The sum of all variances gives a
picture of the overall over-performance or under-performance for a
particular reporting period. For each individual item, companies assess its
favorability by comparing actual costs and standard costs in the industry.
An important aspect of variance analysis is the need to separate
controllable from uncontrollable variances.

5. CONTROLLABLE AND UNCONTROLLABLE VARIANCES
If a variance is regarded as the responsibility of a particular person ,with the result that his
degree of efficiency can be reflected in its size, then it is said to be a controllable variance. For
example, excess usage of material is usually the responsibility of the foreman concerned.
However, if the excessive usage is due to material being defective, the responsibility may rest
with the Inspection Department for non detection of defects.
If a variance arises due to certain factors beyond the control of management, it is known as
uncontrollable variance. For example, general increase in labour rates , increase in the rates of
power or insurance premium, etc. are not within the control of management of the company.
Responsibility for uncontrollable variances cannot be assigned to any department or person.

6. The division of variances is extremely important. The management should place more
emphasis on controllable variance as it is these variances which require investigation and
corrective action. The uncontrollable variances may be ignored, thus following the
“principle of exception”.

7. FAVOURABLE AND UNFAVOURABLE VARIANCES
Where actual cost is less than standard cost it is known as ‘Favourable’ or ‘Credit’
variance. On the other hand, where the actual cost is more than standard cost, the
difference is referred to as ‘unfavourable’ , ‘adverse’ or ‘debit’ variance.
In other words, any variance that has a favourable effect on profit is favourable
variance and any variance which has an adverse or unfavourable effect on profit is
unfavourable variance.
Favourable
Variance
• Actual Cost < Standard Cost
Unfavourable
Variance
• Actual Cost > Standard Cost

8. Material Cost Variances
Labour Cost Variances
Variable Overhead Cost Variances
Fixed Overhead Cost Variances
Sales Variances
Variances are broadly classified into the following :

9. Total Cost
Variance
Material Cost
Variance
Material
Price
Variance
Material
Usage
Variance
Material Mix
Variance
Material
Yield
Variance
Labor Cost
Variance
Labor Rate
Variance
Labor
Efficiency
Variance
Labor Mix
Variance
Idle Time
Variance
Labor Yield
Variance
Overhead
Cost Variance
Variable
Overhead
Cost Variance
Expenditure
or Budget
Variance
Efficiency
Variance
Fixed
Overhead
Cost Variance
Expenditure
or Budget
Variance
Volume
Variance
Efficiency
Variance
Capacity
Variance
Calendar
Variance

10. MATERIALVARIANCES

11. MCV = Standard cost of actual output – Actual cost
MCV = SC – AC
OR
MCV = (Standard quantity for actual output*Standard Price) – (Actual quantity*Actual price)
MCV = (SQ*SP) – (AQ*AP)
MPV = (Standard price - actual price)*Actual quantity
MPV = (SP – AP)*AQ

12. Reasons for Material PriceVariance :

13. MUV = (Standard quantity for actual output – Actual quantity) * Standard Price
MUV = (SQ – AQ) * SP
(Or Quantity)
Algebraic sum of material price variance
and material usage variance should be
equal to material cost variance.
MCV = MPV+MUV

14. Reasons for Material UsageVariance :

15. Material MixVariance
This is sub-variance of material usage variance. It arises only when more than one type of
material is used for producing the finished product. It is defined as that portion of material
usage variance which is due to difference between standard and actual composition of
materials.
MMV = (Revised standard quantity – Actual quantity)*Standard Price
MMV= (RSQ – AQ)*SP
RSQ = (Standard quantity of one material/Total of standard quantities of all materials) *Total of
actual quantities of all materials

16. Material Sub-usage (or Material Revised Usage)Variance
This is sub-variance of material usage variance and represents that portion of the material usage variance
which is attributed to reasons other than those which give rise to material mix variance.
MRUV = (Standard Quantity – Revised standard quantity)*Standard price
MRUV = (SQ-RSQ)*SP
Also, the sum of revised usage variance and material mix variance is equal to material usage variance.
MUV = MMV + MRUV
MaterialYieldVariance
This is also a sub-variance of material usage variance. It is that portion of MUV which is due to
the difference between standard yield and actual yield obtained.
MYV = (Actual yield – Standard yield)*Standard output price
MYV = (AY-SY)*SOP
One important feature is thatYieldVariance is an output variance whereas other variances are
input variances.

