Variance Analysis
Part 01 – Performance Management
SECTION C
• Variance analysis is the process of comparing the actual expenses and
revenues during a certain period to the budgeted amounts for that same
period.
• Variance analysis shows management where the differences are
between actual and budgeted amount and by how much and that’s
enabling the management to investigate and determine the reasons for
variances.
Ø Variances can be classified in terms of level. A level denotes the
amount of detail provided by the variance.
Ø A low-level variance provides the least detail, whereas more
information is provided by a variance with a higher-level number.
Variance Analysis
Level 1 – Static Budget Variance
Level 2 – Flexible Budget Variance and Sales Volume Variance
Level 3 – Manufacturing Input and Sales Quantity and Sales Mix Variances
Variance Analysis
Level 1 – Static Budget Variance (SBV)
Budgeted Production and Sales = 12,000 units
Selling Price = $ 1200
Budgeted Direct Material = $ 600 per unit
Budgeted Direct Labor = $160 per unit
Budgeted VMOH = $ 120 per unit
Budgeted fixed cost = $ 27,60,000
At the end of the year actual production and sales is 10,000 units with the
following result.
Selling Price = $ 1250
Direct material = $ 621.6 per unit
Direct Labor = $ 198 per unit
VMOH = $ 130.5 per unit
FC = $ 28,50,000
Variance Analysis
Static Budget
Static Budget
Particular Actual Result Variance
(Master Budget)
(actual - budget)
(12000×$ 1200) (10000×$ 1250)
Sales $ 19,00,000 UF
$ 1,44,00,000 $ 1,25,00,000
(12000×$ 600) (10000×$ 621.6)
Direct Material $ 9,84,000 F
$ 72,00,000 $ 62,16,000
(12000×$ 160) (10000×$ 198)
Direct Labor $ 60,000 UF
$ 19,20,000 $ 19,80,000
(12000×$ 120) (10000×$ 130.5)
Variable Cost $ 1,35,000 F
$ 14,40,000 $ 13,05,000
Contribution Margin $ 38,40,000 $ 29,99,000 $ 8,41,000 UF
Fixed Cost $ 27,60,000 $ 28,50,000 $ 90,000 UF
Operating Profit $ 10,80,000 $ 1,49,000 $ 9,31,000 UF
Variance Analysis
Level 2 – Flexible Budget Variance (FBV) and
Sales Volume Variance (SVV)
Static Budget Variance (SBV)
Flexible Budget Variance (FBV)
FBV = Actual Results – Flexible Budget Amount
Sales Volume Variance (SVV)
SVV = Flexible Budget Amount – Static Budget Amount
SBV = FBV + SVV
Variance Analysis
Flexible Budget Variance (FBV)
Flexible Budget Variance (FBV) is the comparison between flexible budget
and actual result. Here we compare the changes in cost. Flexible budget
calculate the budgeted revenue and coast based on the actual output. FBV is
difference between actual result corresponding to flexible budget. Due to
the difference in selling price variable cost per unit and fixed cost variance is
showing.
Sales Volume Variance (SVV)
Sales Volume Variance is the change due to quantity or sales or volume
change. SVV is the difference between flexible budget and static budget due
to change in sales volume.
Variance Analysis
Sales Volume Flexible Budget
Variance Variance
Particular Static Budget Flexible Budget Actual Result
(Flexible Budget – Static (Actual Result –
Budget) Flexible Budget)
(12000×$ 1200) (10,000 × $ 1200) (10000×$ 1250)
Sales
$ 1,44,00,000
$ 24,00,000 $ 1,20,00,000
$ 5,00,000 $ 1,25,00,000
(12000×$ 600) (10,000 × $ 600) (10000×$ 621.6)
DM
$ 72,00,000
$ 12,00,000 $ 60,00,000
$ 2,16,000 $ 62,16,000
(12000×$ 160) (10,000 × $ 160) (10000×$ 198)
DL
$ 19,20,000
$ 3,20,000 $ 16,00,000
$ 3,80,000 $ 19,80,000
(12000×$ 120) (10,000 × $ 120) (10000×$ 130.5)
VC
$ 14,40,000
$ 2,40,000 $ 12,00,000
$ 1,05,000 $ 13,05,000
CM $ 38,40,000 $ 6,40,000 $ 32,00,000 $ 2,01,000 $ 29,99,000
FC $ 27,60,000 $0 $ 27,60,000 $ 90,000 $ 28,50,000
OI $ 10,80,000 $ 6,40,000 $ 4,40,000 $ 2,91,000 $ 1,49,000
Variance Analysis
𝐒𝐕𝐕 = 𝚫 𝐮𝐧𝐢𝐭𝐬 ×𝐁𝐮𝐝𝐠𝐞𝐭𝐞𝐝 𝐂𝐌
𝐅𝐁𝐕 = 𝐀𝐜𝐭𝐮𝐚𝐥 𝐔𝐧𝐢𝐭𝐬 ×𝚫𝐂𝐌 + 𝚫FC
Variance Analysis
Budgeted Production and Sales = 12,000 units Actual Sales = 10,000 units
Selling Price = $ 1200 Selling Price = $ 1250
Budgeted Direct Material = $ 600 per unit Direct material = $ 621.6 per unit
Budgeted Direct Labor = $160 per unit Direct Labor = $ 198 per unit
Budgeted VMOH = $ 120 per unit VMOH = $ 130.5 per unit
Budgeted fixed cost = $ 27,60,000 FC = $ 28,50,000
𝐒𝐕𝐕 = 𝚫 𝐮𝐧𝐢𝐭𝐬 ×𝐁𝐮𝐝𝐠𝐞𝐭𝐞𝐝 𝐂𝐌
= (12,000 – 10,000) × 320 = $ 6,40,000
𝐅𝐁𝐕 = 𝐀𝐜𝐭𝐮𝐚𝐥 𝐔𝐧𝐢𝐭𝐬 ×𝚫𝐂𝐌 + 𝚫FC
= 10,000 × (320 – 299.9) + (28,50,000 – 27,60,000)
= 10,000 ×20.1 + 90,000
= $ 2,91,000
Variance Analysis
RABEEH OVUNGAL
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Variance Analysis
Part 01 – Performance Management