Variance Analysis

Variance Analysis

1. Absorption Costing

   • Standard Costing
     • Basic
       • Too Low
     • Ideal
       • Too High
     • Historical
       • Too Low
     • Attainable
       • Just right
   • Overhead Absorption Rate

2. Adverse or Favourable?

3. Materials

   • Price
     • Favourable
       • Standard Price set too high
       • Unexpected discount
       • Unexpected market price fall
       • Lower quality of material used
       • Careful purchasing
       • Gaining bulk discounts by buying larger quantities
     • Adverse
       • Standard price set too low
       • Unexpected general price increase
       • Higher quality material used
       • Careless purchasing
       • Losing bulk discounts by buying smaller quantities
   • Usage
     • Favourable
       • Standard usage set too high
       • higher quality of material used
       • Stricter quality control
     • Adverse
       • Standard usage set too low
       • Lower quality of material used
       • Lower grade of worker used the material less efficiently
       • theft

4. Labour

   • Rate
     • Favourable
       • Standard rate set too high
       • Lower grade of worker used
       • pay cut or pay freeze
     • Adverse
       • Standard rate set too low
       • Higher grade of worker used
       • Higher rate due to pay award
   • Efficiency
     • Adverse
       • Standard hours set too low
       • Lower grade of worker
       • Lower grade of material harder to work with
       • Poor motivation maybe because of pay
     • Favourable
       • Standard hours set too high
       • Higher grade of worker
       • Higher grade of material - quick to process
       • More efficient due to pay rise - motivation
   • Idle Time (always adverse)
     • Shortage of work
     • Machine Breakdown
     • Shortage of material

5. Overheads

   • Variable
     • Expenditure
       • Standards set too high or low
     • Efficiency
       • See Labour Efficiency variance
   • Fixed
     • Expenditure
       • Adverse
         • Increase in costs
         • Original budget too low
       • Favourable
         • Cost savings
         • Original budget too high
     • Volume
       • Adverse
         • Fall in demand - lower production levels
         • Loss in orders
         • Production loss due to strike
       • Favourable
         • Increase in demand
         • Unexpected order
         • Original Budget activity too low