Given the following information, calculate the direct material price variance

Unit III

STANDARD COSTING

One of the most important functions of management accounting is to facilitate managerial control. The major aspect of managerial control is cost control. The efficiency of management, among other things, depends upon the effective control of costs. For controlling costs, management should not only know actual cost- the cost actually incurred but also pre-determined costs – the cost which should have been incurred. Standards costs are the widely used form of pre-determined costs. The system of standard costing is the most efficient way to controlling costs.

Historical costs systems are principally associated with recording of historical, or as they are commonly called, actual cost. Historical costing is the ascertainment of costs after they have been incurred. No doubt, information on actual costs is useful in determining the cost of production per unit; but from the point of view of decision-making and control, actual costs are not useful to management. Actual costs are meaningful only when they are compared with pre-determined costs.

Standard costs seeks to establish the cost of a product, operations or process under standard operating conditions. The aim of standard cost is to eliminate the influenced of abnormal changes in prices. It is used a guide for future decision and action over a period of time . Standard coatings as an effective management tool for planning decision making coordination and control of business. The object of standard costs is to ascertain the quotation and determination of price policy. It is a new technique of cost control.
Standard costing is defined by I.C.M.A. Terminology as, “The preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and points of incidence.”

“Standard costing is a method of ascertaining the costs whereby statistics are prepared to show (a) the standard cost (b) the actual cost (c) the difference between these costs, which is termed the variance”. Thus the techniques of standard cost study comprises of :
        1. Ascertainment and use of standard costs.
        2. Comparison of actual costs with standard costs and measuring the variances.
        3. Controlling costs by the variance analysis.
        4. Reporting to management for taking proper action to maximize the efficiency.

ADVANTAGES OF STANDARD COSTING

        1. It helps the management in formulating price and production policy.
        2. It is a yardstick of performance. Standard costs are compared with actual costs, and the differences are analysed and effective             

            cost control is taken. Thus reduction of cost is possible by increasing the profits.
        3. It reduces avoidable wastages and losses.
        4. It facilitates to reduce clerical and accounting cost and managerial time.
        5. It creates cost consciousness among the personnel, because the variance analysis fixes responsibility for favourable or 

            unfavourable performance.
        6. Executives become more responsible, as it shows clearly who is responsible for the cost centres.
        7. By the variance analysis and reporting, “the principle of management by exception: “the principle of management by exception” 

            is facilitated. Management must concentrate their attention on variations only.
        8. It aids in budgetary control and in decision-making.
        9. Opening stock and closing stock are valued at the standard price. This helps in the preparation of Profit and Loss Account for a 

            short period-say a week, a month etc.
        10.It facilitates timely cost reports to management and a forward looking mentality is encouraged at all levels of the 

            management. It is a basic for the implementation of an incentive system for the employees.

Standard costs form a basis for future planning, preparation of tenders, fixation of price etc. Otherwise, or in the absence of standard cost, decision will be based on actual cost. The prices of material, labour etc, may change from time to time. There must be a fixed cost structure based on normal standard efficiency. Thus it helps the management in formulating price and production policy.
When standards have been fixed, the section-heads safely delegate the responsibility to the workers. The standard of activity can be measured through the costing reports.
Introduction of standard cost facilitates timely reporting. The management gives attention to the variances and takes corrective steps. The costing reports, based on standard cost, reveal the overall result of the manufacturing side.

LIMITATIONS OF STANDARD COSTING

    1. It is costly, as the setting of standards needs technical skill.
    2. Keeping of up-to-date standard is a problem. Periodic revision of standard is a costly thing.
    3. Inefficient staff is incapable of operating this system.
    4. Since it is difficult to set correct standards, it is difficult to ascertain correct variance.
    5. Industries, which are subject to frequent changes in technological process or the quality of material or the character of labour,     

        need a constant revision of standard. But revision of standard is more expensive.
    6. For small concerns, standard costing is expensive.
    7. It is difficult to apply this method where production takes more than one accounting period. Standard c may not be effective in 

        industries which deal in non-standardised products or jobs according to customer’s requirements.

