Sales Guides: Variance Formulas

Showing posts with label Variance Formulas. Show all posts

Tuesday, 9 February 2016

Variable Overhead Expenditure Variance Formula

Variable overhead expenditure has been shown below. This formula has been explained with an example.

Actual Variable Overhead x (Actual Hr - Standard Rate per Hr)

Variable Overhead Expenditure Formula Example

Total Actual Hours = 200,000

Actual Rate Per Hr = 12

Standard Rate per Hr= $ 7

Solution

Actual Hours X (Actual Rate - Standard Rate)

= 200,000 x (12 - 7)

= 200,000 x -5

=-1000,000

Significance of Variable Overhead Expenditure

Variable overheads variance is calculated to control the variable overheads expenditure. Reasons for adverse variance may be investigated and appropriate corrective actions may be taken for improving the situation (controlling the actual rate).

it is pertinent to mention that sometime rise in rate is beyond control i.e rise due to inflation in the country, but some costs can be controlled by placing appropriate control like factory lightening.

Favorable or adverse Variable overhead Expenditure

Favorable variable overhead results in when actual overhead rate is less than expected overhead expenditure rate. it is very logical (you are incurring expenditure at lower rate than expectation) Adverse Variable overheads expenditure results in, when actual expenditure rate is more than standard expenditure rate.

Actual Rate > Standard Rate = Adverse Variable Overheads Expenditure

Actual Rate < Standard Rate = Favorable variable Overhead Expenditure

Reasons for favorable overheads expenditure variance

One of the fundamental reasons for favorable overheads expenditure variance is more effective controls over utilization of resources. Other reason of favorable overheads expenditure variance may be rates selection or application, it is important to note that Rates calculation is a complex procedure, and therefore there is possibility of inaccurate selection/application of rates.

Reasons for adverse overhead Expenditure Variance

Reasons for adverse overhead expenditure variance include the poor or inefficient utilization of resources due to ineffective controls. Other reason of adverse overheads expenditure may be the wrong calculation application of rates (actual or standard). it is important to note that overheads rate calculation involves some easy mathematics but complex procedures.

Other Name of Variable Overhead Expenditure

Other name of variable overhead expenditure is variable overheads spending expenditure. Variable overheads expenditure variance and variable overhead spending may be used interchangeably.

Variable Overhead Expenditure Formula Practice Question

Company Actual Expenditure = 200,000

Actual Rate = 10$

Standard Rate = $ 8

Variable Overheads Expenditure Variance Formula
Variable Overhead Efficiency Variance Formula
Fixed Overhead Expenditure Formula
Fixed Overhead Efficiency Variance Formula
Fixed Overhead Volume Variance Formula
Fixed Overhead Capacity Variance Formula

Variable Overhead Efficiency Variance Formula

Variable overheads efficiency variance formula has been shown below. Variable overheads efficiency variance formula has been explained with an example.

Variable overhead efficiency = Standard Rate x (Standard Hr-Actual Hr)

it is important to note that variable overhead efficiency variance focuses on the production timing (time taken in production against time expected to be taken).

Variable Overhead Efficiency Variance Example

Standard rate = $ 12

Standard Hr = 10 Hr per unit

Unit produced= 20,000

Actual Hr = 210,000

Solution

Standard hour = units produced x Hr taken per unit

=20,000 x 10

=200,000 Hr

Variable overhead efficiency = Standard Rate x (Standard Hour-Actual Hour)

= 12 x (200,000-210,000)

= 12 x -10,000

=-120,000 (adverse Variable overhead efficiency variance).

Favorable and adverse Variable Overhead Efficiency Variance

When actual hour taken in the process of production are less than standard hour, then it is a favorable situation and technically called favorable efficiency variance. On other hand, when actual hour taken in the process of production are more than standard hour, then this is adverse efficiency variance case.

Reasons of Favorable Variable Overheads Efficiency Variance

First reason of favorable efficiency reason may be use of modern technology. Similarly skilled labour may be other important reasons for favorable efficiency variance. Training of employee may also result in favorable efficiency variance due to improvement in efficiency of indirect labour.

