The document discusses analyzing and reporting variances from standards. It defines a variance as the difference between an actual result and the corresponding budgeted amount. It describes two types of variances: favorable variances which increase operating income relative to the budget, and unfavorable variances which decrease operating income relative to the budget. The document also discusses static budget variances, flexible budget variances, sales volume variances, and how variances are computed.

1. Analyzing and
Reporting Variances
From Standards

2. Each variance we computed is the difference
between an amount based on an actual result
and the corresponding budgeted amount – that
is , the actual amount of something and the
amount it was supposed to be according to the
budget (Horngren,Datar,Foster,2003).
By Nicolas Huguet

3. Static Budget Variance
 Favorable variance- has the effect of
increasing(Horngren,Datar,Foster,2003)
operating income relative to the budget amount.
 Unfavorable variance- has the effect of
decreasing operating income relative to the
budget amount(Horngren,Datar,Foster,2003).

4. Flexible- Budget Variance and
Sales Volumen Variance
 Sales Volumen Variance- is the (Horngren,Datar,Foster,2003)
difference between a flexible- budget amount and the
corresponding static budget amount.
Sales volumen flexible- budget static budget
variance for = amount - amount
the operating income
 Flexible- Budget Variance- is the difference between an actual
result and the corresponding flexible- budget amount based on
the output level in the budget period.
flexible- budget Actual flexible budget
variance = results - amount

5. Direct Material Variances
The direct (Globusz, 2001-2010) material total variance is the
difference between what the output actually cost and what it
should have cost, in terms of material.
From the example above the material total variance is given by:
$1,000 units should have cost (x $50) 50,000
But did cost 46,075
Direct material total variance 3, 925

6. The Direct Material Price Variance
This is the difference (Globusz, 2001-2010) between what the actual
quantity of material used did cost and what it should have cost.
$ 4,850 kgs should have cost (x $10) 48,500
But did cost 46,075

7. Direct Labour Total Variance
The direct labour total variance is the difference
between what the output should have cost and
what it did cost, in terms of labour (Globusz, 2001-
2010).
$ 1,000 units should have cost (x $20) 20,000
But did cost 21,210
Direct material price variance 1,210

8. The Direct Labor Efficiency
Variance
The is the (Globusz, 2001-2010) difference between how
many hours should have been worked for the number of
units actually produced and how many hours were
worked, valued at the standard rate per hour.
$ 1,000 units should have taken (x 4 hrs) 4,000 hrs
But did take 4,200 hrs
Variance in hrs 200 hrs
Valued at standard rate per hour x $5
Direct labour efficiency variance $1,000

9. Variable Production Overhead
Total Variances
The variable (Globusz, 2001-2010) production overhead total
variance is the difference between what the output should have
cost and what it did cost, in terms of variable production
overhead.
The variable production overhead expenditure variance
$ 1,000 units should have cost (x $8) 8,000
But did cost 9,450
Variable production o/hd expenditure variance 1,450

10. The Variable Production
Overhead Efficiency Variance
This is the same (Globusz, 2001-2010) as the direct
labour efficiency variance in hours, valued at the
variable production overhead rate per hour.
Labor efficiency variance in hours 200 hrs
Valued @ standard rate per hour x $2
Variable production o/hd efficiency variance $400

11. Fixed Production Overhead
Volume Variance
This is the (Globusz, 2001-2010) difference between actual
and budgeted production volume multiplied by the standard
absorption rate per unit.
Actual production at std rate (1,000 x $24) 24,000
Budgeted production at std rate (1,200 x $24) 28,800
4,800

12. Direct Materials Variance
 By J. Santana

13. Setting Standard Costs—A Difficult Task
Direct Materials
The direct materials price standard is the cost per
unit of direct materials that should be incurred.

14. Setting Standard Costs—A Difficult Task
Direct Materials
The direct materials quantity standard is the
quantity of direct materials that should be used per
unit of finished goods.
The standard direct materials cost is $12.00
($3.00 × 4.0 pounds).