SETTING THE STANDARD

While setting standard cost for operations, process or products, the following preliminaries must be gone through :

    1. There must be Standard Committee, similar to Budget Committee, in which Purchase Manger, Personnel Manager, and     

        Production Manager are represented. The Cost Accountant coordinates the functions of the Standard Committee.
    2. Study the existing costing system, cost records and forms in use. If necessary, review the existing system.
    3. A technical survey of the existing methods of production should be undertaken so that accurate and reliable standard can be 

        established.
    4. Determine the type of standard to be used.
    5. Fix standard for each element of cost.
    6. Determine standard costs for each product.
    7. Fix the responsibility for setting standards.
    8. Classify the accounts properly so that variances may be accounted for in the manner desired.
    9. Comparison of actual costs with pre-determined standards to ascertain the deviations.
    10.Action to be taken by management to ensure that adverse variances are not repeated.

The most significant contribution of standard costing to the science and art of management is the presentation of ‘variances’. As a matter of act, without determination and analysis of variances, standard costing is meaningless. The term ‘Variance’ has been derived from the verb ‘To vary’ meaning to differ. In cost accounting, variance means deviation of the actual cost from the standard cost. In standard costing, standard costs are pre-determined and refer to the amounts which ought to be incurred. These become the yardsticks against which actual costs can be compared.

That is, variance analysis is a tool to measure performances and based on the principle of management by exception.
After the standard costs have been fixed, the next stage in the operation of standard costing is to ascertain the actual cost of each element and compare them with the standard already set. Computation and analysis of variances is the main objective of standard costing. The deviation of actual from the standard is called ‘variance’.

FAVOURABLE AND UNFAVOURABLE VARIANCES

Variances may be favourable (positive or credit) or unfavourable (or negative or adverse or debit) depending upon whether the actual resulting cost is less or more than the standard cost.
Favourable variance : When the actual cost incurred is less than the standard cost, the deviation is known as favourable variance. The effect of the favourable variance increases the profit. Again, favourable variance would result when the actual cost is lower than the standard cost. It is also known as positive or credit variance and viewed only as savings.
Unfavourable variance : When the actual cost incurred is more than the standard cost, there is a variance, known as unfavourable or adverse variance. Unfavourable variance refers to deviation to the loss of business. It is also known as negative or debit variance and viewed as additional costs or losses.
When the profit is greater than the standard profit, it is known as favourable variance. When the profit is less than the standard profit, it is known as unfavourable variance. This favourable variance is a sign or efficiency of the organization and the unfavourable variance is a sign of inefficiency of the organization.

CALCULATION & ANALYSIS OF VARIANCE

Analysis of variance is a an important and crucial part of standard costing. Calculation of variance indicates a management whether a cost are under control or not. By knowing favourable & unfavourable variances, the management can decide whether a process are under a not and identity those areas where remedial action need to be taken.

VARIANCE CAN BE SUDIVIDED IN THE FOLLOWING CATEGORY:

    1. Material cost variance
    2. Labour or wage variance
    3. Overhead cost variance
    4. Sales variance

I. MATERIAL COST VARIANCE
It is a difference between a standard cost of a material and actual cost of the material used. It is important to study this variance in crde to know a difference between a actual & standard cost of material used. It produce a particular product. It may be favourable if a actual cost is less than a standard cost. It will be unfavourable & actual cost is more than the standard cost.
    MCV = (SP û SQ) - (AQ û AP)

    Where SQ = Standard Qty.
    SP = Standard Price
    AQ = Actual Qty.
    AP = Actual price
            The following are the variance in the case of materials : Materials Variances (Diagrammatic representation)

    MATERIAL COST VARIANCE (OR) MCV = (SQûSP) - (AQûAP)

    MATERIAL PRICE VARIANCE MATERIAL USAGE VARIANCE (OR) MPV (OR) MUV
                                                                         AQ (SR-AR) SR(SQ-AQ)

MATERIAL MIX VARIANCE MATERIAL YIELD VARIANCE
(OR) MMV (OR) MYV
SR(SQ-AQ) OR SR (RSQ-AQ) SR (AY-SY)

MCV = MPV + MUV
MUV = MMV + MYV
MCV = MPV + MMV + MYV

ILLUSTRATION 1: The standard material and standard cost per Kg. of material required for the production of one unit of product A is as follows :

Material : 5 Kg. per Unit of output at 5 Rs. per Kg as standard cost.
The actual production and related material data are as follows : 

400 units of product A
Actual Material used 2,200 Kgs.
Price of material Rs. 4.50 per Kg.

