Cost variance

Cost variance
See also
Direct expense Cost classification Costs of production Absorbed costs Cost of production Conversion cost Indirect labor Applied overhead Cost

Cost variance is the difference between the expenditure actually incurred and the planned cost. Cost variances mainly relate to the costs of manufacturing enterprises. We classify cost variances into three types:

• Material variances (Material Cost Variances, MCV)
• Labour variances
• Overhead variances

Variance analysis

According to The Institute of Cost and Management Accountants (UK) variance is the difference between standard cost and actual cost incurred during a period. Variance analysis examines the quantitative difference between actual and planned behavior. There are two phases of Variance analysis:

1. Computation of individual variances (material, labour, and factory overhead variances)
2. Determination of the cause of each variance

The amount of variances is not the only important thing to know in variance analysis, but also where the variances originated, who was responsible for them and why they arise.

Material variances

Material variances also known as Material cost Variances (MCV) is the difference between actual expenses spent for materials and planned cost of those materials.

$MCV=Stanadard\ Cost\ -Actual\ Cost\$

We distinguish material variances into:

• Material price variance (MPV) - is the difference between standard price and actual price for the purchase of materials.

$MPV=(Standard\ Price\ -Actual\ Price)\cdot Actual\ Quantity$

• Material usage (quantity) variance (MUV) - is the difference between standard usage and actual usage of materials.

$MUV=(Standard\ Quantity\ -Actual\ Quantity)\cdot Standard\ Price$

Material usage variance is divided into:

• Material mix sub-variance (MMSV) - it is the difference between the standard mix and the actual mix of different raw materials actually used and their corresponding standard price

$MMSV=Standard\ Cost\ of\ Actual\ Mix-Standard\ Cost\ of\ Standard\ Mix\$

• Material yield sub-variance (MYSV) - the difference between actual cost and standard cost of the output.

$MYSV=(Actual\ Yield\ -Standard\ Yield)\cdot Standard\ Cost\ Per\ Unit\$

Labour variances

Labour variance is the second type of cost variance. Labour cost variance (LCV) is the difference between standard labour cost and the actual labour cost. The Labour variance has two types:

• Labour rate variance (LRV) - the difference between the standard piece-wage rate and the actual piece-wage rate
• Labour efficiency variance (LEV) - the difference between the actual labour hours and the standard labour hours used to produce a product.

Overhead variances

Overhead variance is divided into:

• Variable overhead cost variance (VOCV) - the difference between the actual and the standard variable overheads cost for actual output. Variable overhead cost variance divide into two types:
• Variable factory overhead efficiency variance
• Variable factory overhead spending variance
• Fixed overhead cost variance (FOCV) - FOCV's components are:
• Fixed overhead spending variance
• Fixed overhead efficiency variance
• Volume variance - calendar variance, capacity variance, fixed overhead efficiency variance

$Volume\ variance=calendar\ variance+capacity\ variance+efficiency\ variance$

References

• Jain P.K. (2000) Cost Accounting, Tata McGraw-Hill Publishing Company Limited
• Lal J., Srivastava S. (2009) Cost Accounting 4E, Tata McGraw-Hill Publishing Company Limited
• Rajasekaran V., Lalitha R. (2011) Cost Accounting, Dorling Kindersley (India) Pvt. Ltd.

Author: Emilia Zapart