15. Analyzing and Reporting Variances
Illustration: Inman Corporation manufactures a single product.
The standard cost per unit of product is shown below.
Direct materials—2 pounds of plastic at $5.00 per pound $ 10.00
Direct labor—2 hours at $12.00 per hour 24.00
Variable manufacturing overhead 12.00
$18.00
Fixed manufacturing overhead 6.00
Total standard cost per unit $ 52.00
The predetermined manufacturing overhead rate is $9 per
direct labor hour ($18.00/2). It was computed from a master
manufacturing overhead budget based on normal production of
180,000 direct labor hours for (90,000 units) .

16. Analyzing and Reporting Variances
The master budget showed total variable costs of $1,080,000
($6.00 per hour) and total fixed overhead costs of $540,000
($3.00 per hour). Actual costs for November in producing
7,600 units were as follows.
Direct materials (15,000 pounds) $ 73,500
Direct labor (14,900 hours) 181,780
Variable overhead 88,990
Fixed overhead 44,000
Total manufacturing costs $ 388,270
The purchasing department buys the quantities of raw
materials that are expected to be used in production each
month. Raw materials inventories, therefore, can be ignored.

17. Analyzing and Reporting Variances
Direct Materials Variances
In producing 7,600 units, the company used 15,000 pounds of
direct materials. These were purchased at a cost of $4.90
per unit ($73,500/15,000 pounds). The standard quantity of
materials is 15,200 pounds (7,600 × 2). The total materials
variance is computed from the following formula.
Actual Quantity Standard Quantity Total Materials
× Actual Price - × Standard Price = Variance
[(AQ) × (AP)] [(SQ) × (SP)] (TMV)
$73,500 - $76,000
(15,000 × $4.90) (15,200 × $5.00)
= $2,500 F

18. Analyzing and Reporting Variances
Direct Materials Variances
Next, the company analyzes the total variance to
determine the amount attributable to price (costs) and to
quantity (use). The materials price variance is computed
from the following formula.
Actual Quantity Actual Quantity Materials Price
x Actual Price - x Standard Price = Variance
[(AQ) × (AP)] [(AQ) × (SP)] (MPV)
$73,500 - $75,000
(15,000 × $4.90) (15,000 × $5.00)
= $1,500 F

19. Analyzing and Reporting Variances
Direct Materials Variances
The materials quantity variance is determined from the
following formula.
Materials
Actual Quantity Standard Quantity
× Standard Price - × Standard Price = Quantity
Variance
[(AQ) × (SP)] [(SQ) × (SP)]
(MQV)
$75,000 - $76,000
(15,000 × $5.00) (15,200 × $5.00)
= $1,000 F
Companies sometimes use a matrix to analyze a variance.

20. Matrix for Direct Materials Variances
1 2 3
Actual Quantity Actual Quantity Standard Quantity
× Actual Price × Standard Price × Standard Price
[(AQ) × (AP)] [(AQ) × (SP)] [(SQ) × (SP)]
15,000 × $4.90 = $73,500 15,000 × $5.00 = $75,000 15,200 × $5.00 = $76,000
Price Variance Quantity Variance
1 - 2 2 - 3
$73,500 – $75,000 = $1,500 F $75,000 – $76,000 = $1,000 F
Total Variance
1 - 3
$73,500 – $76,000 = $2,500 F

21. Analyzing and Reporting Variances
Causes of Material Variances
Materials Price Variance – Factors that affect the
price paid for raw materials include the availability of
quantity and cash discounts, the quality of the materials
requested, and the delivery method used. To the extent
that these factors are considered in setting the price
standard, the purchasing department is responsible.
Materials Quantity Variance – If the variance is due to
inexperienced workers, faulty machinery, or
carelessness, the production department is responsible.

22. Analyzing and Reporting Variances From
Standards (Direct Labor Variances)
By Marcos J. Morales

23. Analyzing and Reporting Variances From Standards
(Direct Labor Variances)
One of the major management uses of standard
costs is to identify variances from standards.
Variances are the differences between total
actual costs and total standard costs.