Calculate Material cost variance.
Solution :

Material cost variance : (SQûSP)-(AQûAP)
SQ refers to standard quantity for action production.
Standard quantity for actual production of 400 units = 400û5 = 2,000 Kgs.
    MCV = (2,000 û Rs. 5) - (2,200 û Rs. 4.50)
            = Rs. 10,000 - Rs. 9,900
            = Rs. 100 (F)

This is the responsibility of the purchase manager. Material price variance is that portion of the direct material cost variance which is the difference between the standard price specified and the actual price paid for the direct materials used. The formula is :
Direct material price variance =(Actual quantity consumed û Standard price) - (Actual quantity consumed û Actual price)

or
Actual quantity consumed (Standard Rate - Actual Rate)
MPV = AQ(SR-AR)

A favourable variance arises if the actual price is less than the standard price and vice versa.

The reasons for direct material price variances are :
1. Fluctuations in market price.
2. Non-availability of standard quality
3. Using cheaper materials or substitute
4. Inefficiency in buying
5. High cost of transportation and carriage of goods
6. Loss of discount and fraud in purchases.
7. Changes in price policies
8. Emergency purchase leading to higher price
9. Government interferences leading to rise in prices
10. Incorrect setting of standard
11. Untimely purchase
12. Loss in transit, in excess of normal loss
13. Unexpected additional cost
14. Failure to enter into forward contract

ILLUSTRATION 2 : The standard cost of a material for manufacturing a unit of particular product is estimated as follows :
20 Kg. of raw materials @ Rs. 2 per kg.
On completion of the unit, it was found that 25 Kg. of raw material costing Rs. 3 per kg. has been consumed.
Solution :
            MPV = AQ(SR-AR)
                    = 25 (Rs. 2 - Rs.3)
                    = 25 (Re -1)
                    = - 25 or Rs. 25 (Adverse)

Variance : It is the deviation caused by the standards due to difference in quantity used. It is calculated by multiplying the difference between the standard quantity specified and the actual quantity used by the standard price.
Thus material usage variance is “that portion of the direct materials cost variance which is the difference between the standard quantity specified for the production achieved, whether completed or not, and the actual quantity used, both valued at standard prices.”

Material Usage or Quantity Variance
                                                            = Standard Rate (Standard Quantity - Actual Quantity)
                                                                                            (OR)
                                                                                  MUV = SR (SQ - AQ)

The reasons for usage variance are :
1. Careless handling of materials;
2. Wastages, scarp, spoilage etc. due to inefficient production method or unskilled employees;
3. Change in design or specifications of product;
4. Use of inferior materials;
5. Defective equipment and tools;
6. Non- standard material used;
7. Accounting errors;
8. Setting of proper standards;
9. Improper inspection;
10. Non-standard substitutes used;
11. Theft of materials;
12. Difference between actual yield from materials and standard yield.
13. Lack of proper tools and machines.

ILLUSTRATION 3 : From the following data calculate material usage variance :
Standard 20 Kg. at Rs. 5.50 per kg.
Actual 25 Kg. at Rs. 6 per kg.
Solution :
                    MUV = SR(SQ-AQ)
                            = Rs. 5.50 (20-25)
                            = Rs. 5.50 (-5)
                            = Rs. -27.50 or Rs. 27.50 (Adverse)

When two or more materials are used in the manufacture of a product, the difference between the standard composition and the actual composition of material mix is the Material mix variance. The variance arises due to the actual composition of material and the standard ratio. The formula is :

Direct material mix variance = Standard Rate (Standard mix - Actual Mix)

            i.) When actual weight of mix and standard weight of mix are the same
                               MMV = Standard Rate (Standard quantity - Actual quantity)
                                                                   or

                                                            SR (SQ-AQ)

Standard is revised due to the shortage of a particular type of material.