18. LABOURVARIANCES

19. Labour CostVariance
This is the difference between the standard direct labour cost specified for activity achieved and the
actual labour cost concerned.
LCV = Standard labour cost of actual output – Actual labour cost
LCV = SC – AC
OR
LCV = (Standard hours for actual output*Standard rate per hour) – (Actual hours*Actual rate per hour)
LCV = (SH*SR) – (AH*AR)
Labour RateVariance
It is the portion of labour cost variance which is due to the difference between the standard
rate specified and the catual rate paid.
LRV = (Standard Rate – Actual Rate)*Actual Hours
LRV = (SR-AR)*AH

20. Reasons for Labour RateVariance :

21. LabourTime (or Efficiency)Variance
This is that portion of labour cost variance which is due to the difference between labour hours
specified for actual output and the actual labour hours expended.
LEV = (Standard hours for actual output – Actual hours) * Standard Rate
LEV = (SH-AH)*SR
The total of labour rate variance and
labour efficiency variance is equal to
labour cost variance.
LCV = LRV+LEV

22. Reasons for Labour EfficiencyVariance :

23. IdleTimeVariance
This represents that portion of the labour efficiency variance which is due to abnormal idle time, such
as time lost due to machine break-down, power failure,strike,etc.
LITV = Idle hours * Standard Rate
LITV = IH * SR
AS IDLE HOURS REPRESENT A LOSS, IDLETIMEVARIANCE IS ALWAYS UNFAVOURABLE.

24. Labour MixVariance (Gang CompositionVariance)
It arises when more than one grade of workers are employed and the competition and the composition
of actual grade of workers differ from these specified.
LMV = (Revised Standard hours – Actual hours) * Standard rate
LMV = (RSH – AH)*SR
RSH = (Standard hours of a grade/Total standard hours)*Total actual hours
Labour Revised EfficiencyVariance (or Sub-efficiencyVariance)
It is sub-variance of labour efficiency variance. It arises due to factors other than those which give rise
to idle time variance and labour mix variance.Thus, it is residue of labour efficiency variance left after
idle time and mix variance have been separated .
LREV = (Standard hours for actual output – Revised Standard Hours) * Standard Rate
LREV =(SH-RSH)*SR

25. :LabourYieldVariance
This variance reveals the effect on labour cost of actual output or yield being more or less
than the standard yield.
LYV = (ActualYield – Standard yield from actual input) * Standard labour cost per unit of
output

26. OVERHEADVARIANCES
(A)When overhead rate per hour is used :
1. Standard hours for actual output (SHAO) = (Budgeted Hours / Budgeted Output) *Actual output
2. Absorbed or Recovered Overhead = Standard hours for actual output*Standard overhead rate per
hour
3. Standard Overhead = Actual Hours*Standard overhead rate per hour
4. Budgeted Overhead = Budgeted Hours*Standard overhead rate per hour
5. Actual Overhead = Actual hours*actual overhead rate per hour

27. (B) When overhead rate per unit is used :
5. Actual Overhead = Actual output*actual overhead rate per unit
4. Budgeted Overhead = Budgeted output * Standard overhead rate per unit
3. Standard Overhead = Standard output for actual time * Standard overhead rate per unit
2. Absorbed overhead = Actual output * Standard overhead rate per unit
1. Standard output for actual hours (SOAH) = (Budgeted output (in units) /Budgeted hours)*Actual
hours

28. Overhead CostVariance
This is the total overhead cost variance and is defined by C.I.M.A., London as “the difference between
the standard cost of overhead absorbed in the output achieved and the actual overhead cost.”
Overhead CostVariance = Absorbed overhead – Actual overhead
OCV = (Standard hours for actual output * Standard overhead absorption rate) – Actual Overhead

30. Variable Overhead CostVariance
It is the difference between absorbed variable overhead and actual variable overhead.
Variable overhead cost variance = (Standard hours for actual output * Standard variable overhead rate) –
Actual Overhead cost
VOCV = (AbsorbedV.O – ActualV.O)
Variable Overhead ExpenditureVariance
( Spending or BudgetVariance)
This arises due to the difference between standard variable overhead allowed and actual variable
overhead incurred.
V.O ExpenditureVariance = (StandardVariable overhead rate*Actual hours) – Actual overhead cost
VOEV = (StandardV.O – ActualVO)

