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www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. Variance Analysis 2 Introduction Controlling Compare Basic Variance 1. Controlling Controlling is one of the important roles of the management function. Once a plan is created, it must be implemented and monitored by managers to ensure that the plan is being carried out as intended. 2. Compare Manager have to compare between the standard and actual results to evaluate the performance of the business. In this chapter, we will learn how to calculate the basic variance such as material, labor and overhead variances. 3. Basic Variances
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 3 Description 1 Description 2 Standard Costing Standard costing is a technique which uses standard cost and revenues for the purpose of control through variances analysis. Role of Manager Before starting the production, the managers will set the standard cost for each element of cost such as material, labor and overhead. Variance Analysis Standard Costing
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 4 Setting standard costs for different elements of cost, such as material, labor and overhead Recording actual cost Comparing between standard cost and actual cost to determine the variances Analyzing the significant variances to know the causes and implications Reporting the analysis of variances to management for taking appropriate action where necessary Step in standard costing method
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. Variance Analysis 5 Definition of Variance Analysis Differences The differences between the actual cost and standard cost is known as variance. Use of Variance Managers use variances analysis for control, decision implementation, performance evaluation, organizational learning and continuous improvement. Defined as… Variance analysis may be defined as the process of analysing the total difference between planned and actual performance Classified The differences can be classified as Favorable (F) and Unfavorable (UF) depend on the effect to the profit. Actual cost<Standard cost= Favorable Actual cost>Standard cost= UnFavorable
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 6
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 7 Direct Material Cost • MCV (Material cost variance) is the difference between the standard Material cost of output produced and the actual material cost incurred. • MCV=MPV+MUV • MPV=Material Price Variance • MUV=Material Usage Variance
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 8 Material Cost Variances MPV • MPV=(AP-SP)AQ • AP=actual price/unit • SP=Standard price/unit • AQ=Actual quantity purchased Example:
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 9 Material Cost Variances MUV • MUV=(AQ-SQ)SP • AQ=actual quantity used • SQ=Standard quantity for actual output • Standard price/unit Example:
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 10 Direct Labor Cost Variances • LCV (Labor cost variance) is the difference between the standard direct labor cost and the actual direct labor cost incurred. • LCV=LRV+LEV • LRV=Labor rate Variance • LEV=Labor Efficiency Variance
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 11 Labor Cost Variances LRV • LRV=(AR-SR)AH • AR=actual rate • SR=standard rate • AH=Actual direct hour labor used Example:
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 12 Labor Cost Variances LEV • LEV=(AH-SH)SR • AH=Actual direct hour used • SH=Standard direct labor hour for actual output • SR=Standard hour rate Example:
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 13 Variable Production Overhead Variance (VPOH) • VPOH is the difference between the actual variable overhead incurred and the applied variable overhead. • VPOH =VPOH Expenditure + VPOH Efficiency
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 14 Variable Production Overhead Variance (VPOH) VPOH (Expenditure) • Actual variable production overhead – (AH x SVOR) • (AVOR-SVOR)AH SVOR=Standard variable production overhead rate AVOR=Actual variable production overhead rate AH=Actual hour Example
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 15 Variable Production Overhead Variance (VPOH) VPOH (Efficiency) VPOH Efficiency variance measures the change in variable overhead consumption that occurs because of efficient or inefficient use of direct labor. • (AH-SH)SVOR – AH =Actual hour – SH=Standard Hour – SVOR=Standard variable production overhead rate Example
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 16 Fixed Production Overhead Variance (FPOH) • FPOH is the difference between the actual fixed overhead incurred and the applied fixed overhead. Example fixed overhead cost are factory rent, depreciation, insurance and so on. • FPOH =FPOH Expenditure + FPOH Volume
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 17 Fixed Production Overhead Variance (FPOH) FPOH (expenditure) variance • FPOH expenditure variance is the difference between the budgeted fixed overhead and the actual fixed overhead expenditure. • BFO-AFO – BFO=Budgeted Fixed Overhead – AFO=Actual Fixed Overhead Example
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 18 Fixed Production Overhead Variance (FPOH) FPOH (Volume) variance • Budgeted fixed production Overhead-Applied Fixed Production Overhead - Applied fixed production overhead (standard hours x standard fixed overhead rate) - Standard Fixed Overhead rate = Budgeted Fixed Overhead Budgeted basis Example
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 19 TOTAL COST VARIANCES Labor Cost Variance FPOH Material Cost Variance VPOH
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 20 CAUSES AND IMPLICATIONS OF VARIANCES
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 21 CAUSES AND IMPLICATIONS OF VARIANCES
www.yourcompany.com © 2017 The Worthy PowerPoint Presentation. 22 CAUSES AND IMPLICATIONS OF VARIANCES