The formula is :
                               MMV = Standard Rate (Revised standard quantity - Actual quantity) 

Revised standard quantity = Standard Quantity of each material in total actual material in standard ration.   

Material Mix Variance :
Here, the actual weight of mix and standard weight of mix differ from each other therefore,
                MMV = Standard Rate (Revised Standard Quantity - Actual Quantity)
Here, the revised standard quantity formula :

                                Actual Quantity                     Standard Quantity
            A                        40                                            50

            B                        60                                            66

                       Total      100                                           116

RSQ for material 

                                            A = 40 = 44 units
                                            B = 60 = 66 units
Then,
MMV = Standard Rate (Revised Standard Quantity- Actual Quantity)
                     
Material 

                    A : 50(44-50) = Rs. 300 (Adverse)
                    B : 40(60-66) = Rs. 240 (Favourable)
                                            -----------
                                   Total   Rs. 60 (Adverse)

Revised material usage variance
= Standard Rate (Standard Quantity -Revised Standard Quantity)
Material A : Rs. 50 (40-44) = 200 (Adverse)
B : Rs. 40 (60-66) = 240 (Adverse)
-----------
Rs. 440 (A)

Material Cost Variance :
Material : MCV = (SQ´SP) -(AQ´AP)
A = (40´50)-(50´50) = 500 (A)
B = (60´40)-(60´45) =300 (A)
-----------
Rs. 800 (A)
MCV = MPV + MUV
Rs. 800 (A) = Rs. 300 (A) + Rs. 500 (A)
MUV = RUV + NMV
Rs. 500 (a) = Rs. 440 (A) + Rs. 60(A)

Direct Material Yield Variance :
It is that portion of the direct material usage variance which is the due to the difference between the standard yield specified and the actual yield obtained.
i) When actual mix and standard mix are the same the formula is :
MYV = Standard Yield Rate ( Standard Yield - Actual Yield)
(Or) = Standard Revised Rate (Actual Loss - Standard Loss)
Here Standard Yield Rate =
Net Standard Output = Gross Output - Standard Loss
ii.) When the actual mix and the standard mix differ from each other, the formula is :
Standard Rate =
Material Yield Variance
= Standard Rate (Actual Standard Yield - Revised Standard Yield)

ILLUSTRATION : The standard material cost for 100 kg of chemical D is made up of :
Chemical A - 30 kg. @ Rs. 4 per kg.
Chemical B - 40 kg. @ Rs. 5 per kg.
Chemical C - 80 kg. @ Rs. 6 per kg.
In a batch, 500 kg of chemical D where produced from a mix of
Chemical A - 140 kg. at a cost of Rs. 588
Chemical B - 220 kg at a cost of Rs. 1,056
Chemical C - 440 kg. at a cost of Rs. 2,860
How do you yield, mix and the price factor contribute to the variance in the actual per 100 kg of chemical D over the standard cost?
Solution :
MCV Rs.
Rs. 100.80(A)

MPV (Rs. 40.80)(A) MUV (Rs.60)(A)

MMV (Rs. 6.67)(A) MYV (Rs. 53.33)(A)
We have to find out the variance only for 100 kg of output. Therefore, the date required is calculated as follows :
Chemical A : Rate = = Rs. 4.20 per kg
Chemical B : Rate = = Rs. 4.80 per kg.
Chemical C : Rate = = Rs. 6.50 per kg
Chemical D (500 kg) the chemical A is 140 kg.
\ 100 kg of chemical D, the required :
Chemical A is = 28 kg.
Chemical B is = 44 kg.
Chemical C is = 88 kg.

