Variance Analysis

Material Price Variance:

         The difference in cost which has been resulted from price being different to standard is known as material price variance. Therefore, it is the multiplication of actual usage with the difference in price.

The formula is:
Actual quantity * Price Difference

Or, Actual quantity * (Standard price-Actual price)
Or, Actual quantity * Standard price – Actual quantity * Actual price
Or, Standard cost of actual quantity – Actual cost


Material Usage Variance:

         The difference arising between actual usage & expected usage (i.e. for producing the actual output, what should have been used) multiplied by the standard price is known as the material variance.

The formula is:
Standard price * Usage difference

Or, Standard price * (Standard Usage-Actual Usage)
Or, Standard price * Standard Usage – Standard price * Actual Usage
Or, Standard cost of standard quantity – Standard cost of actual quantity


Total Cost Variance:

         The difference between the total standard cost of the output that has been achieved in a period & the total actual cost which has been incurred in a period is known as total cost variance. On actual output & not on standard or budgeted output, all cost variances are based.
Total material cost variance = Price variance + Usage variance

Labour Rate Variance:

         The difference between the standard rate & the actual rate of pay, multiplied by the actual hours worked is known as labour rate variance.

The formula is:
Actual hours worked * Rate difference

Or, Actual hours worked * (Standard rate – Actual rate)
Or, (Actual hours worked * Standard rate) – (Actual hours worked * Actual rate)
Or, Standard rate of actual hours worked – Actual cost


Labour Efficiency Variance:

          When there is a difference between actual efficiency & the expected efficiency, the labour efficiency variances occurs & the calculation of the same is done as the difference between the actual hours that has been worked & the actual hours that should have been worked for producing the actual output (i.e. standard hours of actual output), multiplied by the standard rate.

The formula is:


Standard Rate * Hours difference
Or, Standard Rate * (Standard hours of actual output – Actual output)
Or, (Standard rate * Standard hours) – (Standard rate * Actual hours)
Or, Standard cost of standard hours – Standard cost of actual hours


Labour Cost Variance:

         Due to the difference between the standard cost of direct labour which has been specified for the achieved production & the actual direct wage that has been incurred, direct labour cost variance arises.

The formula is:
Standard Cost – Actual Cost

         Analysis of labour variances also, like material variance, can be done into two components, viz., direct labour rate variance & direct labour efficiency variance.
Relationship between the variances:

         Total labour cost variance = Rate variance + Efficiency variance