Variance Analysis: Material - Labour - Overheads

Introduction to Variance Analysis

Variance analysis is a crucial management accounting technique which involves the comparison of the standards numbers to the actual performance numbers (Ward, 2012). It is to be noted that there are different category of variance analysis, and same could be computed for both the quantity and price of materials, labour rate, labour efficiency and variable overhead, and there reporting of results is done to the management of an enterprise. Each of the variances has its own importance depending on the objective of the analysis, as undertaken by the management (Corporate Finance Institute, 2022). On the analysis of these variances, companies are able to use the information for the identification of problem areas in performance as well as making strategic changes therein for the improvement of the overall company performance. The following are presented the different variances for entity Video Tech Ltd for different variables.

a) Direct labour rate variance
Description	Actual hours (a)	Actual costs (b)	Standard rate	Actual rate (b/a)	Variance = (Stadard rate- Actual rate)*Actual hours
Assembly	3900	$ 93,600.00	$ 24.00	$ 24.00	$ -
Printed circuit boards	2400	$ 71,280.00	$ 27.00	$ 29.70	$ -6,480.00
Reading heads	3500	$1,15,500.00	$ 30.00	$ 33.00	$ -10,500.00
				Total	$ -16,980.00

b) Direct labour efficiency variance
Description	Actual units (a)	Standard hours (b)	Total Standard Hours (a*b)	Standard rate	Actual hours	Variance = Stadard rate* (Standrad hours -Actual hours)
Assembly	2200	2	4400	$ 24.00	3900	$ 12,000.00
Printed circuit boards	2200	1	2200	$ 27.00	2400	$ -5,400.00
Reading heads	2200	1.5	3300	$ 30.00	3500	$ -6,000.00
					Total	$ 600.00

c) Direct material price variance
Description	Standard cost per unit	Actual quantity (a)	Actual total cost (b)	Actual costs per unit(b/a)	Variance = Actual quantity* (Standrad price -Actual price)
Housing	$ 20.00	2200	$ 44,000.00	$ 20.00	$ -
Printed circuit boards	$ 15.00	4700	$ 75,200.00	$ 16.00	$ -4,700.00
Reading heads	$ 10.00	9200	$ 1,01,200.00	$ 11.00	$ -9,200.00
				Total	$ -13,900.00

d) Direct material quantity variance
Description	Standard price	Actual Quantity	Quantity per unit (a)	Actual output (b)	Standard quantity = (b*a)	Variance = Standrad price*(Standard quantity-Actual quantity)
Housing	$ 20.00	2200	1	2200	2200	$ -
Printed circuit boards	$ 15.00	4700	2	2200	4400	$ -4,500.00
Reading heads	$ 10.00	9200	4	2200	8800	$ -4,000.00
					Total	$ -8,500.00

e) Variable overhead spending variance
Computation of allowable standard hours
Std hours allowed =	Actual units*Std hours
Std hours allowed =	2200*4.5
Std hours allowed =	9900
Variable overhead spending variance =	(Std rate x Std allowed hours) - Actual variable overhead
Variable overhead spending variance =	(2*9900)-18800
Variable overhead spending variance =	$ 1,000.00

f) Variable overhead efficiency variance
Actual hours =	9800
Standard allowed hours =	9900
Standard rate =	$ 2.00
Variable overhead efficiency variance =	Standard rate x (Standard hours allowed - Actual hours)
Variable overhead efficiency variance =	$ 200.00
g) Sales price variance
Budgeted selling price =	$ 300.00
Actual selling price =	$ 300.00
Actual units sold =	2200
Sales price variance=	(Budgeted selling price -Actual selling price)*Actual units sold
Sales price variance=	0
h) Sales volume variance
Budgeted selling price =	$ 300.00
Budgeted sale units =	2000
Actual units sold =	2200
Sales price variance=	(Actual units sold- Budgeted sale units)*Budgeted selling price
Sales price variance=	$ 60,000.00

Direct Material price variance	(13,900)	Unfavourable
Direct Material quantity variance	(8500)	Unfavourable
Direct Labour rate variance	(16980)	Unfavourable
Direct Labour efficiency variance	600	Favourable
Variable overhead spending variance	1000	Favourable
Variable overhead efficiency variance	200	Favourable
Contribution margin volume variance	16200	Favourable
Total variance	-21580	Unfavourable

