ACCA MA Syllabus E. Standard Costing - Interpret variances & possible causes - Notes ^{6 / 8}

Sales variances

The selling price variance is a measure of the effect on expected profit of a different selling price to standard selling price. It is calculated as the difference between what the sales revenue should have been for the actual quantity sold, and what it was.

The sales volume profit variance is the difference between the actual units sold and the budgeted (planned) quantity, valued at the standard profit (under absorption costing) or at the standard contribution (under marginal costing) per unit. In other words, it measures the increase or decrease in standard profit as a result of the sales volume being higher or lower than budgeted (planned).

Possible causes of sales variances

• unplanned price increases

• unplanned price reduction to attract additional business

• unexpected fall in demand due to recession

• increased demand due to reduced price

• failure to satisfy demand due to production difficulties

Materials variances

The direct material total variance is the difference between what the output actually cost and what it should have cost, in terms of material.

The direct material price variance calculates the difference between the standard cost and the actual cost for the actual quantity of material used or purchased. In other words, it is the difference between what the material did cost and what it should have cost.

The direct material usage variance is the difference between the standard quantity of materials that should have been used for the number of units actually produced, and the actual quantity of materials used, valued at the standard cost per unit of material. In other words, it is the difference between how much material should have been used and how much material was used, valued at standard cost.

Labour variances

The direct labour total variance is the difference between what the output should have cost and what it did cost, in terms of labour.

The direct labour rate variance is the difference between the standard cost and the actual cost for the actual number of hours paid for. In other words, it is the difference between what the labour did cost and what it should have cost.

The direct labour efficiency variance is the difference between the hours that should have been worked for the number of units actually produced, and the actual number of hours worked, valued at the standard rate per hour. 

In other words, it is the difference between how many hours should have been worked and how many hours were worked, valued at the standard rate per hour.

Variable overhead variances

The variable production overhead expenditure variance is the difference between the amount of variable production overhead that should have been incurred in the actual hours actively worked, and the actual amount of variable production overhead incurred.

The variable production overhead efficiency variance is exactly the same in hours as the direct labour efficiency variance, but priced at the variable production overhead rate per hour.

Fixed overhead variances

Fixed overhead total variance is the difference between fixed overhead incurred and fixed overhead absorbed. In other words, it is the under– or over-absorbed fixed overhead.

Fixed overhead expenditure variance is the difference between the budgeted fixed overhead expenditure and actual fixed overhead expenditure.

Fixed overhead volume variance is the difference between actual and budgeted (planned) volume multiplied by the standard absorption rate per unit.

Fixed overhead efficiency variance is the difference between the number of hours that actual production should have taken, and the number of hours actually taken (that is, worked) multiplied by the standard absorption rate per hour.

Fixed overhead capacity variance is the difference between budgeted (planned) hours of work and the actual hours worked, multiplied by the standard absorption rate per hour.