Variance Analysis

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Variance Analysis

• Topic Six
• by Dr. Ong Tze San
• tzesan_at_econ.upm.edu.my

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Standard Costs
Standards are benchmarks or normsfor measuring
performance. Two typesof standards are commonly
used.
Quantity standardsspecify how much of aninput
should be used tomake a product orprovide a
service.
Cost (price)standards specify how much should
be paid for each unitof the input.
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Setting Standard Costs

• Accountants, engineers, purchasingagents, and
  production managerscombine efforts to set
  standards that encourage efficient future
  production.

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Setting Direct Material Standards
PriceStandards
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Setting Direct Labor Standards
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Setting Variable Overhead Standards
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Price and Quantity Standards
Price and quantity standards are determined
separately for two reasons
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A General Model for Variance Analysis
Variance Analysis
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A General Model for Variance Analysis
Variance Analysis
Materials quantity variance Labor efficiency
variance VOH efficiency variance
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A General Model for Variance Analysis
(AQ AP) (AQ SP) (AQ SP) (SQ
SP) AQ Actual Quantity SP Standard
Price AP Actual Price SQ
Standard Quantity
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VariancesUsing the Factored Equations

• Materials price variance
• MPV AQ (AP - SP)
• Materials quantity variance
• MQV SP (AQ - SQ)
• Labor rate variance
• LRV AH (AR SR
• Labor efficiency variance
• LEV SR (AH - SH)
• Variable manufacturing overhead spending variance
• VMSV AH (AR - SR)
• Variable manufacturing overhead efficiency
  variance
• VMEV SR (AH - SH)

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A Statistical Control Chart
Exh. 10-9
Warning signals for investigation


Favorable Limit





Desired Value

Unfavorable Limit

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Variance Measurements