Budgeted unit contribution margin = Budgeted total contribution margin/ Budgeted units

Budgeted unit contribution margin = $ 162000/ 2000

Budgeted unit contribution margin = $ 81 per unit

Contribution margin volume variance = (Actual units - Budgeted units)* Budgeted unit contribution

Contribution margin volume variance = (2200- 2000) $ 81

Contribution margin volume variance (Favourable) = $ 16200

In the given circumstance, there have been assessed certain behavioural factors which have led to the frictions between production managers, as well as the production managers and maintenance managers; which have been explained as follows. It is imperative to note that the downtime of equipment has led to extra overtime costs. This would lead to frictions among managers of Reading heads and Printed circuit boards, and the maintenance department. Further to be noted is that the performance of the assembly department is dependent on the inputs as given by the other production departments. Thus, the frictions may arise when the manager of assembly department would put pressure on other departmental managers, in order to enhance its production level. In addition, the printed circuit boards department along with the reading heads department can engage in rejection of the parts that would have otherwise been modified and utilized, in usual circumstances. Thus, it can be concluded that there are individual departmental interests leading to frictions among the managers.

On the assessment of Robert Smith's analysis of the unfavourable contribution margin, a range of observations have been drawn. The primary observation is that the said analysis is incomplete because there has been a failure on part of Robert Smith in terms of assessment of the real reasons for the unfavourable variances. It is imperative to note that a variance analysis is regarded as efficient only when it involves both the quantitative as well as the qualitative aspects (Drury, 2018). Thus, it is the duty of Robert Smith to enlighten the management with the actual reasons that has led to the variances in the performance and not let management to make its own conclusions. This is because such a conclusion could be inappropriate as each and every departmental manager would try to hide its own efficiencies of the performance. In addition it has been observed that the primary reason for variance as elaborated by Robert Smith is in form of inefficiency of the direct labour. While there are additionally issues in term of material usage as well as the maintenance issues that led to the equipment downtime for some departments. Thus, the report of Robert Smith not only lacks the completeness in terms of absence of reasons of variances, but also there has been an inefficient information as key reasons for variances are not highlighted and only one issue is focussed.

Description	Static budget	Flexible budget	Actual budget	Variance
Units	2000	2200	2200	0
Sell price	$ 300.00	$ 300.00	$ 300.00	$ -
Revenue	$ 6,00,000.00	$ 6,60,000.00	$ 6,60,000.00	$ -
Variable costs:
Direct Material
Housing units	$ 40,000.00	$ 44,000.00	$ 44,000.00	$ -
Printed circuit boards	$ 60,000.00	$ 66,000.00	$ 75,200.00	$ -9,200.00
Reading heads	$ 80,000.00	$ 88,000.00	$ 1,01,200.00	$ -13,200.00
Total Direct Material	$ 1,80,000.00	$ 1,98,000.00	$ 2,20,400.00	$ -22,400.00 (U)
Direct labour
Assembly	$ 96,000.00	$ 1,05,600.00	$ 93,600.00	$ 12,000.00
Printed circuit boards	$ 54,000.00	$ 59,400.00	$ 71,280.00	$ -11,880.00
Reading heads	$ 90,000.00	$ 99,000.00	$ 1,15,500.00	$ -16,500.00
Total direct labour	$ 2,40,000.00	$ 2,64,000.00	$ 2,80,380.00	$ -16,380.00 (U)
Variable overhead	$ 18,000.00	$ 19,800.00	$ 18,800.00	$ 1,000.00 (F)
Total variable costs	$ 4,38,000.00	$ 4,81,800.00	$ 5,19,580.00	$ -37,780.00 (U)
Contribution margin	$ 1,62,000.00	$ 1,78,200.00	$ 1,40,420.00	$ -37,780.00 (U)

References

Corporate Finance Institute (2022) The role of variance analysis [online] Available from: https://corporatefinanceinstitute.com/resources/knowledge/accounting/variance-analysis/ [Accessed on: 20 January 2022].

Drury, C. (2018) Cost and management accounting. Australia: Cengage Learning.

Ward, K. (2012) Strategic management accounting. UK: Routledge.

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