(a) Material Cost Variance :
(SQ ´SP)-(AQ-AP)
Chemical A = (30´Rs.4)-(28´Rs. 4.20)= Rs. 2.40 (F)
Chemical B = (40´Rs.5)-(44´Rs. 4.80)= Rs.11.20 (A)
Chemical B = (80´Rs.6)-(88´Rs. 6.50)= Rs 92.00 (A)
--------------------
Total MCV = Rs. 100.80(A)
--------------------
(b) Material Price Variance :
AQ (SP - AP)
Chemical A = 28 (4-4.20) =Rs. 5.60 (A)
Chemical B = 44 (5-4.80) =Rs. 8.80 (F)
Chemical C = 88 (6-6.50) =Rs. 44.00 (A)
-------------------
Total MPV =Rs. 40.80 (A)

(c) Material Usage Variance :
SP(SQ-AQ)
Chemical A : 4(30-28) = Rs. 8(F)
Chemical B : 5(40-44) = Rs. 20(A)
Chemical C : 6(80-88) = Rs. 48(A)
------------
Total MUV = Rs. 60(A)
(d) Material Mix Variance :
SP (RSQ-AQ)
The actual quantity of 160 kg to be apportioned in the standard proportion, i.e., 30:40:80
Chemical A is = 32 kg.
Chemical B is = 42 kg.
Chemical C is = 85 kg.
MMV = SP(RSQ-AQ)
For Chemical A : 4(32-28) = Rs. 16.00(F)
Chemical B : 5(42-44) = Rs. 6.67(A)
Chemical C : 6(85-88) = Rs. 16.00(A)
-----------------
Total MMV = Rs. 6.67(A)

e) Material Yield Variance
Average standard price = = = Rs. 8
150 kg. mix will produce 100 kg.
\ 160 kg. of mix will produce = = 106 kg.
MYV = Average standard price (Actual Production - Standard Production)
= Rs. 8(100 Kgs-106 Kgs.)
= Rs. 8 (6) = Rs. 53.33(A)

II. LABOUR VARAINCES
Labour variances arise because of (i) difference in actual rates and standard rates of labour and (ii) the variation in action time taken by workers and the standard time allotted to them for performing a job. The various variances can be analysed as follows :
A. Labour Cost Variance
B. Labour Rate Variance
C. Labour Time or Efficiency Variance
D. Labour Idle Time Variance
E. Labour Mix Variance or Gang Composition Variance

The second important element of cost is labour. The management keeps a close watch on the labour cost in order to keep the cost of production low. The various labour variances are :
When one type of labour is employed :
LABOURT COST VARIANCE
(ST ´ SR) - (AT ´ AR)

Rate Variance Either
AT (SR-AR) Total Efficiency Variance
SR (ST - AT)
or
Yield Variance
Total efficiency variance may be sub-divided into two :
TOTAL EFFICIENCY VARIANCE
SR(ST-AT)

Idle time either
(SR ´IT) SR(ST-AT)
AT means less idle time
(or)
Yield variance
when different grades of labour are employed :

LABOUR COST VARIANCE
Rate Variance Total efficiency variance
AT (SR-AR) SR(ST-AT)

Mix Variance (Gang Composition) either
SR (RST AT) (or)
Yield variance
Total efficiency many be sub-divided into three, when idle time variance is also to be calculated :

TOTAL EFFICIECNCY VARIANCE
SR (ST-AT)

Idle time variance Mix variance either
SR ´ IT SR (RST-AT) SR(SR-rst)

LCV = LRV + LEV
LEV = LMV + LYV + LITV

(a) Labour Cost Variance or Labour Wage Variance
This variance represents the difference between the standard labour costs and the actual labour costs. That is, it is the difference between standard direct wages specified for the activity achieved and the actual direct wages paid.
Labour Cost Variance = Standard Cost of Labour - Actual Cost of Labour
= (Standard Time´ Standard Rate)-(Actual Time´Actual Rate)
= (ST´SR)-(AT´AR)

(b) Labour or Wage Rate Variance
This variance is the direct result of the wages paid at a rate different from the standard rated. That is, it is the different between the standard rate of pay specified and the actual rate paid.
Labour Rate
=Actual Time (Standard Wage Rage´Actual Wage Rate Variance )
= AT (SR-AR)
The reasons for wage rate variance :
1. Changes in basic wage rates.
2. Overtime work at higher or lower than standard rate.
3. Faulty recruitment.
4. Overtime work at higher or lower than specified hours.
5. Change in composition of gang at a different rate from standard.
6. Higher or lower rate paid to causal labourers.
7. Improper planning of overtime or bonus.
8. General rise in wages.
9. Wrong setting of standard rates of labour.
10. Higher wages paid because of urgent work.