31. Variable Overhead EfficiencyVariance
This variance arises due to the difference between standard hours allowed for actual output and actual
hours.
The reasons for this variance are the same which give rise to labour efficiency variance.
VOEV = (Standard hours for actual output – Actual hours ) * Standard variable overhead rate
VOEV = AbsorbedVO – StandardVO

32. CalenderVariance EfficiencyVariance CapacityVariance

33. Fixed Overhead CostVariance
It is the difference between standard fixed overhead cost for actual output(or absorbed overhead)
and actual fixed overhead.
FOCV = (Standard hours for actual output * Standard fixed overhead rate) – Actual fixed overhead
FOCV = Absorbed overhead – Actual overhead
Fixed Overhead ExpenditureVariance (Spending or BudgetVariance)
It arises due to the difference between budgeted fixed overhead and actual fixed overhead.
FOEV = Budgeted fixed overhead – Actual fixed overhead

34. Fixed Overhead EfficiencyVariance
This is defined as “that portion of volume variance which reflects the increased or reduced output
arising from efficiency above or below the standard which is expected”.
EfficiencyVariance = Absorbed fixed overhead – Standard fixed overhead
EfficiencyVariance = (Standard hours for actual output – Actual hours) * Standard rate
Fixed OverheadVolumeVariance
It is defined as that portion of overhead variance which arises due to the difference between
standard cost of overhead absorbed by actual production and the standard allowance for that
output.
FOVV = (Standard hours for actual output – Budgeted hours)*Standard rate
FOVV= Absorbed overhead – Budgeted overhead

35. CalenderVariance
It is defined as “that portion of volume variance which is due to the difference between the number of
working days in the budgeted period and the number of actual working days in the period to which the
budget is applied”.
Calender variance = (Actual number of working days – Standard number of working days) *Standard
rate per day
CalenderVariance = (Revised budgeted hours – budgeted hours )*Standard rate per hour
Fixed Overhead CapacityVariance
This is “that portion of the volume variance which is due to working at higher or lower capacity usage
than the standard”.
CapacityVariance = (Standard fixed overhead – Budgeted overhead)
CapacityVariance = (Actual hours worked – Budgeted hours)*Standard rate

36. Revised CapacityVariance
When calendar variance is calculated ,the method of calculating capacity variance has to be modified.
The new formula in that case is :
Revised CapacityVariance = (Actual number of working days – Standard number of working days)*
Standard rate per day

37. Sales
Variance
Turnover
Method
Price
Variance
Volume
Variance
Mix
Variance
Quantity
Variance
Margin
Method
Price
Variance
Volume
Variance
Mix
Variance
Quantity
Variance

38. (A) TURNOVER METHOD OR SALESVALUE METHOD :
1.SalesValueVariance
This is the difference between the budgeted value and the actual value of sales effected during a period.
SalesValueVariance = Actual sales – Budgeted sales
Reasons for Sales valueVariance:

39. 2.SalesVolumeVariance
This is the difference between the actual volume and the standard volume of sales.
SalesVolumeVariance = (Actual quantity – Budgeted quantity)*Standard price
SalesVolumeVariance = Standard sales – Budgeted sales
Reasons for Sales volumeVariance:

40. 3.Sales PriceVariance
This is the difference between the standard price specified and the actual price charged.
Sales PriceVariance = (Actual price – Standard price)*Actual quantity
Sales PriceVariance = Actual Sales – Standard Sales
4.Sales MixVariance
This is that portion of the sales volume variance which is due to the difference between the standard and
the actual inter-relationship of the quantities of each product or product group of which sales are
composed.
Sales MixVariance = (Actual quantity – Revised standard quantity)*Standard price
Sales MixVariance = Standard sales – Revised standard sales
Revised Standard Quality is calculated as
= (Total of actual quantities of all products/Total of standard quantities of all products) * Standard
quantity of one product

41. 5.Sales Quantity Variance
The variance is the difference between the budgeted sales and revised standard sales.
Sales QuantityVariance = (Revised Standard quantity – Budgeted quantity)*Standard price
Sales QuantityVariance = Revised standard sales – Budgeted sales

42. SalesValueVariance = PriceVariance +VolumeVariance
SalesVolumeVariance = MixVariance + QuantityVariance

43. (B) SALES MARGIN METHOD :
1.Total Sales margin ( Profit)Variance
This variance is the difference between actual profit and budgeted profit .
Total Sales marginVariance = (Actual Quantity*Actual Profit per unit) – (Budgeted
Quantity*Standard profit per unit)
Total Sales marginVariance = Actual Profit – Budgeted Profit
2.Sales Margin PriceVariance
This variance is the difference between actual profit and standard profit .
Sales margin PriceVariance = (Actual Profit per unit - Standard profit per unit)*Actual quantity sold
Sales margin PriceVariance = Actual Profit – Standard Profit

