Standard Costing &

Variance Analysis
(overhead & other Variances)

Warunika N. Hettiarachchi
Overhead cost Variances
 Overhead Variances
 Overhead variances arise due to the difference
between actual overhead and absorbed overhead.

 Overhead cost Variances can be mainly divided in to

two

1. Variable overhead variances.

2. Fixed overhead variances.

Variable overhead Cost variance
 Variable overhead expenditure/spending variance
Variable standard variable Actual
overhead = overhead for actual - variable
expenditure hours worked overhead
variance
OR
VOHSV =(Standard rate – Actual rate ) x Actual Hours
 actual variable overhead > standard variable
overhead for actual hours worked = adverse variance
 Variable overhead efficiency variance

Variable
standard variable standard variable
overhead
= overhead for - overhead hours for
efficiency
actual hours actual output
variance
OR
(Std. hrs for ac. output – Act. hrs for ac. output) x Std. VOH Rate
Variable Overhead Total Cost Variable

Variable
Std cost for Actual cost
Overhead
Total Cost
= Actual - for Actual
Output Output
Variable
Ex 01: Calculate variable overhead expenditure
and efficiency variances from the following data:
Budgeted Production for January 3000 units
Budgeted Variable Overhead Rs. 15,000
Standard Time for One Unit 2 hours
Actual Production for January 2,500 units
Actual Hours Worked 4500 hours
Actual Variable Overhead Rs. 13,500.
Ex 02: Find out variable overhead expenditure and
efficiency variances from the following;
Budgeted variable overhead for January Rs. 8,000
Budgeted production for the month 500 units
Standard time for one unit of production 10 hours
Actual variable overhead Rs. 6,600
Actual production for the month 400 units
Actual hours worked 3,800
Ex 03: The variable production overhead standard cost
per unit 1.5 hrs x Rs.4.00 = Rs. 6.00 . The
organization budgeted to produce 200,000 units and
the actual production was 180,000 units.
Organization works 261,000 hrs at a total cost Rs.
1,017,900
Calculate variable production overhead variances
 Answer;
Expenditure variance = 26,100 (F)
Efficiency variance = 36,000 (F)
Total cost variance = 62,100 (F)
 Fixed overhead variance
 Fixed overhead expenditure variance
Fixed Budgeted fixed Actual fixed
overhead = - overhead
overhead
expenditure
variance

 If the actual is greater than the budgeted the variance is

adverse & vise versa
Fixed overhead volume variance

Fixed overhead Standard fixed

Budgeted fixed
volume variance
=
overhead
- overhead for
actual output

OR
Fixed overhead Actual Budgeted
Units - Units
= X OAR
volume variance

 If the BFOH is greater than the SFOH on actual

production the variance is adverse & vise versa.
Possible Causes for Overhead Variances

 Variable overhead variance

 Unexpected price changes for overhead items
 Labour efficiency variances
  Fixed overhead expenditure variance
 Changes in prices relating to fixed overhead items (eg:
rent increase)
 Seasonal effects (eg: heat/light in winter)- This arises
where the annual budget is divided into four equal
quarters of 13 equal four-weekly periods without
allowances for seasonal factors.

 Fixed overhead volume

 Changes in production volume due to change in demand
or alterations to stockholding policy
 Changes in productivity of labour or machinery
 Production lost through strikes etc
Other variances
 Sales Variances
 Selling Price Variance
Actual
Selling Price Standard Actual
= - X Quantity
variance Selling Price Selling Price sold

SPV = (SP-AP)x AQ

 Sales Volume Profit variance

Sales Volume Actual Sales Standard
Standard - Units X Profit per
Profit =
Sales Units Unit
variance
SVPV = (SQ-AQ)*SP
 Sales Volume Contribution Variance

Sales Volume Standard

Budgeted Actual
Contribution =
Sales Unit - Sales Unit X Contribution
Variance per unit

SVCV = (BS – AC) X St. Con.

