Tag: Variance Analysis

The sales volume variance has two components, the sales mix variance and the sales quantity variance. The sales mix variance shows the effect of the difference between the actual and budgeted sales mix. The sales quantity variance shows the effect of the difference between the actual volume sold at the budgeted mix and the budgeted volume.

The total sales variance sometimes referred to as the sales value variance is the difference between the actual sales and budgeted sales and can be split and analysed into the sales volume variance and the sales price variance.

This tutorial explains the normal costing system and the main differences it has to an actual costing system and a standard costing system.

In a standard costing accounting system, fixed manufacturing overhead has two main variances budget and volume. Fixed overheads are those costs which do not vary in response to the level of production output. To operate a standard costing system and allocate fixed overhead, the business must first decide on the basis of allocation, and calculate the standard fixed overhead allocation rate.

In a standard costing accounting system, variable manufacturing overhead has two main variances rate and efficiency. Variable overheads are those costs which vary in response to the level of production output but which cannot be attributed to individual units of production. To operate a standard costing system and allocate variable overhead, the business must first decide on the basis of allocation.

In a standard costing accounting system, direct labor has two main variances price and efficiency. Unlike direct materials, direct labor is used at the same time as it is purchased, and therefore the price and efficiency variances occur at the same time on the same production run, and a single journal is needed post the variances together with the standard and actual cost to the accounting system.

The direct labor efficiency variance is one of the main variances used in standard costing and represents the difference between the standard quantity of labor and the actual quantity of labor used, multiplied by the standard labor rate.

The direct material quantity variance is one of the main variances used in standard costing and represents the difference between the standard material quantity and the actual material quantity, multiplied by the standard price per unit.

The direct materials price variance is one of the main variances used in standard costing and represents the difference between the standard material unit price and the actual material unit price, multiplied by the quantity of units used.

This tutorial deals with standard costing and variance analysis which is used by management to the monitor business performance against predetermined standard costs using variance reports. Standard costing is also a useful tool for valuing inventory and providing estimated selling prices to customers.