Skilled labour, trained employees and improved quality material shall reduce the production timing (efficiency). when such time saving is reflected in standard rate , it is called Favorable Variable overhead efficiency variance.

Reasons for Adverse Variable Overhead Efficiency Variance

Reasons for adverse efficiency variance include the use of unskilled labour. Other reason for adverse variable efficiency variance may be use of outdated or old production method. Use of low quality material may also result in negative variable efficiency variance.

unskilled labour is supposed to take more time and thus actual hour of production are expected to increase , similarly old methods of production would also consume more time in production. poor quality material is not easy to handle during the production.

Limitation of Variable overhead Efficiency

Variable overhead are first accumulated and then divided by the appropriate hour (labour hour or machine hours). It is pertinent to mention that using one standard hour bases does not reflect the variable overheads, because variable overhead are independent of labour or machine hours.

Fixed Overheads Total Variance Formula

Fixed overhead total variance formula has been shown below; this formula has been explained with an example.

Fixed Overhead Total Variance =FOH (Standard) – FOH incurred

FOH - Fixed Overheads

In simplest term Fixed overhead total variance is a comparison between expected fixed overhead and actual fixed overhead at particular level of activity (production). This concept has been explained with an easy example below

Fixed Overheads Total Variance Formula Example

Unit Produced by Company= 20,000

Absorption Rate = $ 5 per unit

Actual Fixed overheads = 130,000

Solution

Absorbed = unit produced x Rate

= 20,000 x $ 5

= $ 100,000

Fixed Overhead Total Variance = Fixed overhead incurred – FOH Absorbed

=100,000-130,000

=30,000 (Fixed overhead total variance)

Fixed overhead variance amounting 30,000/- is favorable.

Favorable and Adverse Total Fixed overhead Variance

When fixed overhead incurred are more than absorbed fixed overhead expenditure, then variance is known as adverse fixed overhead variance. When actual incurred fixed overhead are lower than absorbed overhead, then variance is known as favorable fixed overhead variance.

Fixed Overhead Capacity Variance Formula

Fixed Overhead Capacity Variance Formula has been shown below. The concept of fixed overhead capacity variance has been clarified with an example.

Fixed overhead capacity = standard rate x (budgeted hours - actual Hours)

Fixed overhead capacity primarily shows about the utilization of available resources. In simplest term it is comparison between budgeted or available resources utilized resources. It is important to remember that actual hour in this case can never exceed the budgeted over.

Fixed Overhead Capacity Variance Formula Example

Budgeted Production = 1800 Units

Actual production = 1200 Units

Budgeted Hour = 8 Per Unit

Actual Production Hrs = 12000

Standard absorption Rate= 12

Calculated fixed capacity variance?

Solution

Budgeted Production hours = 1800 x 8= 14400

Fixed overhead capacity =Standard Rate x (Budgeted Hours - Actual Hours)

= $ 12 x (14400-12000)

= $ 12 – 2400

= 28800 (Adverse)

Favorable and Adverse Fixed capacity Variance

More working hours are recommended (favorable), because more working hours will result in over absorption of overhead (cost saving). On other hand less working hour is not recommended or adverse situation for the company, because it means under absorption of overheads (increase in production cost).

Significance of Fixed overhead Capacity Variance

Fixed overhead capacity variance provides useful information about the idle capacity (resources not utilized). This information can be used for future resource planning and budgeting. It is important to remember that idle resource or capacity means that company is paying for no work.

Fixed Overhead Expenditure Formula

Fixed overhead expenditure Formula has been shown below. This formula has been explained with an example.

Fixed overhead Expenditure = Budgeted FOH – Actual FOH

Difference between budgeted and actual fixed overhead is technically known as fixed overheads variance. This concept has been explained with an easy example

Fixed overhead Expenditure Formula Example

Budgeted Expenditure = 80,000

Actual Expenditure = 90,000

Solution

Fixed overhead Expenditure = Budgeted FOH – Actual FOH

=80,000-90000

=10,000

Favorable and adverse fixed overhead Expenditure

Where actual expenditure is more than budgeted expenditure, then variance is called adverse fixed overhead expenditure variance. When actual fixed overheads are lower than budgeted overhead, then variance is regarded as adverse.

