Stage 3 Variance Analysis
What types of discussion are required in variance questions? (6)
What is expected in discussion marks for variance questions? (2)
What is a favourable variance? (2)
What is an unfavourable (or adverse) variance? (2)
Stage 3 Variance Analysis
What types of discussion are required in variance questions?
- Evaluation of profit performance in a period
- Evaluation of the usefulness of certain variance calculations
- Interpretation of variances already calculated
- Evaluation of the consequences of the variances
- Recommendations on which variances need investigation
- Suggestions of potential reasons for variances
What is expected in discussion marks for variance questions?
- Insightful comments
- Use of calculated or scenario-provided information
What is a favourable variance?
- A positive difference that results in more profit than expected
- Labelled with F
What is an unfavourable (or adverse) variance?
- A negative difference that results in a worse outcome than expected
- Labelled with U or A
Sales Variances
What makes up the Sales variances (4)
What do sales variances show? (1)
What does the sales price variance tell us (2)
What is the sales mix variance? (1)
What quantities are compared when calculating the sales mix variance? (2)
What does the sales quantity variance measure? (1)
Sales Variances
What makes up the Sales variances
- Sales Price Variance = (AQAM x BP) - TAR
- Sales Volume Variance = (BQ - AQ) x BP
- Sales Mix Variance = (AQAM - AQBM) x BP
- Sales Quantity Variance = (AQBM - BQBM) x BP
What do sales variances show?
- They show the impact on sales revenue or profit of having more or fewer sales than budgeted
What does the sales price variance tell us
- It shows the financial impact on profit of selling products at a higher or lower price than expected
- It explains how differences between actual selling price and budgeted selling price affect profitability
What is the sales mix variance?
- Selling products in a different ratio than budgeted
What does the sales quantity variance measure?
- The effect on sales revenue of selling more or fewer units, with the mix effect removed
Use Budgeted Contribution if possible
Impact on Profit
What should variances be valued at when reconciling budgeted profit to actual profit? (3)
Impact on Profit
What should variances be valued at when reconciling budgeted profit to actual profit?
- Volume variances should be valued at the standard contribution per unit
- Mix variances should be valued at the standard contribution per unit
- Quantity variances should be valued at the standard contribution per unit
Meaning of the Sales Variances
What does the sales price variance tell you? (3)
What does the sales mix variance show? (4)
What does the sales quantity variance reflect? (4)
Meaning of the Sales Variances
What does the sales price variance tell you?
- Whether products were sold at higher or lower prices than expected
- A favourable variance indicates stronger pricing power, brand value, or effective sales strategy
- An adverse variance may indicate discounting, competitive pressure, or weaker demand
What does the sales mix variance show?
- Whether the proportion of products sold differs from the planned mix
- A favourable variance means more high‑margin products were sold than expected
- An adverse variance means sales shifted toward lower‑margin products
- Individual product variances indicate which products are driving the mix change
What does the sales quantity variance reflect?