(c) Labour Time or Labour Efficiency Variance
The terminology defines Labour Efficiency V as “the difference between the standard hours for the actual production achieved and the hours actually worked, valued at the standard labour rate.
Labour Efficiency Variance = Standard Rate (Standard Time -Actual Time)
= SR (SR-AT)

Favourable Factors
1. Strict supervision
2. Use of good quality materials.
3. Low labour turnover rate
4. High morale of workers
5. Proper working condition
6. Improved tools and machines
7. Good incentives
8. Worker’s co-operation
9. Right man at right work
10. Employment of skilled workers.

Unfavourable Factors
1. Improper training to employees
2. Inadequate supervision
3. Low employee morale
4. More idle time than normal
5. Incorrect instruction
6. Engaging new or unskilled workers
7. Workers’ dissatisfaction
8. Defective machinery
9. High labour turnover rate
10. Bad working condition
11. Failure of power supply
12. Use of sub-standard materials
13. Delay due to waiting for materials
14. Fixation of incorrect standard
15. Lack of co-operation

(d) Idle Time Variance
This type of variance arises because of the time during which the labour remains idle due to abnormal reasons, i.e., power failure, strikes, machine breakdown, shortage of materials etc.
Labour Idle Time Variance = Abnormal Idle Time ´ Standard Hourly Rate

(e) Labour Mix Variance or Gang Composition Variance
It results from employing different grades of labour from the standard fixed in advance. It is the difference between the standard composition of workers and the actual gang of workers.
i. When the total hours i.e. time of the standard composition and actual composition of workers do not differ, the formula is :
Mix = (Standard Cost of Standard Mix)-(Standard Cost of Actual Mix)
Variance
ii. When the total hours i.e. time of the standard composition and actual composition of workers differ, the formula is :
Labour Mix Variance
= -(Std.Costof ActualMix)
(f) Labour Yield Variance
It is the difference between the standard labour output and actual output or yield. It is calculated as below :
Labour Yield Variance
= Std. Cost per unit (Std. Production of Actual Mix - Actual Production)
If the actual production is more than standard production, it would result in a favourable variance and vice versa.

Relationship
a. Labour cost variance = Labour rate variance + Labour efficiency variance
b. Labour efficiency variance = Labour mix variance + Idle time variance
c. Labour efficiency variance = Labour yield variance +Idle time variance
d. Efficiency variance = Labour mix variance + yield variance + Idle time variance

ILLUSTRATIION : With the help of following information calculate
a. Labour cost variance
b. Labour rate variance
c. Labour efficiency variance
Standard hours : 40 @ Rs. 3 per hour
Actual hours : 50 @ Rs. 4 per hour
Solution :
a. Labour cost variance = (Std. time´ Std. rate)-(Actual time ´Actual rate)
= (40´ Rs.3)- (50´Rs. 4)
= Rs. 120-200 = Rs. -80
= Rs.80 (Adverse)
b. Labour rate variance = Actual Time (Std. rate -Actual rate)
= 50 (Rs. 3- Rs. 4) = Rs. -50
= Rs. 50 (Adverse)
c. Labour efficiency variance = Std. Rate (Std. time - Actual time)
= Rs. 3(40-50) = Rs. -30
= Rs. 30 (Adverse)