Fixed Overhead Efficiency Variance Formula

Fixed overhead efficiency variance formula is given below. Fixed overhead efficiency concept or formula has been explained with an example.

Fixed overhead efficiency variance = Standard rate (Standard hour – Actual Hrs)

Fixed overhead efficiency variance is primarily difference between actual hour during the production and standard hour for such production level. This difference is expressed in term of standard rate of absorption per hour.

Fixed Overhead Efficiency Variance Formula Example

Unit produced by the Company = 7000

Standard hrs per Unit = 6 Hr per unit

Actual Hours Production Hrs = 40,000

Standard Rate per hour = $ 8

Solution

Standard Hours = Production x standard hours =

7000 units x 6 hr= 42,000 hrs

Fixed overhead efficiency variance = Standard rate (Standard Hours – Actual Hours)

= $ 8 x (42,000-40,000)

= $ 8 x 2000

= $ 16000

Favorable and Adverse Fixed Overhead Variance

If actual hours taken or worked are less than standard, then it is a favorable fixed overhead efficiency variance, and when actual hours are more than standard hours, then it is adverse fixed overheads efficiency variance. it is important to note that this variance only reflect the efficiency and does not give idea about actual fixed overheads expenditure.

Fixed Overhead Efficiency Variance Formula Question

Total production = 9000 Units

Standard Hours Required per Unit = 8 Hr/ unit

Actual Production Hours = 65,000

Standard Rate per hour = $ 12

Fixed overhead volume Variance Formula

Fixed Overhead Volume Variance Formula has been shown below. Formula of fixed overhead volume variance is being explained with an example.

Standard Rate x (Budgeted Production – Actual Production)

Fixed Overhead Volume Variance Example

Actual Production- Units = 1600

Budgeted Production - Units = 1500

Standard absorption Rate= $ 10

Solution

Standard Rate x (Budgeted Production – Actual Production)

= $ 10 x (1500-1600)

= $10 x 100

=1000 Favorable

Favorable and adverse Fixed Overhead Volume Variance

When the actual production is more than budgeted production, then this is favorable situation for the organization (favorable Fixed Overhead Volume variance), because it will lower the product cost. Where actual production is lower than budgeted production, then this would result in adverse fixed overhead volume Variance, because lower production increases the product cost.

Actual Production and Unit Fixed Cost

Because unit fixed cost decreases with increase in level of production. Therefore higher production than expected production would result in favorable fixed volume variance. Similarly lower production will increase unit fixed cost, and result in adverse fixed volume variance.

Higher production at fixed resources is due to efficient use of fixed overhead and therefore more production means favorable fixed overhead volume variance and lower production would result in adverse fixed overhead volume variance.

Fixed Overhead Volume Variance Question

Actual Production of a company = 1800 units

Budgeted Production of the company - Units = 1600

Standard absorption Rate= $ 8

Monday, 8 February 2016

Sales Quantity Variance Formula

Sales Quantity Variance Formula has been shown below. Sales Quantity formula has been explained with an example.

Sales Quantity Variance= Standard Price x (Budgeted Quantity – Actual Quantity)

Sales Quantity variance shows the difference between expected quantity and actual quantity sold and such difference is reflected in standard price.

Sales Quantity Variance Formula Example

Sales Quantity= 70,000

Budgeted Sales (Quantity) = 60,000

Standard Price = 18

Solution

Sales Quantity Variance= Standard Price x (Budgeted Quantity – Actual Quantity)

= 18 x (60,000-70,000)

=18 x 10,000

= 180,000

It is important to note that sales quantity variance may be valued at standard profit or marginal profit.

Significance of Sales Quantity Variance

Sales volume and profitability has close relationship, therefore sales volume variance provides useful is a tool for management to take appropriate action for low volume of sales. (Adverse Sales Quantity Variance)

Favorable and Adverse Sales Quantity Variance

When actual sales volume is more than expected volume, then this is favorable quantity variance. When the actual sales volume is lower than standard volume of sales, then this is adverse sales quantity variance.

