Thread 4: Variance Analysis

Question 1

What is Variance Analysis?

Answer 1

The process of comparing budgeted/standard results with actual results to measure performance.

Question 2

Purpose of Variance Analysis

Answer 2

To identify whether spending or performance was favourable (F) or unfavourable (U) and why.

Question 3

Favourable vs Unfavourable Variance

Answer 3

Actual < Budgeted = Favourable (F); Actual > Budgeted = Unfavourable (U).

Question 4

Main types of variances

Answer 4

Material, Labour, and Overhead variances.

Question 5

Two types of Material Variance

Answer 5

Material Price Variance (MPV) and Material Quantity Variance (MQV).

Question 6

Formula for Material Price Variance (MPV)

Answer 6

MPV = (Standard Price – Actual Price) × Actual Quantity.

Question 7

Formula for Material Quantity Variance (MQV)

Answer 7

MQV = (Standard Quantity – Actual Quantity) × Standard Price.

Question 8

Material Variance Example summary

Answer 8

Standard: $5/kg, 2kg per unit; Actual: $6/kg, 2.2kg; Output: 1,000 units → MPV=$2,200U, MQV=$1,000U.

Question 9

Interpretation of Material Variances

Answer 9

Higher price = U; higher usage = U; investigate supplier cost or wastage.

Question 10

Two types of Labour Variance

Answer 10

Labour Rate Variance (LRV) and Labour Efficiency Variance (LEV).

Question 11

Formula for Labour Rate Variance (LRV)

Answer 11

LRV = (Standard Rate – Actual Rate) × Actual Hours.

Question 12

Formula for Labour Efficiency Variance (LEV)

Answer 12

LEV = (Standard Hours – Actual Hours) × Standard Rate.

Question 13

Labour Variance Example summary

Answer 13

Standard: $25/hr, 0.2 hr/unit; Actual: $27/hr, 0.25 hr/unit; Output 1,000 → LRV=$500U, LEV=$1,250U.

Question 14

Interpretation of Labour Variances

Answer 14

Higher pay or slower production = U; address via training or process improvement.

Question 15

Two types of Overhead Variance

Answer 15

Variable Overhead Variance and Fixed Overhead Variance.

Question 16

Variable Overhead Variances

Answer 16

1. Spending (Rate) Variance 2. Efficiency Variance.

Question 17

Fixed Overhead Variances

Answer 17

1. Spending (Budget) Variance 2. Volume Variance.

Question 18

Formula: Variable OH Spending Variance

Answer 18

(Standard VOH Rate – Actual VOH Rate) × Actual Hours.

Question 19

Formula: Variable OH Efficiency Variance

Answer 19

(Standard Hours – Actual Hours) × Standard VOH Rate.

Question 20

Formula: Fixed OH Spending (Budget) Variance

Answer 20

Budgeted FOH – Actual FOH.

Question 21

Formula: Fixed OH Volume Variance

Answer 21

(Actual Units – Budgeted Units) × Fixed OH Rate per Unit.

Question 22

Overhead Variance Example summary

Answer 22

VOH rate=$6; Actual=$6.50; Hours=250 → $125U spending; $300U efficiency; FOH volume=$417U.

Question 23

Total Variance Example

Answer 23

All combined = $5,792 Unfavourable total variance.

Question 24

Interpretation of Overhead Variances

Answer 24

Higher utility costs or underproduction = U; manage by energy savings or higher sales.

Question 25

Management response to Material Price (U)

Answer 25

Negotiate supplier prices or find new suppliers.

Question 26

Management response to Material Quantity (U)

Answer 26

Reduce wastage, improve material quality or training.

Question 27

Management response to Labour Rate (U)

Answer 27

Plan better rosters or review pay structure.

Question 28

Management response to Labour Efficiency (U)

Answer 28

Train workers, improve production flow or automate tasks.

Question 29

Management response to Overhead Spending (U)

Answer 29

Review rent/utilities; perform cost control audits.

Question 30

Management response to Overhead Volume (U)

Answer 30

Increase production or reduce fixed costs.

Question 31

Analogy for Variance Analysis

Answer 31

Like checking why your bake sale costs were higher — identify where and why spending went off plan.

Question 32

Bake Sale Analogy Summary

Answer 32

Used more flour (MQV U), paid higher price (MPV U), worked longer (LEV U), paid more/hr (LRV U).

Question 33

Practice Q1

Answer 33

500 units, Std: 1kg@$4; Used 600kg@$5 → MPV and MQV?

Question 34

Practice Q2

Answer 34

Std: 2hr@$20; Actual: 2.5hr@$22 for 200 units → LRV and LEV?

Question 35

Practice Q3

Answer 35

Budgeted FOH $12,000 for 1,000 units; made 900 → FOH Volume Variance?

Question 36

Why does Variance Analysis matter?

Answer 36

Identifies problems early, supports accountability, and drives continuous improvement.

Question 37

Managerial use of Variance Analysis

Answer 37

Acts as a diagnostic tool — highlights inefficiencies before they become costly.