24. Analyzing and Reporting Variances
Causes of Labor Variances
Labor Price Variance – Usually results from two factors:
(1) paying workers higher wages than expected
(2) misallocation of workers. The manager who authorized
the wage increase is responsible for the higher wages.
The production department generally is responsible
variances resulting from misallocation of the workforce.
Labor Quantity Variances - Relates to the efficiency of
workers. The cause of a quantity variance generally can
be traced to the production department.

25. Analyzing and Reporting Variances
When actual costs exceed standard costs, the
variance is unfavorable.
When actual costs are less than standard
costs, the variance is favorable.
To interpret properly the significance of a
variance, you must analyze it to determine the
underlying factors. Analyzing variances begins by
determining the cost elements that comprise the
variance.

26. Setting Standard Costs—A Difficult Task
Direct Labor
The direct labor price standard is the rate per hour
that should be incurred for direct labor.

27. Setting Standard Costs—A Difficult Task
Direct Labor
The direct labor quantity standard is the time that
should be required to make one unit of the product.
The standard direct labor cost is $20
($10.00 × 2.0 hours).

28. Analyzing and Reporting Variances (Cost Breakdown)
Illustration: Inman Corporation manufactures a single product.
The standard cost per unit of product is shown below.
Direct materials—2 pounds of plastic at $5.00 per pound $ 10.00
Direct labor—2 hours at $12.00 per hour 24.00
Variable manufacturing overhead 12.00
$18.00
Fixed manufacturing overhead 6.00
Total standard cost per unit $ 52.00
The predetermined manufacturing overhead rate is $9 per
direct labor hour ($18.00/2). It was computed from a master
manufacturing overhead budget based on normal production of
180,000 direct labor hours for (90,000 units) .

29. Standard Cost Accounting Procedure for Labor:
Actual hours worked (AH) 1,880
Actual rate paid per hour (AR) $ 6.50
Standard hours allowed for actual production (SH) 1,590
Standard rate per hour (SR) $ 6.00

30. The following journal entry is passed to record
the actual direct labor payroll, assuming that
there were no payroll deductions.
Dr. Cr.
Payroll (AH x AR) (1880 x $6.50) $ 12,220.00
Accrued Payroll (AH x AR) (1880 x $6.50) $12,220.00
Actual hours worked
(AH) 1,880.00
Actual rate paid per hour
(AR) $ 6.50
Standard hours allowed
for actual production
(SH) 1,590.00
Standard rate per hour
(SR) $ 6.00

31. Matrix for Direct Labor Variances
1 2 3
Actual Hours Actual Hours Standard Hours
× Actual Rate × Standard Rate × Standard Rate
(AH) × (AR) (AH) × (SR) (SH) × (SR)
1,880 x $6.50 = $12,220 1,880 x $6.00 = $11,280 1,590 x $6.00 = $9540
Labor Price Variance Labor Quantity Variance
1 - 2 2 - 3
$12,220 – $11,280 = $940.00 U $11,280 – $9,540 = $1,740 U
Actual hours worked
(AH) 1,880.00 Total Variance
Actual rate paid per hour 1 - 3
(AR) $ 6.50
Standard hours allowed
for actual production
$12,220 – $9,540 = $2,680 U
(SH) 1,590.00
Standard rate per hour
(SR) $ 6.00

32. Journal Entry for Direct Labor Variance (Format)
Work in Process (SH x SR) XXX
Labor Rate Variance [(AR-SR)AH] XXX or XXX
Labor Efficiency Variance [(AH-SH)SR] XXX or XXX
Wages Payable (AH x AR) XXX

