Variance analysis formula helps in calculating and examining of the difference between the standards numbers expected by the business to achieve and the actual numbers achieved by them and it is calculated by deducting the actual number achieved by the standards numbers expected by the business to achieve
What is the Variance Analysis Formula?
Variance analysis refers to the investigation, due to deviations, in the financial performance from the standards set by the company in the budget. It helps the management of the company to keep an eye and a control check on its operational performance.
Variance Analysis can apply to many variables, but they are generally and broadly categorize into the following different types:
- Material Variance
- Variable Overhead Variance
- Labor Variance
- Sales Variance
- Fixed Overhead Variance
Below are some of the Variance Analysis formulae that one can apply:
- Material Cost Variance Formula = Standard Cost – Actual Cost = (SQ * SP) – (AQ * AP)
- Labor Variance Formula= Standard Wages – Actual Wages = (SH * SP) – (AH * AP)
- Variable Overhead Variance Formula = Standard Variable Overhead – Actual Variable Overhead = (SR – AR) * AO.
- Fixed Overhead Variance Formula = (AO * SR) – Actual Fixed Overhead.
- Sales Variance Formula = (BQ * BP) – (AQ * AP)
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For eg:
Source: Variance Analysis Formula (wallstreetmojo.com)
NOTES:
Where,
- SQ = Standard Quantity for actual output,
- SP = Standard Price
- AQ = Actual Quantity
- AP = Actual Price
- SH = Standard Hours
- AH = Actual Hours
- SR = Standard Rate
- AR = Actual Rate
- AO = Actual Output
- BQ = Budgeted Quantity
- BP = Budgeted Price
Explanation of the Variance Analysis Formula
There are various aspects of variance analysis formula, as mentioned above. The difference between the direct material’s standard costStandard CostStandard cost is an estimated cost determined by the company for the production of the goods and services or for performing an operation under normal circumstances and are derived by the company from the historical analysis of the data or from the time and the motion studies.read more and direct material’s actual cost that the firm uses for its production can be termed as Material Variance (Cost Variance). The first term in every formula is associated with a standard that is set and the second term in every formula state in actual, and the difference gives us whether that Variance is favorable or adverse. When the result is positive, that is favorable versus the result that comes in negative is adverse.
Examples of Variance Analysis Formula (with Excel Template)
Let’s see some simple to advanced examples of Variance Analysis Formula to understand it better.
Example # 1
Below is the summary extracted from ABC Ltd., which is engaged in manufacturing steel. You are required to do material and labor variance analysis.
Below is given data for the calculation of variance analysis.
Calculation of Standard Quantity for AO
Calculation of Standard Hours for AO
Calculation of Material Cost Variance
Material Cost Variance Formula = Standard Cost – Actual Cost
= (SQ * SP) – (AQ * AP)
= (320*11) – (300*9)
Material Cost Variance will be –
=2080 (Favorable)
Calculation of Labor Variance
Labor Variance formula = Standard wages – Actual Wages
= (SH * SP) – (AH * AP)
= (240*9) – (350*8)
Labor Variance will be –
=640 (Adverse)
Example # 2
Prashant industries, a well-renowned company in the manufacturing of copper cables, is worried about its actual performance due to an increment of overhead expenses and has provided you the below data and asked you to conduct overhead analysis for both fixed and variable.
Below is given data for the calculation of variance analysis.
Calculation of Variable Overhead Variance
Variable Overhead Variance = Standard Variable Overhead – Actual Variable Overhead = (SR – AR) * AO
= (25 – 27) * 80
Variable Overhead Variance will be –
=160 (Adverse)
Calculation of Fixed Overhead Variance
Fixed Overhead Variance = (AO * SR) – Actual Fixed Overhead
=(80 * 25) – 2500
Fixed Overhead Variance will be –
=500 (Adverse)
Example # 3
Silver ltd has been trying to analyze its issue related to performance as it is not able to analyze why it shortfall with meeting its street estimate profits, and upon initial investigation, it found out that its operating profit is fluctuating year on year. Hence, the driver for the same was gross profit, and hence it decided to review its production-related issues, if any. You are required to conduct all the variance analysis and advise the management of Silver ltd where the issue lies.
Below is given data for the calculation of variance analysis.
Calculation of Standard Quantity for AO
Calculation of Standard Hours for AO
Calculation of Material Cost Variance
Material Cost Variance Formula =Standard Cost – Actual Cost
=(SQ * SP) – (AQ * AP)
=(1080*3.55) – (2700*4)
Material Cost Variance will be –
=6966 (Adverse)
Calculation of Labor Variance Formula
Labor Variance formula = Standard wages – Actual Wages
= (SH * SP) – (AH * AP)
=(12960*2) – (11000*1.5)
Labor Variance will be –
= 9420 (Favorable)
Calculation of Variable Overhead Variance
Variable Overhead Variance = Standard Variable Overhead – Actual Variable Overhead = (SR – AR) * AO
=(2 – 1.5) * 2700
Variable Overhead Variance will be –
=1350 (Favorable)
Calculation of Fixed Overhead Variance
Fixed Overhead Variance = (AO * SR) – Actual Fixed Overhead
=(2700 * 2) – 7000
Fixed Overhead Variance will be –
=1600 (Adverse)
Calculation of Sales Variance
Sales Variance = (BQ * BP) – (AQ * AP)
=(2500*5.6) – (2700*5.5)
Sales Variance will be –
=850 (Adverse)
Relevance and Uses
It can be said that variance analysis involves the isolation of different causes for variation in budgeted when compared with actual outcomes. Variance analysis aids in management by exceptionManagement By ExceptionManagement by exception is a strategy which states that managers and supervisors should investigate and develop solutions for issues with a deviation from set standards, norms, business practices, profits deviation, quality issues and infrastructure issues instead of examining and dealing with routine business activities.read more concept by depicting all the deviations from standards that are affecting the firm’s financial performance. If variance analysis is not performed, then such exceptions may cause a delay in action from the management, which was very much necessary in that particular situation. The performance of each and every responsibility which is assigned to different departments is measured and will be then evaluated against standards with respect to areas that are within its direct control.
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