44. 3. Sales MarginVolumeVariance
This variance is the difference between standard profit and budgeted profit .
SalesVolumeVariance = (Actual Quantity - Budgeted Quantity)*Standard profit per unit
Sales MarginVolumeVariance = Standard Profit – Budgeted Profit

45. 5.Sales Margin QuantityVariance
This variance is the difference between revised standard profit and budgeted profit .
Sales Margin QuantityVariance = (Revised Standard Quantity – Budgeted quantity)*Standard profit per unit
Sales Margin QuantityVariance = Revised standard Profit – Budgeted Profit
4.Sales Margin MixVariance
This variance arises only when a company is selling more than one type of product.
Sales Margin MixVariance = (Actual Quantity – Revised Standard Quantity)*Standard profit per unit
Sales Margin MixVariance = Standard Profit – Revised Standard Profit

46. Managerial Uses of Variances
Determination of variances is only the first step in the process of standard cost variance
analysis. Mere computation of material, labour and overhead variances is useless for cost
control and performance evaluation. The final objective of variance analysis is to
determine the person(s) responsible for each variance and to pinpoint the cause(s) for
incurrence of these variances.
Properly used standard cost variances are useful tools in achieving effective cost control.
Management should only pay attention to those that are unusual or particularly
significant. Often, by analyzing these variances, companies are able to use the
information to identify a problem so that it can be fixed or simply to improve overall
company performance.
Analysis of standard cost variances is, therefore, necessary by responsibilities and
causes.

48. Analysis of Variances by Responsibilities
Variances must be identified with the manager responsible for the costs incurred,
who should be held responsible for the cost. The cost factors which are directly
controllable by operating supervisors must be separated from those cost factors for
which executive management is responsible.
Analysis of Variances by Causes
Variances reflect the effect on costs which certain events or conditions have produced.
Reasons for the variance should be determined and plans for necessary corrective
action made either by discussing possible causes with the supervisors or by examining
underlying data and records.
The analysis of variances by causes is, therefore, an important aspect of the use of
standard costs to attain effective cost control. For any standard cost variance, there are
many possible causes.

50. Analysis of Variances by Products
Since management usually wants current true
costs when decisions are to be made with respect
to pricing and related questions, variances are
often analyzed by products in order to arrive at
current product costs. Companies producing
non-standard goods according to customer’s
specification may also help analyze variances by
job orders.
The analysis of variances by causes is useful in
deciding whether or not cost variances should be
allocated to products in arriving at product costs
for pricing. Standard product costs should be
reviewed periodically and revised when it is
found that the standard product costs in use are
no longer useful for the purpose.

51. Control ratios are used by the management to know whether the deviations of the actual performance
from the budgeted performance are favourable or unfavourable.These ratios are generally expressed in
terms of percentage. If the ratio is 100% or more, the performance is considered as favourable and if the
ratio is less than 100%, the performance is considered as unsatisfactory.

52. 1.Efficiency Ratio
It is defined as “the standard hours equivalent to the work produced expressed as a percentage of actual hours
spent in production”.
Efficiency Ratio = (Standard hours for actual output / Actual hours worked)*100
2.Activity Ratio
It is defined as “the standard hours equivalent to the work produced ,expressed as percentage of budgeted
standard hours.
Activity Ratio = (Standard hours for actual output / Budgetary hours)*100

53. Capacity Ratio = (Actual hours worked / Budgeted hours)*100
3. Capacity Ratio
It shows the relationship between actual hours worked and the budgeted hours.
4. Calender Ratio
Calender Ratio = (Actual working days in a budget period / Budgeted working days in
the budget period)*100
The ratio indicates the extent of actual working days availed during the budget period.
Also, Activity Ratio = Capacity Ratio * Efficiency Ratio

54. Video reference on Control Ratios :

55. References
Management Accounting by M.N. Arora and Priyanka Katyal
https://www.yourarticlelibrary.com/accounting/variances-
analysis/managerial-uses-of-variances-analysis-and-causes/52833
https://corporatefinanceinstitute.com/resources/knowledge/accounting/varia
nce-analysis/