Variance analysis guide

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Variance analysis guide

SMA EXAM REFERENCE PACK | MODULE 3 | PRINT AND KEEP WITH YOUR NOTES

How to use this guide. A variance is the gap between what actually happened and what the budget planned. Learn

the letters, use one test for F or U, then let the map send you to the right card. Each card ends with a worked line

from the same small example, so you can see the numbers go in.

The example used in this guide

Maple Lane Jams (imagined) plans to make and sell 2,000 jars of jam a month. Budgeted variable cost is $4.90

a jar ($2.40 fruit + $1.80 labour + $0.70 overhead), so the budgeted contribution margin is $8.60 - $4.90 = $3.70

a jar.

Budget (static) Actual

Jars made and sold 2,000 2,300

Selling price per jar $8.60 $8.20

Fruit 0.4 kg a jar at $6.00 per kg 970 kg at $5.80 per kg

Labour 0.05 hours (3 minutes) a jar at $36 an hour 104 hours at $38 an hour

Variable overhead $14 per labour hour $1,700 in total

Fixed overhead $3,200 a month ($1.60 a jar on budgeted

output)

$3,410

The letters in every formula

Letter Plain meaning Maple Lane

AQ Actual quantity: units actually sold, or input actually used 2,300 jars sold; 970 kg of fruit used

AP Actual price: the selling price actually charged, or the price

actually paid per unit of input

$8.20 a jar; $5.80 per kg

BQ Budgeted quantity: units the static budget planned to sell 2,000 jars

BP Budgeted price: the budgeted selling price, or the budgeted

(standard) price per unit of input

$8.60 a jar; $6.00 per kg

BQ allowed Input the budget allows for the output actually made: budgeted

input per unit x actual units made

0.4 kg x 2,300 = 920 kg

Bcm Budgeted contribution margin per unit: budgeted price - budgeted

variable cost per unit

$8.60 - $4.90 = $3.70

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F or U? One test for every variance

Item Actual higher than budget Actual lower than budget

Money in: selling price, units sold F - more profit U - less profit

Money out: price paid, input used, overhead

spent

U - less profit F - more profit

Ask one question: did this difference leave profit higher (F) or lower (U) than the budget? Write F or U beside every

dollar amount. A bare plus or minus sign is easy to misread under exam pressure.

Find the variance you need

Which figure moved away from the budget?

The selling price per unit

Selling price variance Card 1

The number of units sold

Sales volume variance Card 2

The price paid per kg, per hour or per driver hour Price variance

rate (labour), spending (overhead)

Card 3

The quantity of input used for the output made Efficiency variance

also called usage (materials)

Card 4

Both the price paid and the quantity used Price and efficiency

together = flexible budget variance

Cards 3 + 4

The total fixed overhead bill

Fixed overhead spending variance Card 5

The number of units produced (fixed overhead)

Production volume variance Card 6

Sales variances

Card 1: Selling price variance SALES

What it measures: the profit effect of charging a different price per unit on the units actually sold.

(AP - BP) x AQ sold

F OR U Charged more than the budgeted price = F. Charged less, for example after discounting = U.

MAPLE LANE ($8.20 - $8.60) x 2,300 jars = $920 U

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Card 2: Sales volume variance SALES

What it measures: the profit effect of selling more or fewer units than the static budget planned.

(AQ sold - BQ sold) x Bcm

F OR U Sold more units than planned = F. Sold fewer = U.

WATCH OUT Value the extra or missing units at the budgeted contribution margin, not the selling price: each

extra unit also brings extra variable cost.

MAPLE LANE (2,300 - 2,000) x $3.70 = $1,110 F

Variable cost variances: materials, labour and overhead

Card 3: Price variance COST

What it measures: the cost effect of paying a different price for each unit of input: per kg, per labour hour or per driver

hour.

(AQ x AP) - (AQ x BP) = (AP - BP) x AQ

ALSO CALLED Labour: rate variance. Variable overhead: spending variance. The formula is the same for all three

costs.

F OR U Paid above the budgeted price = U. Paid below it = F.

MAPLE LANE Fruit: (970 kg x $5.80) - (970 kg x $6.00) = $5,626 - $5,820 = $194 F

Card 4: Efficiency variance COST

What it measures: the cost effect of using more or less input than the standard allows for the output actually made.

FIRST FIND BQ ALLOWED. Budgeted input per unit x actual units produced. Fruit: 0.4 kg x 2,300 jars = 920 kg. Base

it on units actually produced, not the units in the original budget.

(AQ x BP) - (BQ allowed x BP) = (AQ - BQ allowed) x BP

ALSO CALLED Materials: usage variance.

F OR U Used more than allowed = U. Used less = F.