- Whether overall sales volume was higher or lower than expected
- A favourable variance indicates stronger demand, effective marketing, or good distribution
- An adverse variance suggests weaker market conditions or poor sales execution
- Individual product quantity variances are not meaningful because the mix effect is removed; only the total matters
Usefulness of Sales Variances
When are sales variances useful (5)
Usefulness of Sales Variances
When are sales variances useful
- When analysing a product line to see which products drive profitability and whether the sales mix is shifting toward high‑ or low‑margin items
- When making strategic decisions about product focus, marketing investment, and resource allocation
- When evaluating performance by assessing how each product contributes to total sales and identifying strong or weak performers
- When analysing profitability or revenue to understand how changes in sales mix affect overall contribution and to refine pricing or promotional strategies
- When assessing marketing campaigns to determine whether they successfully shifted customer behaviour toward target products and to improve future campaign design
Materials Cost Variances
What makes up the total materials cost variance (4)
What does the materials usage variance tell us (2)
What does the materials price variance tell us (2)
Materials Cost Variances
What makes up the total materials cost variance
- Materials price variance = (AQAM x BC) - TAC
- Materials usage variance = (BQ - AQ) x BC
- Materials mix variance = (AQAM - AQBM) x BC
- Materials yield variance = (AQBM - BQBM) x BC
What does the materials usage variance tell us
- It shows the impact on profit of using more or less material than expected for the actual units produced
- It highlights how differences between actual usage and standard usage affect total material cost and therefore profit
What does the materials price variance tell us
- It shows the financial impact on profit of paying more or less than expected for the actual quantity of materials purchased
- It highlights how differences between actual price and standard price affect total material cost and therefore profit
Keyword Bank
Materials price variance – Impact of paying more or less than the standard price
Materials usage variance – Impact of using more or less material than expected
Materials mix variance – Effect of using a different proportion of materials than planned
Materials yield variance – Effect of getting more or less output from the same input
Labour Variances
What are the two main components of the labour variance (4)
When is this type of labour variance analysis useful (1)
What does the labour rate variance tell us (2)
What does the labour efficiency variance tell us (2)
Labour Variances
What are the two main components of the labour variance
- Labour rate variance = (AHAM x BC/h) - TAC
- Labour efficiency variance = (AH – BH) × BC/h
- Labour mix variance = (AHAM - AHBM) x BC/h
- Labour yield variance = (AHBM - BHBM) x BC/h
When is this type of labour variance analysis useful
- When there is more than one type of labour with different standard costs
What does the labour rate variance tell us
- It shows the financial impact on profit of paying a higher or lower hourly wage rate than expected for the actual hours worked
- It highlights how differences between actual hourly rate and standard hourly rate affect total labour cost and therefore profit
What does the labour efficiency variance tell us
- It shows the impact on profit of taking more or fewer labour hours than expected to produce the actual units made
- It highlights how differences between actual hours worked and standard hours allowed affect total labour cost and therefore profit
Keyword Bank
Labour rate variance – Effect of paying a different wage rate than expected
Labour efficiency variance – Effect of using more or fewer labour hours than planned
Labour mix variance – Impact of using a different combination of labour types
Labour yield variance – Impact of getting more or less output from the labour used
Planning and Operational Variances
What do planning variances show (2)
When do planning variances arise (2)
What do operational variances show (1)
What do operational variances do (2)
Planning and Operational Variances
What do planning variances show
- The part of a variance caused by a defective or inappropriate standard or budget
When do planning variances arise
- When a budget or standard is deemed incorrect due to factors outside the manager’s control
What does the planning variance do
Compares:
- The actual outcome x the budgeted standard
- The actual outcome x the revised standard
What do operational variances show
- The part of a variance caused by actions or factors within a manager’s control
What do operational variances do
Compares:
- The actual outcome x the revised standard
- The actual outcome for the cost in question
Planning and Operational Variances for Materials
What makes up the total materials variance (6)
Planning and Operational Variances for Materials
What makes up the total materials variance
- Materials price variance = (AQ x BC) - TAC
- Price planning variance = (AQ x BC) - (AQ x RC)
- Price operational variance = (AQ x RC) - TAC
- Materials usage variance = (BQ - AQ) x BC
- Usage planning variance = (BQ - RQ) x BC
- Usage operational variance = (RQ - TAQ) x BC
Planning and Operational Variances for Labour
What makes up the total labour variance (6)
Planning and Operational Variances for Labour
What makes up the total labour variance
- Labour rate variance = (AH x BC) - TAC
- Rate planning variance = (AH x BC) - (AH x RC)
- Rate operational variance = (AH x RC) - TAC
- Labour efficiency variance = ((AQ x BH) - TAH) x BC
- Efficiency planning variance = (AQ x BH) - (AQ x RH)
- Efficiency operational variance = ((AQ x RH - TAH)) x BC
Market Size and Market Share Variances
What can a sales volume variance be analysed into (2)
What is market size variance (3)
What is market share variance (3)
When can sales price variances be analysed into planning and operational variances (1)
Market Size and Market Share Variances
