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Unit 11: Variance Analysis

11.1 Classification of Variances Notes

There are two types of variances viz. cost variance and revenue variance.
Cost Variance: Cost variance can be further classified into three categories:

1. Material Cost Variance
2. Labour Cost Variance
3. Overhead Variance
Revenue Variance:
1. Sales Variance

Apart from the above classified types, there is a general way of studying variances. Let us
discuss every variance in detail in the remaining unit.

11.2 Material Variances

11.2.1 Material Cost Variance (MCV)

The name of the variance is self-explanatory, means that the difference in between the standard
cost of materials and Actual cost of materials. The material cost variance is in between the
standard material cost for actual production in units and actual cost.

Material cost variance can be computed into two different ways:
1. Direct Method: It is a method simply studies the deviation in between the two different
cost of materials without giving any emphasis for other factors of influence viz. the quantity
of materials and price of a material. Under the direct method, the comparison is in between
the standard cost of materials which is the planned cost of materials before commencement,
scientifically developed by considering the all other factors of influence and the actual
cost of materials, which is actually incurred during the production.

Why standard cost is to be tuned to the level of actual cost?
The main aim of computing the standard cost for actual output is that the standard cost
developed is not to the tune of actual production in units, instead it is available in terms of
per unit of a product/for overall production e.g. for a year. To have leveled comparison in
between the standard cost has to be designed to the tune of Actual cost.

Material cost variance = Standard cost of materials for actual output — Actual cost of raw
materials
= (SQAO × SP) – (AQ×AP)

2. Indirect method: It is a method which computes the material cost variance by considering
two important variances viz. material price variance and material usage variance. Under
this method material cost variance is calculated through the summation of the variances
viz. price and usage of materials.
Material Cost Variance = Material Price Variance (MPV) + Material Usage Variance

Example: To manufacture one unit of product, the requirement is 2 Kgs of material @ 2
per Kg. Actual output is 400 units Actual quantity of materials used is 850 kgs 1.80 find out the
material cost variance.

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