MAPLE LANE Fruit: (970 kg x $6.00) - (920 kg x $6.00) = $5,820 - $5,520 = $300 U

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Price and quantity together: three columns

Actual results

AQ x AP

970 kg x $5.80

$5,626

Flexed budget

AQ x BP

970 kg x $6.00

$5,820

Flexible budget

BQ allowed x BP

920 kg x $6.00

$5,520

Price variance (Card 3)

$194 F

Efficiency variance (Card 4)

$300 U

Flexible budget variance = $5,626 - $5,520 = $106 U

Quick check. The price and efficiency variances must add up to the flexible budget variance (actual cost - flexible

budget cost). Fruit: $194 F + $300 U = $106 U. If they don't agree, recheck the middle column.

Same method for all three variable costs

Only the meaning of the letters changes. Some textbooks write AH, SR and SH (actual hours, standard rate,

standard hours allowed); they mean AQ, BP and BQ allowed.

Cost AQ AP and BP BQ allowed

Direct materials kg actually used actual and budgeted price per

kg

budgeted kg per unit x actual

units made

Direct labour hours actually worked actual and budgeted wage

rate per hour

budgeted hours per unit x

actual units made

Variable overhead actual quantity of the cost

driver, such as labour hours

actual and budgeted

overhead rate per driver unit

budgeted driver quantity per

unit x actual units made

Maple Lane's variable cost variances

Labour hours allowed = 0.05 hours x 2,300 jars = 115 hours. Variable overhead follows labour hours, so it uses

the same 104 actual and 115 allowed hours.

Cost Price variance Efficiency variance Flexible budget

variance

Fruit $5,626 - $5,820 = $194 F $5,820 - $5,520 = $300 U $106 U

Labour (104 x $38) - (104 x $36) = $208 U (104 - 115 hours) x $36 = $396 F $188 F

Variable overhead $1,700 - (104 x $14) = $244 U (104 - 115 hours) x $14 = $154 F $90 U

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Fixed overhead variances

Fixed overhead stays the same whatever the output (within the relevant range), so there is no efficiency

variance. Two variances replace it. The fixed rate is budgeted fixed overhead divided by budgeted output:

$3,200 / 2,000 jars = $1.60 a jar.

Actual fixed overhead

what was really spent

$3,410

Budgeted fixed overhead

the lump sum in the static budget

$3,200

Allocated fixed overhead

actual units x fixed rate

2,300 x $1.60

$3,680

Spending variance (Card 5)

$210 U

Production volume variance (Card 6)

$480 F

Card 5: Fixed overhead spending variance FIXED OVERHEAD

What it measures: the gap between the fixed overhead actually incurred (rent, salaries, insurance) and the budgeted

lump sum.

Actual fixed overhead - budgeted fixed overhead

F OR U Spent above the budget = U. Spent below it = F.

MAPLE LANE $3,410 - $3,200 = $210 U

Card 6: Production volume variance CAPACITY

What it measures: how much budgeted fixed overhead was under- or over-allocated because output differed from the

budgeted level.

Budgeted fixed overhead - allocated fixed overhead

ALLOCATED Actual units produced x fixed rate per unit. If the rate is per hour, use the hours allowed for the

actual output.

F OR U Output below the budgeted level = U: overhead under-allocated, spare capacity. Output above it =

F: over-allocated.

MAPLE LANE $3,200 - (2,300 x $1.60) = $480 F

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Why it might have happened: linked pairs

Pattern What it can mean

Material price F, material usage U Maple Lane paid 20 cents less per kg but used 50 kg more than allowed.

Cheaper fruit is often poorer fruit, so more of it is thrown away.

Labour rate U, labour efficiency F Maple Lane paid $38 an hour instead of $36 and saved 11 hours. Experienced,

better-paid staff often work faster.

Selling price U, sales volume F Maple Lane charged 40 cents less and sold 300 more jars. A lower price usually

lifts demand.

Labour efficiency and overhead efficiency

together

Both are measured in labour hours here, so the 11 hours saved show up in

both.

Production volume U Output fell short of the budgeted level: weaker demand, breakdowns or supply

problems. Spare capacity to fill or remove.

Remember: a variance shows where to look, not who to blame. It may also mean the budget itself was unrealistic.

Read linked pairs together before judging a manager.

From budgeted profit to actual profit

Start from the profit the static budget planned, then add each variance in turn. After the sales volume variance

you have reached the flexible budget profit ($5,310).

Step Variance Running profit

Static budget operating profit $4,200

Sales volume variance $1,110 F $5,310

Selling price variance $920 U $4,390

Fruit price variance $194 F $4,584

Fruit usage variance $300 U $4,284

Labour rate variance $208 U $4,076

Labour efficiency variance $396 F $4,472

Variable overhead spending variance $244 U $4,228

Variable overhead efficiency variance $154 F $4,382

Fixed overhead spending variance $210 U $4,172

Actual operating profit $28 U net $4,172

Check: $18,860 sales - $5,626 fruit - $3,952 labour - $1,700 variable overhead - $3,410 fixed overhead = $4,172. The

production volume variance ($480 F) is not in this bridge, because fixed overhead is a lump sum in both budgets here. It is

a signal about capacity, not a change in profit.

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