Variance Analysis

Question 1

What is variance analysis?

Answer 1

The process of comparing actual expenses and revenues during a certain period to the budgeted amounts for that same period.

Variance analysis helps management identify areas operating less efficiently than planned.

Question 2

What does management by exception focus on?

Answer 2

It focuses on significant variances between actual results and the budget or plan.

This approach allows management to prioritize areas with the greatest variances.

Question 3

What is the flexible budget variance?

Answer 3

The difference between the actual results and the flexible budget amount.

It indicates how much of the static budget variance was caused by factors other than the difference between actual and budgeted sales volume.

Question 4

What is the sales volume variance?

Answer 4

The difference between the flexible budget amount and the static budget amount.

It shows how much of the static budget variance was caused by actual sales volume differing from budgeted sales volume.

Question 5

What are manufacturing input variances concerned with?

Answer 5

• Quantity of inputs used per unit manufactured (efficiency variance).
• Cost of inputs per unit compared to the standard (price variance).
• Monetary impact of each type of variance.

These variances are used in controlling production and are reported on a production variance report.

Question 6

What is the total direct materials variance?

Answer 6

The difference between the actual direct materials costs and the standard costs for the standard quantity of materials allowed for the actual output at the standard price.

It is also the flexible budget variance for direct materials.

Question 7

How is the quantity variance calculated?

Answer 7

(Actual Quantity - Standard Quantity) × Standard Price

The quantity variance measures the cost difference due to using more or less direct material than budgeted, excluding price differences.

Question 8

What are potential causes of an unfavorable direct materials quantity variance?

Answer 8

• Low quality materials
• Poorly maintained machinery
• Poor product design
• Abnormal spoilage
• Theft of materials
• Inadequate training or supervision
• Rush orders disrupting production

Identifying and addressing these causes can help improve production efficiency.

Question 9

What is the price variance?

Answer 9

The difference between the actual material usage at the actual price and the actual material usage at the standard price.

It measures the cost difference due to paying a different amount per unit of direct materials than budgeted.

Question 10

How is the price variance calculated?

Answer 10

(Actual Price - Standard Price) × Actual Quantity

A positive result indicates an unfavorable variance, while a negative result indicates a favorable variance.

Question 11

What are possible causes of a favorable direct materials price variance?

Answer 11

• Decreases in the market price of direct materials.
• Better purchasing research resulting in finding less expensive direct materials without quality loss.

A favorable variance occurs when the actual cost per unit is lower than the budgeted cost per unit.

Question 12

What are potential causes of an unfavorable direct materials price variance?

Answer 12

• Unavoidable increases in market prices.
• Poor purchasing decisions due to inexperienced employees.

Adjustments to standards or training may be necessary to address these issues.

Question 13

What is the direct labor rate variance?

Answer 13

The difference between the cost of actual labor used at the actual rate and the cost of actual labor used at the standard rate.

A positive variance is unfavorable, indicating higher costs than expected.

Question 14

What causes a favorable direct labor rate variance?

Answer 14

Paying hourly wage rates lower than standard rates.

This may lead to lower quality products and higher warranty costs.

Question 15

What is the direct labor efficiency variance?

Answer 15

The difference in cost between actual direct labor hours used at the standard rate and standard direct labor hours allowed for the actual output at the standard rate.

A positive result indicates an unfavorable variance due to higher costs.

Question 16

What are potential causes of an unfavorable direct labor efficiency variance?

Answer 16

• Inexperienced or inadequately trained employees
• Poor material quality
• More equipment breakdowns than usual

These factors negatively affect production workers’ performance.

Question 17

What is the fixed overhead spending variance?

Answer 17

The difference between actual fixed overhead costs incurred and the budgeted fixed overhead amount.

A positive variance indicates actual costs were greater than budgeted costs.

Question 18

What causes a favorable fixed overhead spending variance?

Answer 18

• Moving to less expensive manufacturing facilities
• Decrease in insurance premiums

These changes reduce fixed overhead costs.

Question 19

What is the fixed overhead production-volume variance?

Answer 19

The difference between the budgeted amount of fixed overhead and the amount of fixed overhead applied.

This variance measures capacity utilization, not actual costs.

Question 20

What is the formula for the fixed overhead production-volume variance?

Answer 20

Budgeted Fixed Overhead - Fixed Overhead Applied

This variance measures the difference between budgeted and applied fixed overhead, indicating whether production levels were higher or lower than planned.

Question 21

How is a favorable fixed overhead production-volume variance interpreted?

Answer 21

• Applied fixed overhead is greater than budgeted fixed overhead.
• Indicates actual production exceeded budgeted production.

A favorable variance suggests efficient use of resources or higher demand than anticipated.

Question 22

What causes an unfavorable fixed overhead production-volume variance?

Answer 22

• Production lower than planned.
• Equipment breakdowns.
• Decreased customer demand.

Unfavorable variances often result from operational inefficiencies or external factors reducing production.

Question 23

Why is there no fixed overhead efficiency variance?

Answer 23

Fixed costs do not relate to levels of output and cannot be used efficiently or inefficiently.

Efficiency variances apply to variable costs, which fluctuate with production levels, unlike fixed costs.