VARIANCE ANALYSIS
P R E S E N T E D B Y: GURLEEN KAUR M B A ( 3 RD S E M )
VARIANCE
Variance represents the difference between actual and
budgeted values (Revenue and Expense).
It helps in analyzing the financial performance of the total
business unit or various responsibility centers.
CALCULATING VARIANCES
Although
the main focus is on comparing actual performance with the budget, competent operating manager nevertheless adopt a continuous improvement or Kaizen mentality. Some companies merely report about the amount of variances but not the reasons behind those variances. Thorough analysis identifies the cause of variances and organization unit responsible for that. Effective systems identify variances to the lowest level of management.
TYPES OF VARIANCES
Total Variance
Nonmanuf acturing costs Marketing
Manufact uring Costs
Sales
Administr ation
R&D
Variable Costs
Fixed Costs
Volume
Selling Price
Material
Direct Labor
Variable Overhead
Market Share
Industry Volume
REVENUE VARIANCE
In this we calculate selling price, volume and mix
variances.
This is calculated for each product line and product line
results are aggregated to calculate the total variance.
Positive variance is favorable which means we have
higher profit than budgeted, and negative variance is unfavorable.
1) SELLING PRICE VARIANCE
It is calculated by multiplying the difference between
actual price and standard price with the actual volume. Example: For Product A: Volume =1,00,000 units Actual Price=5 Rs Standard Price=4.50Rs So, Selling Price Variance= (5-4.50)*100000 =50,000 Rs. (favorable)
2) MIX AND VOLUME VARIANCE
Volume variance results from selling different number of
units.
Mix variance results from selling a different proportion of
products from that assumed in the budget.
Often mix and volume variances are not separated.
Mix and Volume variance=(Actual volume Budgeted
volume)*Budgeted unit contribution
Example:
For product A: Actual volume is 10000units Budgeted volume is 12000units Budgeted contribution is 2Rs per unit In that case we have Rs. 4000(unfavorable)profit
SEPERATING MIX VARIANCE FROM VOLUME VARIANCE
Mix variance for each product is found from the following
equation:
Mix variance=[(Actual volume of sales)-(Total actual volume of sales*Budgeted proportion)*Budgeted unit contribution]
EXAMPLE(MIX VARIANCE)
Budget mix Budgeted at actual Actual Product proportion volume sales
Unit Difference contributio Variance (4)-(3) n (5)-(6) -50 50 nil 0.2 0.9 nil -10 45 nil 35
A
B C
1/3 1/3 1/3
150 150 150 450
100 200 150 450
Total
Volume variance can be calculated by subtracting the mix
variance from the combined mix and volume variance.
It can be calculated for each product as follows:
Volume variance= [(Total actual volume of sales)*(Budgeted percentage)-(Budgeted sales)]*(Budgeted unit contribution)
EXAMPLE(VOLUME VARIANCE)
Product
Budget mix at actual Budgeted volume Volume
150 100
Difference (2)-(3) 50
Unit Variance contribution (5)-(6) 0.2 10
B
C Total
150
150 450
100
100 300
50
50
0.9
1.20
45
60 $115
EXPENSE VARIANCE
Fixed costsVariance between actual and budgeted fixed
costs are obtained by subtracting since these cost are not affected by volume of sales or production.
Variable costs Variable cost varies directly and
proportionately with volume. The budgeted variable manufacturing costs must be adjusted to the actual volume of production.
EXAMPLE(FIXED COST VARIANCE)
Actual
Budget $75 55 $75 50
Favorable or Unfavorable Variances (5)
Fixed overhead Selling expense
Administrative expense
30 $160
25 $150
(5) $(10)
Total
EXAMPLE(VARIABLE MANUFACTURING EXPENSE VARIANCE)
1 2 3 4
5 6 7
Product
B $84 18
C $300 20
Material Labor
Overhead (variable)
$75 15
Total $459 53
Budget $470 65
Favorable or Unfavorabl e Variances $(11) (12)
30
$120
30
$132
40
$360
100
$612
90
$625
10
$(13)
Total
VARIANCE IN PRACTICE
TIME PERIOD OF COMPARISON
FOCUS ON GROSS MARGIN
EVALUATION STANDARD
Predetermined standard 2. Historical standard 3. External standard
1.
LIMITATIONS OF VARIANCE ANALYSIS
WHY THE VARIANCE OCCURRED
APPLICABLE ONLY IN FREQUENT INTERVALS
PERFORMANCE OF ONE DEPARTMENT OFFSET
BY SECOND DEPARTMENT DONT SHOW FUTURE ACTIONS
THANK YOU!!!