Reasons for Favorable Sales Quantity Variance

Reasons for favorable sales quantity variances include low sales price, seasonal demand, and change in weather condition or disaster (selling ships in flood), positive customer response to new features of product or improved quality of product.

Reasons for adverse Sales Quantity Variance

Reasons for adverse sales quantity variance includes high sales price, seasonal demand, low production due to natural disaster, entry of new competitor in the market, bad news about product in the market.

Other name of Sales Quantity Variance

Other name of sales quantity variance is sales volume variance.

Sales Quantity Variance Formula Practice Question

Sales Quantity of Material X = 80,000

Budgeted Sales of Material X (Quantity) = 70,000

Standard Price of Material X = 20

Sales Price Variance Formula

Sales price variance formula has been given below. Sale price variance formula has been explained with an example

Actual Quantity Sold x (Actual price – Standard Price)

Difference between the actual and standard price of the quantity sold is technically known as sales price variance. Sales price variance reflects, when actual sales price differ from the standard price.

Sales Price Variance Formula Example

Quantity of material Sold = 1500

Standard Price of material = 15

Actual Price = 10

Solution

Actual Quantity Sold x (Actual Price – Standard Price)

= 1500 x (10-15)

= 1500 x -5

= -7500(Sales price variance)

Significance of Sales price Variance

Sales price variance shows the changes in revenue due to the variation of actual sales price. These sales price variation may be investigated (especially reduce in price).

Favorable and Adverse Sales Price Variance

If actual price is more than standard price, then it is favorable situation for the organization (favorable sales price variance). When the actual price is lower than standard price, then it is adverse situation for company.

Reasons for favorable Sales Price Variance

Reasons for improved or increased sales prices are inflation in the economy, reduced competition in the market and better product responses.

Reasons for adverse Sales Price Variance

Reasons for adverse sales price variance includes deflation in the economy, high competition in the market and low customer response.

Sales Price Variance Formula Practice Question

Quantity of material Sold = 1800

Standard Price of material = 16

Actual Price = 13

Wednesday, 3 February 2016

Material Usage Variance Formula

Material usage variance formula is given below. Material usage variance formula can be explained with an example.

Material usage Variance = Standard Price x (Standard Quantity- Actual Quantity).

Material Usage Variance Formula Example

Quantity Consumed (Actual) = 12000 kg

Standard Price (Per unit) = $ 10

Units produced by Company=2000

Standard usage per unit = 8 kg

Actual Price of Material = 70,000

Calculate Material Price Variance

Solution

Standard consumption = Units produced x standard usage per unit

=2000 x 8

=16,000 kg

Material usage Variance = Standard Price x (Standard Quantity- Actual Quantity).

$ 10 x (16000-12000)

= $ 8 x 4000

= $32,000 (material usage variance)

Material Usage Variance Calculation

Material usage variance is primarily a difference between standard quantity of material (should have been used) and actual quantity of material and such difference is measured at standard cost. Material usage variance may be favorable or adverse. Adverse material usage variance suggests that more material used than expectation, where favorable material usage variance suggest that less material consumed than standard.

Significance of Material usage Variance

Material usage variance provides useful information about the usage of material in the production process. Such information can be used to take appropriate decision for improving the material usage during the production process.

Reasons for adverse material usage variance

Reasons for adverse material usage variance includes use of unskilled labour, old or outdated production techniques, and using low quality material. These factor or reasons would increase the material usage quantity and hence result in adverse material usage variance.

Reasons for favorable Material usage variance

Reasons for favorable material usage variance include using skilled labour, new or modern technology and using premium quality material. These factors will lower the material consumption and thus would result in favorable material usage variance.

