Variance analysis explained

A variance is the difference between what something should have cost, or earned, and what it actually did. Each one splits that difference into a price effect and a quantity effect, so a manager can see why profit moved.

Cost variance	Standard cost less actual cost
Favourable	Actual cost below standard, or revenue above it
Price and rate	Use the actual quantity bought or hours paid
Usage and efficiency	Use the standard price or rate

Materials and labour

Materials price: (standard price × actual quantity) − actual cost.
Materials usage: (standard quantity for actual output − actual quantity) × standard price.
Labour rate: (standard rate × hours paid) − actual cost.
Labour efficiency: (standard hours for actual output − hours worked) × standard rate. Idle time is hours paid but not worked, at the standard rate, and is always adverse.

Overheads and sales

Variable overhead expenditure and efficiency follow the labour pattern, using the variable overhead rate per hour.
Fixed overhead expenditure: budgeted less actual. Under absorption costing, fixed overhead volume: (actual output − budgeted output) × standard fixed overhead per unit.
Sales price: (actual price − standard price) × actual units. Sales volume: (actual units − budgeted units) × standard profit, or standard contribution under marginal costing.

The operating statement

Start from budgeted profit, add every favourable variance and deduct every adverse one, and you reach actual profit. Under marginal costing the statement starts from budgeted contribution and there is no fixed overhead volume variance.

Try 3 questions

Question 1 · Section A · Syllabus E1, E22 marks

Materials variances

The standard material cost of the Alto at Redcar Co is 2 kg at $12 per kg.

Last month 5,600 units were made. 11,260 kg were bought and used, costing $132,868.

What is the materials price variance? (2 marks)

	Answer
Variance ($)
Favourable or adverse

Question 2 · Section A · Syllabus E1, E22 marks

Fixed overhead variances

Langdon Co uses standard absorption costing. Budgeted fixed production overhead is $31,200 for a budgeted output of 2,600 units, absorbed on standard labour hours (2 hours a unit, so $6 per hour).

Actual output was 2,900 units, using 5,710 labour hours. Actual fixed overhead was $33,100.

What is the fixed overhead expenditure variance? (2 marks)

	Answer
Variance ($)
Favourable or adverse

Question 3 · Section A · Syllabus E1, E22 marks

Sales variances

Jarrow Co budgeted to sell 2,900 units of the Alto at $123 each. The standard cost card is:

Cost	Standard	$ per unit
Direct material	5 kg at $4 per kg	$20
Direct labour	2 hours at $16 per hour	$32
Variable overhead	2 hours at $6 per hour	$12
Fixed overhead	2 hours at $14 per hour	$28

Actual sales were 3,400 units at $121 each.

What is the sales price variance? (2 marks)

	Answer
Variance ($)
Favourable or adverse

Next step

Take the free diagnostic Start the free cost behaviour lesson

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Questions people ask

What is a favourable variance?

One that makes profit higher than standard: a cost below its standard, or revenue above it.

Why is the price variance based on the quantity bought?

So the variance is recognised when the material is purchased and inventory can be held at standard cost.

What is the difference between the absorption and marginal sales volume variance?

Absorption costing values the extra or missing units at standard profit; marginal costing at standard contribution.