Assignment

Variance:
Variance is defined as the average of the squared differences
from the Mean.

Capacity Variance:
The difference between the actual number of
hours worked and the budgeted number of hours. This figure is then
multiplied by the overhead rate for an hour of labour.
Capacity Variance
= (Budgeted production hours Actual production hours)Per labour hour
rate
If actual production hours are greater than budgeted production hours, it is
a favourable situation and if actual production hours are less than budgeted
production hours then it is an unfavourable situation.

Spending Variance:
A spending variance is the difference between the
actual and budgeted amount of an expense.
Spending Variance = Actual expense Budgeted expense
If actual expense is greater than budgeted expense then it is an un
favourable situation and if actual expense is less than budgeted expense
then it is a favourable situation.

Over all variance:

Total variance is the difference between actual and
absorbed production during the period.

Total variance = Actual production Absorbed production*

Absorbed production* = Actual production units Absorption rate*
Absorption rate* = Budgeted production Budgeted units
If actual production is lower than budgeted production then it is a
favourable situation, if actual production is greater than budgeted
production then it is an unfavourable situation.

Marginal Costing Method:

The marginal cost of an item is its variable
cost. The marginal production cost of an item is the sum of its direct
materials cost, direct labour cost, direct expenses cost (if any) and variable
production overhead cost. So as the volume of production and sales
increases total variable costs rise proportionately.
Marginal Costing Income Statement
Sales
Less: Variable costs
Direct materials
Direct labour
Production overheads (V.C)

X
X
X
X

Total contribution
Less: Production overheads (F.C)
Profit

X
X
X
X

Marginal costing focus on variable costs and contribution is useful for shortterm decision-making.

Absorption Costing Method:

Absorption costing means that all of
the manufacturing costs are absorbed by the units produced. In other
words, the cost of a finished unit in inventory will include direct
materials, direct labour and both variable and fixed manufacturing overhead.
As a result, absorption costing is also referred to as full costing or the full
absorption method.
Absorption Costing Income Statement
Sales
X
Less: Total costs

Direct materials
Direct labour
Production overheads (V.C+F.C)
Profit

X
X
X

X
X

Absorption costing is a simple method of calculating the cost of output and

is used in financial statements for inventory valuation.