ILLUSTRATION : Using the following information, calculate the labour variance :
Direct wages : Rs. 3,000
Standard hours produced : 1,600
Standard rate per hour : 1.50
Actual hours paid 1,500 hours, out of which hours not worked (abnormal idle time) are 50.
Solution :
a) Labour Cost Variance
= (Std. time ´ Std. rate) -(Actual time ´Actual rate)
= (1,600´Rs. 1.50) -(1,500´Rs.2)
= Rs. 2,400 - Rs. 3,000
= Rs. 600 (Adverse)

b) Labour Rate Variance
= Actual time (Std. rate -Actual rate)
= 1,500 (Rs. 1.50 -2.00)
= 1500 (-Rs. .50) = - Rs. 750
= Rs. 750 (Adverse)

c) Labour Efficiency Variance
= Std. rate (Std. time - Actual time)
Actual time = Actual hour paid - Abnormal idle time
= 1,500 - 50 = 1,450
LEV = Rs. 1.50 (1,600-1,450)
= Rs. 1.50´150
= Rs. 225 (Favourable)

d) Idle time variance
= Idle time ´ Standard hourly rate
= 50 ´ Rs. 1.50
= Rs. 75(A)

III. OVERHEAD VARIANCE
Overhead variance is “the difference between the standard cost of overhead absorbed in the actual output achieved and the actual overhead cost”. The term overhead includes indirect material, indirect labour and indirect expenses and the variances relate to factory, office or selling and distribution overheads. Overhead variance are divided into two broad categories : (i) Variable overhead variance and (iii) Fixed overhead variances.
a) Standard overheads rate per unit =
b) Standard overheads rate per hour =
c) Standard hours for actual output = ´Actual output
d) Standard output for actual time = ´ Actual hours
e) Recovered or Absorbed overheads = Standard rate per unit´Actual output
or
Standard rte per hour ´ Budgeted hours
f) Budgeted overheads = Standard rate per unit´ Budgeted output
or
Standard rate per hour ´ Budgeted hours
g) Standard overheads = Std. rate per unit ´ Std. output for actual time
or
Standard rate per hour ´ Actual hours
h) Actual overheads = Actual rate per unit ´ Actual output
or
Actual rate per hour ´ Actual hours
OVER HEAD COST VARIANCE

Fixed Variable

Expenditure Volume Expenditure Efficiency

Efficiency Capacity Calendar

(A) VARIABLE SOVERHEAD VARIANCE
Variable cost varies in proportion to the level of output, while the cost is fixed per unit. As such the standard cost per unit of these overheads remains the same irrespective of the level of output attained. As the volume does not affect the variable cost per unit or per hour, the only factor leading to difference is price. The variance will result because of the change in the expenditure incurred.
i) Variance Overhead expenditure Variance
Variable Overhead Expenditure Variance

= (Actual hours worked - Std. Variable Overhead rate per hour)
- Actual Variable Overheads.
ii) Variable Overhead Efficiency Variance :
It shows the effect of change in labour efficiency on variable overheads recovery.
Formula :
Variable Overhead Efficiency Varia = Std. Rate (Std. Qnty - Actual Qnty)
Standard Overhead Ra = (Std. Time for Actual - Actual Time)
iii.) Variable Overhead Variance
It is divided into two : Overhead Expenditure Variance and Overhead Efficiency Variance.
That is,
Formula :
= Variable Overhead Expenditure Variance + Variable Overhead Efficiency 
Variance
OR
= (Std. variable overhea) - (Actual Variable Overhea)

(B) FIXED OVERHEAD VARIANCE
Fixed overhead variance depends on (a) fixed expenses incurred and (b) the volume of production obtained. The volume of production depends upon (i) efficiency (ii) the days for which the factory runs in a week (calendar variance) (iii) capacity of plant for production.

FOV = Actual Output (Fixed Overhead Rate - Actual Fixed Overheads)

(a) Fixed Overhead Expenditure Variance (Budgeted or cost variance): It is the portion of the fixed overhead which is incurred during a particular period due tot eh difference between the budgeted fixed overheads and the actual fixed overheads.
Fixed overhead expenditure variance
= Budgeted fixed overhead - actual fixed overhead.

