Question

Post at least one example using the concept Activity variance and apply it to a company or a project.

Answer 1

Activity Variance

Meaning:- Variance Analysis is the quantitative investigation of the difference between actual and planned behaviour. Activity Variance is the difference between an actual revenue or cost and the revenue or cost in the Flexible Budget that is adjusted for the Actual level of activity of the period.

Causes:- There are three primary causes of budget variance:- errors, changing business conditions and unmet expectations. Errors by the creators of the budget can occur when the budget is being compiled. These include a number of reasons including wrong assumptions or relying on state/bad data.

Calculation:- In activity-based variance analysis, first step is that all overhead costs are assigned to a level of activity. For such allocation activity, next standards(standard rates) are calculated by dividing annual overhead cost to cost centre's practical capacity. Practical capacity is used so that idle capacity may be found and put to better use. The standard rates calculated for batch and product level activities do not vary with production volume. This is difference between ABC and traditional variance analysis.

Activity variance can be examined for the unit-level, batch level, and product-level activities. Since facility level costs can only be assigned arbitrarily, variances cannot be calculated for this level of activity.

Example of Activity variances

Larry's Flexible Budget Compared with Actual:-

Particulars	Revenue/Cost Formulas	Flexible Budget	Actual	Activity Variance
Number of Units (Q)		550	500
Revenue	75Q	$41250	$37500	$3750 F
Expenses:-
Wages and salaries	($5000+$30Q)	$21600	$20000	$1500 U
Gasoline & Supplies	($9Q)	4950	4500	450 U
Equipment Maintenance	($3Q)	1650	1500	150U
Office & Shop Utilities	($1000)	1000	1000	-
Office & Shop Rent	($2000)	2000	2000	-
Equipment Depreciation	($2500)	2500	2500	-
Insurance	($1000)	1000	1000	-
Total expenses		34600	32500	2100 U
Net Operating Income		$6650	$5000	$1650 F

Unit Level Costs of a Newly Established Project :-

Model	Standard Quantity (Machine Hours)	Actual Quantity (Machine Hours)	Standard Rate*	Variance
A	38400	39000	$3.20	$1920U
B	19200	20000	$3.20	$2560U
Total	57600	59000		$4480U

*Annual Cost/Practical Capacity = $184320/57600= $3.20 per hour