Question

What are the formula of Standard costs for variance Analysis (Effieciency Variance and Price Variance) ?

Answer 1

The efficiency variance is the difference between the actual unit usage and the expected amount of it.The expected amount is the standard quantity of direct materials ,direct labour ,machine usage time and so forth that is assigned to a product.However the efficiency variance can be applied for services rendered.

The efficiency variance is calculated separately for each of the following costs:

• Direct Materials-This is called the material yield variance and is calculated as (Actual unit usage-Standard unit usage)*Standard Cost per unit
• Direct Labour-This is the labour Efficiency Variance and is related more to material usage than to efficiency .It is calculated as (Actual Hrs-Standard Hrs)*Standard rate
• Overhead-This is known as the overhead efficiency variance.and calculated as (Actual Hrs-Standard Hrs)*Standard Overhead rate

The Price variance is the actual unit cost of a purchased item minus its standard cost multiplied by quantity of actual units purchased.

The Price Variance =(Actual Cost Incurred-Standard Cost)*Actual quantity of units purchased.

If the actual cost incurred is lower than standard cost there is a favourable variance viceversa a unfavourable variance.However achieving a favourable variance might only be achieved by purchasing goods in large quantities which may put the business at risk of never using the inventory.Conversly the purchasing department would commit to have a lower inventory and so buys materials in small quantities.

The price variance concept can be applied to the following variances.

• Material Price variance-(AR-SR)* SQ
• Direct Labour rate variance-(ARH-SRH)*AH
• Variabe OH spending variance-(SR*AU)-Actual Variable OH Cost
• Fixed OH spending Variance-.(Actual FOH-Budgeted FOH)