Ex 04: An organization budgeted to produce and sell 100,000
units. The actual production and sales 120,000 units. The
standard cost and revenue details are as follows;
Direct material (3 kg x Rs.5) = Rs. 15
Direct labour (2 hrs x Rs.15) = Rs. 30
Direct expenses = Rs. 10
Variable production O/H(2 hrs x Rs.2.50)= Rs.5.00
Fixed production O/H = Rs. 10
Standard Total cost = Rs. 70
Standard profit = Rs. 30
Standard selling price = Rs. 100
Actual selling price Rs. 105

Calculate sales variances

Possible reasons for Sales Variances
Selling Price Variance
Organization change the selling price than expected
(Ex: reduce SP to gain market share)
Organization unable to change selling price as expected
(Ex: unable to increase due to legal barrier)
Changes in the level of competition in the market
 Sales Volume Profit Variance
Increase/decrease in demand for the product
Reduction/increase in competition for the product
Reduction in selling price resulting in an increase in
selling quantity
 Reconciliation of Profit
Budgeted Profit xxx
Add
Favorable variances xxx

Less
Adverse variances (xxx)

Actual Profit xxx

Reconciliation Statement for Absorption Costing
Budgeted Profit xxx
Sales volume profit variance xxx/(xxx)
Sales price variances xxx/(xxx)
xxx
Cost variances
Direct material - Price variance xxx/(xxx)
- Usage variance xxx/(xxx)
Direct labour- Rate variance xxx/(xxx)
- Efficiency variance xxx/(xxx)
- Idle variance xxx/(xxx)
Variable production O/H- Expenditure xxx/(xxx)
- Efficiency xxx/(xxx)
Fixed production O/H - Expenditure xxx/(xxx)
- Volume xxx/(xxx) xxx/(xxx)
Actual Profit xxx
Reconciliation Statement for Marginal Costing
Budgeted Contribution xxx
Sales volume contribution variance xxx/(xxx)
Sales price variances xxx/(xxx)
xxx
Cost variances
Direct material - Price variance xxx/(xxx)
- Usage variance xxx/(xxx)
Direct labour- Rate variance xxx/(xxx)
- Efficiency variance xxx/(xxx)
- Idle variance xxx/(xxx)
Variable production O/H- Expenditure xxx/(xxx)
- Efficiency xxx/(xxx) xxx/(xxx)
Actual Contribution xxx
Fixed production O/H - Expenditure xxx/(xxx)
- Volume xxx/(xxx) xxx/(xxx)
Actual Profit xxx
Factors should be considered when
setting standards
 Standard Direct Material Price
 Quotations and estimates received from potential
suppliers
 Past data to identify the trends of price expectations
 Quality of raw materials
 Bulk discounts available
 Additional charges as carriage inwards, packaging
 Standard Direct Material usage
 Technical specifications for using material
 Unavoidable wastage of materials
  Standard Direct Labour Rate
 Forecast of wage rate increases
 Bonus schemes in operation
 Details of any changes in type of labour required

 Standard Direct Labour Time

 Allowance for machine breakdowns and idle time
 Technical specifications of the task
  Standard selling price
 Current selling price
 Price elasticity of product
 Competitors selling price
 Expected changes to the product
 Standard selling quantity

 Current sales volume

 Expected industry growth
 Level of competition
Interdependence between variances
 Using cheaper materials will result in a favourable material price
variance, but using the cheaper material in production might
increase the wastage rate (adverse material usage) and cause a fall
in labour productivity (adverse labour and variable overhead
efficiency)
 Using more experienced labour to do the work will result in an
adverse labour rate variance, but productivity might be higher as a
result (favourable labour efficiency and variable overhead
efficiency)
 Workers trying to improve number of output (favourable efficiency
variance) in order to win a bonus (adverse rate variance) might use
materials wastefully in order to save time (adverse material usage)
 Cutting sales prices (adverse sales price variance) might result in
higher sales demand from customers (favourable sales volume
variance)