Variance Analysis is very important as it helps the management of an entity to control its operational performance and control direct material, direct labor, and many other resources.
The following are the list of 15 Variance Formula along with detail of Variance Analysis for your reference.
Each variance listed below has a clear explanation, formula, example, and definition to help you get better to understand both for your example and practice.
List of Variance Formula:
Sales Volume Variance:
Sales Volume Variance is the difference between actual sales in quantity and its budget at the standard profit per unit.
This variance help management to assess the effect of entity profit as the result of differences between the target sales in the unit and actual sales at the end of the period.
Sales Volume Variance normally measure in monetary term (USD), not in the unit. One is Sales Mixed Variance and another is Quantity Variance. See the picture below for detail:
Here is the Sales Volume Variance Formula,
Sales Volume Variance = (Actual Sales at Actual Mix – Budget Sales at Standard Mix) X Contribution Per Unit
Sales Mix Variance:
Sales Mix Variance is basically the difference between the entity’s Standard Sales Mix and its Actual Sales Mix. But, what is Sales Mix?
Well, Sales Mix is simply meant the proportion of each product to the total product. For example, assuming that Apple has four products: MacBook, iPhone, iPod, and IPad.
In 2017, Apple had budget sales for the amount of its product USD 100 Million. The proportion of this sale from every four products is MacBook 40%, iPhone 40%, IPod 10%, and IPad 10%. Well, you can break it down into the unit if you like.
So, that is the Sales Mix. The Sales Mixed Variance of Apple is the difference between the above budget and actual sales.
Here is the Sales Mix Variance Formula:
Sales Mix Variance Formula = (Actual Sales at Actual Mix – Actual Sales at Standard Mix) X Contribution Per Unit
Sales Quantity Variance:
If Marginal Costing is used,
Sales Quantity Variance Formula = (Actual Sales at Standard Mix – Budget Sales at Standard Mix) X Contribution Per Unit
Different between Sales Volume Variance and Sales Quantity Variance is:
- Sales Quantity Variance compare Actual Sales at Standard Mix and Budget Sales at Standard Mix and,
- Sales Volume Variance compares Actual Sales at Actual Mix and Budget Sales at Standard Mix.
Sale Volume Variance measures the high-level different while Sale Quantity Variance measure low-level variance. See the picture above.
No more confusing, okay?
Sales Price Variance:
Sales price variance measures the effect of profit from the actual price at the actual unit sold with the standard price at the actual unit.
Assuming Apple has the standard price for iPhone 7 Plus per unit, $800, and during the year, the actual price that is obtained from customers is $850 per unit. So what is the Sales Price Variance of the iPhone 7 Plus? During the year, 700 Units were sold.
Sales Price Variance = Actual Sales Revenue – Actual Sales at Standard Price
Sales Price Variance of iPhone 7 Plus = USD 595,000 – USD 560,000 = USD 35,000
Direct Material Price Variance:
Direct material Price Variance help management to measure the effect of the price of raw material that the entity purchase during the period and its standard price.
This direct material price variance normally affects the price that the entity paid to its suppliers rather than how an entity uses raw material in the production.
This variance assesses the economy rather than the efficiency of the way an entity using its resources.
Direct Material Price Variance = (Actual Quality X Actual Price) – (Actual Quantity X Standard Price)
or ( Actual Price – Standard Price) X Actual Quantity
Direct Material Usage Variance:
Direct Material Usage Variance measure how efficiently the entity’s direct materials are using. This variance compares the standard quantity or budget quantity with the actual quantity of direct material at the standard price.
If the actual quantity of direct materials is higher than the standard once, the variance is unfavorable.
Here is the Variance Formula:
Direct Material Usage Variance = (Actual Quantity X Standard Price) – (Standard Quantity X Standard Price)
I think this variance is quite straight forward and no need to have an example. But, if you have any questions related to this variance, drop them below.
Direct Material Mix Variance:
Direct Material Mix Variance measures the cost of direct material in the productions.
This ratio compares the Actual Mix quantity of direct material with the standard mix quantity of direct material at a standard price. For example, a product required material at standard mix as follow:
- Material a = 10 Units and Price 10 $ Per Unit
- Material b = 20 Units and Price 10 $ Per Unit
- Material c = 30 Units and Price 10 $ Per Unit
Then, the actual material used is:
- Material a = 15 Units
- Material b = 20 Units
- Material c = 35 Units
What is Direct Material Mix Variance?
Direct Material Mix Variance = (Actual Mix Quantity X Standard Price) – Standard Mix Quantity X Standard Price
The variance will be
- 15 – 10 = 5
- 20 – 20 = 0
- 35 – 30 = 5
Total Variance is 10 X 10 = 100 $
Direct Material Yield Variance:
Direct Material Mix Variance = (Actual Quantity X Standard Price) – (Standard Mix Quantity X Standard Price)
Direct Labor Rate Variance:
Direct Labor Rate Variance = (Actual Quantity X Actual Rate) – Actual Quantity Rate
Direct Labor Efficiency Variance:
Direct Labor Effciency Variance = (Actual Hours X Standard Rate) – Standard Hours X Standard Rate
Direct Labor Idle Time Variance:
Direct Labor Idle Time Variance = Number of Idle Time Hours of the Labor X Standard Labor Rate Per Hour
Variable Overhead Spending Variance:
Idle Time Variance = Number of Idle Time X Standard Labor Rate
Variable Overhead Efficiency Variance
Variable Overhead Efficiency Variance = (Standard Hours X Standard Variance Overhead Rate Per Hour) – ( Actual Hours X Standard Variable Overhead Per Hour.
Fixed Overhead Spending Variance
Fixed Overhead Spending Variance = Actual Fixed Overhead Expenditure Variance = Actual Fixed Overheads – Budgeted Fixed Overheads
Fixed Overhead Volume Capacity & Efficiency Variance
Fixed Overhead Volume Capacity & Efficiency Variance = Absorbed Fixed Overhead * Budgeted Fixed Overhead
Hop these articles could provide you informative relate to Variance Formula. Comment below if you have any suggestions.