33. Journal Entry for Direct Labor Variance
Dr. Cr.
Work in Process ($1,590 x $6.00) $ 9,540.00
Labor Rate Variance [($6.50-$6.00) x 1880] $ 940.00
Labor Efficiency Variance [(1880-1590) x $6.00] $ 1,740.00
Wages Payable (1880 x $6.50) $ 12,220.00
Actual hours worked
(AH) 1,880.00
Actual rate paid per hour
(AR) $ 6.50
Standard hours allowed
for actual production
(SH) 1,590.00
Standard rate per hour
(SR) $ 6.00

34. “Favorable” Variances May be
Unfavorable
The fact that a variance is favorable does not mean that
it should not be investigated. Indeed, a favorable
variance may be indicative of poor management
decisions. For example:
A favorable material price variance may be arisen
from purchasing goods of inadequate quality for
production.
A favorable overhead volume variance could mean
that excessive inventory has been produced beyond
customer demand.

35. By Mario Félix

36. Manufacturing Overhead Variances
- overhead variance
overhead variance is generally analyzed through a price variance and a
quantity variance.
- overhead controllable variance
overhead Controllable Variance shows whether overhead costs are
effectively controlled. (varianza de precio)
- overhead volume variance
overhead Volume Variance relates to whether fixed costs were under- or
over-applied during the year. (varianza de cantidad)

37. Before computing overhead always
remember
- The controllable variance generally is for the variable
costs.
- Standard hours allowed are used in each of the
variances.
- Budgeted costs for the controllable variance are derived
from the flexible budget.

38. Total Overhead variance
What is the total overhead variance?
The difference between actual overhead costs and overhead costs
applied to work done.
Ex.
Total overhead costs:
Variable overhead $ 50,000
+
Fixed overhead $50,000 = 100,000
Overhead applied:
Standard hours allowed 10,000
*
Rate per direct labor hour 9 =90,000
Total Overhead Variance = 10,000

39. Overhead Volume Variance
What is the Volume Variance?
Is the difference normal capacity hours and standard hours
allowed time the fixed averhead.
Ex.
Budget Overhead:
Normal capacity in hours 500
-
Standard hours allowed 450= 50
*
Fixed overhead rate ($8/4) 2
Overhead volume variance= 100

40. Overhead Controllable Variance
What is the overhead controllable variance?
Compare the actual overhead cost in budget cost for the
standar hours allowed.
Ex.
Budget overhead: 10,000
-
Actual overhead costs: 8,000
Overhead controllable variance= 2,000

41. In Controllable Variance: unfavorable
variance in the production department
may be caused by increase use of:
-Indirect manufacturing costs
-Factory Supplies
-Indirect labor
-Indirect material
In the overhead Volume Variance: unfavorable variance in the
production department may be caused by:
-inefficient use of direct labor or machine breakdowns

42. Analyzing and Reporting Variances
Reporting Variances
All variances should be reported to appropriate levels
of management as soon as possible.
The form, content, and frequency of variance reports
vary considerably among companies.
Facilitate the principle of ―management by
exception.‖
Top management normally looks for significant
variances.

43. Reporting Variances

44. Analyzing and Reporting Variances
Reporting Variances
Materials price variance report for Xonic, Inc., with the materials for the
Weed-O order listed first.

45. Statement Presentation
of Variances

46. Analyzing and Reporting Variances
Statement
Presentation
of Variances
In income statements
prepared for
management under a
standard cost
accounting system,
cost of goods sold is
stated at standard
cost and the
variances are
disclosed separately.

47. Horgren,Datar,Foster,(2003) Cost Accounting A Managerial Emphasis, Eleventh
Edition, Prentice Hall Upper Saddle River , NJ 07458
www.globusz.com/ebooks/costing/00000015.htm
Managerial Accounting: Tools for Business Decision Making, 5th Edition,
Jerry J. Weygandt (University of Wisconsin, Madison), Paul D. Kimmel
(University of Wisconsin-Milwaukee), Donald E. Kieso (Northern Illinois
University) October 2009, ©2010
http://www.principlesofaccounting.com/chapter%2017.htm#SCHEDULE OF
COST OF GOODS MANUFACTURED

48. Questions?
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