Question

Post one current article, with a summary of at least 250 words, that relates to Activity variance.

Answer 1

Activity Variance

Activity Variance is the difference between the budgeted or expected cost or income for an activity and actual costs for an activity. An activity variance is due solely to the difference in the actual level of activity used in the flexible budget and the level of activity assumed in the planning budget.

Under Activity Variance Analysis, the overheads variances are calculated for each activity . Let's take an example on activity variance :- Suppose Jerry's icecream shop identified three significant activities and thus established three standard rates to allocate overheads instead of one rate. Information of these three activities are as under-

Activity            Standard Rate        Standard Quantity Actual Costs       Actual

                                                           per unit produced                                Quantity

Purchase orders    $25 per order              0.01 orders per unit       $42000           1600 orders

Product Testing      $0.20per test minute   1 minute per unit    $31000           180000 test min

Energy                  $0.05 per minute of     2 minutes per unit        $27000            575000 minutes

                             machine time                                                                 of machine time

In above case, the total overhead costs are $100000 ($42000+$31000+$27000) but these are divided into 3 activities and now variances will also be calculated on the basis of these activities and not on total basis. In this case, the management will able to calculate spending and efficiency variance of each activity.

With the help of activity variance, one can be able to find variances activities wise which will help management to decide that which activity is a value-added in the production or business and which are non-value added activities and required to remove out. If actual amount of overheads is less than budgeted amount of activity, then variance is described as favourable otherwise it will be unfavourable.