Other name of material usage Variance

Other name of material usage variance is material quantity variance. Because this variance is related to consumption of material, therefore words like usage or quantity are used to describe this variance. (Material usage or material quantity variance)

Other Related Formulas

Material Price Variance Formula
Labour Efficiency Variance Formula
Labour Rate Variance Formula
Material Price Variance Formula

Material Price Variance Formula

Material Price Variance Formula is given below. The material price variance concept has been explained with example.

Material Price Variance = Actual quantity x (Standard price- Actual Price).

Material Price Variance Formula Example

Actual Quantity of Material Consumed = 7000 kg

Standard Price per unit of Material = $ 7

Actual Price or cost incurred on Material = 63,000

Calculate Material Price Variance

Solution

Actual Price = 63,000/7 = 9

Material Price Variance = Actual quantity x (Standard price- Actual Price).

Material Price Variance = 7000 (7 – 9)

=7000 (-2)

=-14,000 (Adverse Material Price Variance)

Material Price variance can be calculated as difference between standard price and actual price. This Price difference is multiplied of actual quantity consumed during the production. There are two possible situation, one standard price is high than actual price, this is favorable situation, and second situation is standard price is low than actual price, this is adverse situation.

Reasons for Favorable Material Price Variance

Reasons for favorable material price variance includes deflation in the economy, using low quality material, discount offered on bulk purchases, review of supply chain for lowering the costs, high competition in the supply market , and the low demand of material in the market.

Reasons for Adverse Material Price Variance

Reasons for adverse material price variance include inflation in the economy, rise in the demand of material in the market, withdrawal of major competitor from the market, artificial shortage of material, real shortages due to natural disasters.

Significance of Material Price Variance

Material price variance immediately reflects the price level of material consumed. Favorable material price variance reflects the low price level than expectation or standard. Adverse material price variance reflects high price level than expectations.

Adverse material price information can be used to investigate the reasons for high level of price. Thus adverse material price variance an effective tools for identifying and investigating the high price level.

Favorable material price variance may used to determine the reasons for low price level in the market. This favorable material price variance is a tool of identifying and investigating low price level.

Material Price Variance Formula Example

Quantity Consumed (Actual) = 8000 kg

Unit Standard price= $ 10

Actual Price of material = 93,000

Calculate Material Price Variance

Other Related Formulas

Material Price Variance Formula

Labour Efficiency Variance Formula

Labour Rate Variance Formula

Material Price Variance Formula

Tuesday, 2 February 2016

Labour Efficiency Variance Formula

Labour efficiency variance formula is given below. Labour efficiency formula concept has been explained with an example below;

Labour Efficiency Variance Formula =(Standard Hours-Actual Hours)x(Standard Rate)

Labour Efficiency Variance Formula Example

Number of Chairs to be produced or make = 1200

Labour hour rate Per Chair is= $ 8

Standard Labour or Expected hour per Chair = 6 Hr

Labour Hour consumed = 6000

Calculate Labour Efficiency Variance

Solution

Standard Hours = 1200 x 6 = 7200 hours

Labour Efficiency Variance = (Standard hours –Actual Hours) x (Standard Rate)

= (7200-6000) x 8

= (1200 x 8)

= 9600 (Favorable Variance)

Significance of Labour Efficiency Variance

Labour efficiency variance is calculated to show the labour performance or labour efficiency. The difference between standard hour required for an activity and actual hours taken by that project or activity is measured at standard rate. Labour efficiency ratio may be either is favorable or unfavorable.

Favorable and unfavorable Efficiency Variance

If actual hours are less than standard hour, then this is favorable labour efficiency variance case, otherwise it would be unfavorable labour variance case.Favorable and unfavorable efficiency variance may be mathematically or logically expressed as under;

Actual Labour Hours> Standard Labour hour = unfavorable Labour Variance

Actual Labour Hours < Standard Labour hour = Favorable Labour Variance

Reasons for Favorable Efficiency Variance

Reasons for favorable efficiency variance include use of skilled labour, use of advanced technology, premium quality material, and performance based reward structure for the employees.

Reasons for unfavorable Efficiency Variance

Reasons for unfavorable Labour efficiency variance include use of unskilled labour, use of poor quality material, and use of outdated machinery and lack of performance based structure.