What can a sales volume variance be analysed into
- Market size variance = ((BMarketShare x BMarketSize) - (BMarketShare x RMarketSize)) x BC
- Market share variance = ((BMarketShare x RMarketSize) - TAQ) x BC
What is market size variance
- The impact on sales volume from changes in the size of the market
- Impact on sales caused by under or overestimating total market demand for yours and your competitors’ product
- Usually uncontrollable, so treated as a planning variance
What is market share variance
- The impact on sales from gaining or losing more of the market than expected
- Considered controllable, so treated as an operational variance
- Used to assess managerial performance of those who contributed towards the favourable or adverse result
When can sales price variances be analysed into planning and operational variances
- When the selling price was wholly or partly outside the manager’s control
Valid Reasons for Revising a Standard and Creating a Planning Variance
What are valid reasons for revising a standard and creating a planning variance (8)
Valid Reasons for Revising a Standard and Creating a Planning Variance
What are valid reasons for revising a standard and creating a planning variance
- To provide genuine information to decision makers, not to make operational variances appear more favourable
- When original standards are outdated or unsuitable benchmarks for example:
- Changes in market conditions
- Changes in technology
- Radical changes in customer attitudes
- Unexpected changes in regulations, taxes or compliance obligations
- Changes in product specification (e.g., bespoke customer requirements)
- The original standard was incorrectly calculated
When Should a Variance Be Investigated
What are the conditions under which a variance should be investigated (7)
When Should a Variance Be Investigated
What are the conditions under which a variance should be investigated
- When the variance is material (large enough to matter for decisions or performance evaluation)
- When the variance is unexpected (not anticipated based on normal operations or trends)
- persistent (keeps occurring over time rather than being a one‑off)
- When the variance is getting bigger (shows a worsening pattern that may signal deeper issues)
- When the variance may indicate fundamental errors in planning (e.g., incorrect assumptions, flawed standards, unrealistic budgets)
- When the variance affects significant resource utilisation (e.g., labour hours, machine time, materials consumption)
- When the variance affects the organisation’s ability to act responsibly or fulfil obligations (e.g., compliance, safety, sustainability, contractual commitments)
Variable Overhead Efficiency Variance
What does the variable overhead efficiency variance tell us (2)
How is the variable overhead efficiency variance calculated (2)
Variable Overhead Efficiency Variance
What does the variable overhead efficiency variance tell us
- It shows the impact on profit of taking more or fewer labour‑driven hours than expected, since variable overheads are applied per labour hour
- It reflects how labour efficiency affects the variable overhead cost incurred
How is the variable overhead efficiency variance calculated
- Using the formula: (AH – BH) × BC per hour
- In the example: (190,000 – 192,800) × £1.50 = £4,200 favourable
Variable Overhead Expenditure Variance
What does the variable overhead expenditure variance tell us (2)
How is the variable overhead expenditure variance calculated (2)
Variable Overhead Expenditure Variance
What does the variable overhead expenditure variance tell us
- It shows the financial impact on profit of spending more or less than expected on variable overheads, after removing the effect of labour efficiency
- It isolates whether the variable overhead rate itself was higher or lower than planned
How is the variable overhead expenditure variance calculated
- Using the formula: (BR – AR) × AH
- In the example: (budgeted rate – actual rate) × actual hours = £13,000 favourable
Fixed Overhead Expenditure Variance
What does the fixed overhead expenditure variance tell us (2)
How is the fixed overhead expenditure variance calculated (2)
Fixed Overhead Expenditure Variance
What does the fixed overhead expenditure variance tell us
- It shows the financial impact on profit of spending more or less than expected on fixed overheads
- It highlights how differences between budgeted fixed costs and actual fixed costs affect profitability
How is the fixed overhead expenditure variance calculated
- Using the formula: BFC – AFC
- In the example: £500,000 – £512,000 = £12,000 unfavourable
Reconcile budgeted profit to actual profit
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Management Accounting and MIS11
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Pricing Decisions and strategies13
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CVP analysis and Cost Classification7
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Output decisions with limiting factors11
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Seminar 14
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Risk and uncertainty11
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Seminar 23
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Quantitative Techniques for Forecasting10
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Seminar 34
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Budgeting14
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Variance analysis17
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Seminar 44
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Divisionalisation, responsibility, accounting & transfer pricing11
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Formula Sheet4
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Seminar 54
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Performance Measurement8
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Performance Management14
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Management Accounting for Value12
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Seminar 65