(b) Fixed Overhead volume : This variance is the difference between the standard cost of overhead absorbed in actual output and the standard allowance for that output. This variance measures the over or under recovery of fixed overheads due to deviation of actual output from the budgeted output level.
i) On the basis of units of output :
Fixed overhead Volume Variance
= Standard Rate (Budgeted Output - Actual Output)
OR
= (Budgeted Cost - Standard Cost)
OR
= (Actual Output times Std. Rate) - Budgeted fixed overheads
ii.) On the basis of standard hours :
Fixed Overhead Volume Variance = Standard Rate per hour
(Budgeted Hours - Std. Hours)
Standard Hours = Actual Output + Standard Output per hour

CLASSIFICATION OF VOLUME VARIANCES

(i) Fixed Overhead Efficiency Variance :
This variance is closely related to labour efficiency variance. If the workers have been efficient, the production will be above standard as such overheads will be over-recovered. The portion of the overhead variation, which is due to the differences between the budgeted efficiency of production and the actual efficiency attained, is the efficiency variance.
Efficiency variance = Standard rate (Actual Production - Std. Production)
(or)
= Std. rate (Actual quantity - Std. quantity)

(ii) Fixed Overhead Calendar Variance :
It is the difference between the number of working days anticipated in the budget period and actual working days in the budget period. This may be the result of unexpected public holiday being declared, as such the work in the unit is stopped.
Fixed Overhead Calendar Variance
= Std. Rate per hours (day) ´ Excess of Deficit Hours of days worked

(iii) Fixed Overhead Capacity Variance
The variance which is related to the over and under-utilisation of plant or equipment is known as capacity variance. This variance arises because of the working above or below standard capacity. Strikes, idle time, lock-out etc. leads to under-utilisation, and extra shifts, overtime etc. lead to over-utilisation.
Capacity Variance = Std. Rate (Revised Budgeted Units - Budgeted Units)
(OR) = Std. Rate (Revised Budgeted Hours - Budgeted Hours)

ILLUSTRATION : From the following data, calculate overhead variances.

Budgeted
Actual
Output
15,000 units
16,000 units
Number of working days
25
28
Fixed overheads
Rs. 30,000
Rs. 30,500
Variable overhead
Rs. 45,000
Rs. 47,000

There was an increase of 5% in capacity.
Solution :
Std. Rate =
Fixed Variable
30,000 45,000
15,000 15,000
= Rs. 2.00 = Rs. 3.00
a) Variable overhead expenditure variance :
= Actual units ´ Std. rate - Actual variable Overhead cost
= (16,000´ Rs. 3) - 47,000 = Rs. 1,000(F)
b) Fixed overhead expenditure variance :
= Actual units ´ Std. rate - Actual fixed overhead cost
= 16,000 ´ Rs. 2 - 30,500
= Rs. 1,500 (F)
c) Total overhead cost variance = VOEV + FOV
= Rs. 1,000 (F) + 1,500 (F)
= Rs. 2,500 (F)
d) Volume variance= Actual units ´ Std rate -Budgeted fixed overheads
= 16,000 ´ 2 - 30,000
= Rs. 2,000 (F)
e) Expenditure variance=Budgeted fixed overheads-Actual fixed overheads
= Rs. 30,000 - Rs. 30,500
= Rs. 500 (A)
f) Capacity variance = Std. rate (revised budgeted units-budgeted units)
Revised budgeted units = budgeted units + increase in capacity
= 15,000 +
= Rs. 15,750
Capacity variance = Rs. 2 (15,750 - 15,000)
= Rs. 1,500 (F)
g) Calendar variance = Increase or decrease in production due to more or less working days ´ std rate per unit with the increase in capacity.
The std. production = 15,750
\ For 3 days (28-25) production
= ´3 = 1890 units
C.V. = 1890 ´ Rs. 2 = Rs. 3780 (F)
h) Efficiency variance = Std. rate (Actual production - Std. production)
Std. Production = 15000 units (Budgeted)
= 750 units (Capacity increased)
= units (3 days increased)
\ E.V. = Rs. 2(16,000-17,640)
= Rs. 3,280 (A)

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