Slide 1

COMP UTATI ON
AND
ANALYSI S OF VAR I ANCES

Carly M. Macalino (BS A 2C)

Slide 2

va ria nce

Difference bet ween

ACTUAL a nd STANDARD
COST

Since we are comparing actual with standard cost in this chapter, variance means the difference
between the actual cost and standard cost: where
Slide 3

Actual cost is the actual expenditure made to acquire an

asset, which includes the supplier-invoiced expense, plus
the costs to deliver, set up, and test the asset

Standard cost is an expected cost that a company usually

establishes at the beginning of a fiscal year for prices paid
and amounts used.
VARIANCE = ACTUAL COSTS – STANDARD COSTS

Actual Cost – this is a cost of an asset when it is initially recorded in the financial statements as
a fixed asset
The standard cost is an expected amount paid for materials costs and labor rates.
Slide 4

VARIANCES CAN BE COMPUTED FOR ALL

THE THREE COST ELEMENTS OF
PRODUCTION

Fa ctory
ma te ria ls la bor ove rhe a d
Slide 5

VARIANCEANALYSIS IS PERFORMEDTO KNOWTWO THINGS:

 The difference between actual and standards costs

 The reason for such difference

In variance analysis, we should not just be contented to know the amount of variance. In fact, it
is more important to know the reasons for such variance since these will be the management’s
basis for making the appropriate economic decisions.
Slide 6

VARIANCE MAY BE DESCRIBED AS EITHER FAVORABLE OR UNFAVORABLE

FAVORABLE

UNFOVARABLE = a ctua l cost < st a nda rd cost

= a ctua l cost > st a nda rd cost

Favorable – means that the company incurred less than what is allowed to spend
Unfavorable – meaning that there was overspending during the period
Slide 7

DIRECT MATERIAL VARIANCES

ILLUS TRATION

Standard data for direct materials of Bengram were established as follows:

Standard Quantity = 6pcs.

Standard Price = P20.00
Standard Cost/Unit = P120.00
Slide 8

DIRECT MATERIAL VARIANCES

ACCUMULATION OF ACTUAL DATA

Assume that during the month under review, Ednie Corp. was able to produce 900 units of Bengram, using 5,625
pcs. of plywood. These data could be obtained from the Cost of Production Report prepared by the Cost Accounting Department
during the month. The actual quantity of plywood used could come from the job order tickets, materials requisition forms, materials
issue slips or the stock cards.

Let us also assume that the records revealed that the corporation purchased 5,680 pieces of plywood at P20.25
per piece. These data could be taken from the purchase orders, the suppliers’ sales invoices or the company’s disbursements
vouchers and other pertinent records.

First, we need to accumulate the actual data or actual cost used in the said problem.
So, yung 5,625 dito is yung actual quantity nung plywood na ginamit ni Ednie Corp to produce
the 900 units of Bengram ou of 5,680 na pinurchase nila na plywood, while every piece actual
price nya is P20.25. So how can we get the Actual Cost?
Slide 9

DIRECT MATERIAL VARIANCES

Actual Material Cost (AMC) = Actual Quantity (AQ) used x Actual Price (AP)
= 5,625 pcs. X P20.25/pc.
= P113,906.25

So to get the Actual Material Cost, we have this formula.

The amount of P113,906.25 is the actual cost of materials incurred for the actual production of
900 units.
Slide 10

DIRECT MATERIAL VARIANCES

COMPUTATION OF STANDARD COST

Standard cost refers to the amount that should have been incurred by the company for
the actual production of 900 units of Bengram. Standard quantity refers to the number of units (for
pieces) of materials that should have been used for the actual production.

In this example, the standard quantity for 900 units of Bengram is 5,400 pcs. Of
plywood, since each unit of production requires 6pcs. of plywood (900 x 6 = 5,400)
Slide 11

DIRECT MATERIAL VARIANCES

The standard cost can be determined as follows:

Standard Material Cost (SMC) = Standard Quantity (SQ) x Standard Price (SP)
= 5,400 x P20
= P108,000

To get the Standard Material Cost, we have this formula

Slide 12

DIRECT MATERIAL VARIANCES

COMPUTATION OF VARIANCE

Variance = Actual Cost (AC) – Standard Cost (SC)

= P113,906.25 – P108,000
= P5,906.25 UF

After determining the actual and standard cost data, we can now compare the two, and compute
the total materials cost variance as follows:

The total variance of P5,906.25 is described as unfavorable because the total actual materials
cost incurred in producing 900 units of Bengram was greater than the standard cost that should
have been incurred for such production.
Slide 13

Ana lys is of tota l

va ria nce
Qua ntity Price Tota l

Actua l 5,625 pcs . P20.25 P113,906.25

Sta nda rd 5,400 20.00 108,000.00
Diffe re nce s 225 UF P 0.25 UF P 5,906.25 UF

Diffe re nce in Diffe re n ce in TOTAL VARIANCE

Qua nt ity P rice

The total variance obtained in the foregoing computations is not enough information should
management desire to know the reasons why there is such a variance. The same should be
further analyzed to have a better insight of what really happened during the period, as far as the
incurrence of materials cost is concerned.

For materials cost, the total variance can be analyzed by breaking it down into the factors that
brought about such variance, which are the physical (quantity) and monetary (price) factors.
This is because the total materials cost variance may result from differences between standard
and actual material usage or between standard and actual prices paid for materials or from a
combination of these two factors. To clarify, let us tabulate the actual and standard factors for
the direct materials cost of Bengram:

The total unfavorable variance of P5,906.25 is due to the fact that the total actual cost differed
from the standard cost because of the discrepancies between their quantities and prices. If only
these factors were the same, there could have been no variance at all. That is why, in our
analysis, we shall focus our attention to the portions of the variance brought about by the price
and the quantity factors.
Slide 14

DIRECT MATERIAL PRICE VARIANCE

is the difference between the

st a nda rd cost a nd the a ctua l cost for the
a ct ua l qua ntity of material purcha sed.

It results when the actual price per unit differs from the standard price per unit. This is the
preferred method of computing the direct material price variance because the variances
are recorded when purchases are made. If the problem does not give the quantity
purchased, then quantity put into production may be used.
Slide 15

T H E VAR I ANCE I S COM P UT E D AS F OL L OW S:

Materials Price Variance = Actual Quantity x Standard Price - Actual Quantity x Actual Price
MVP = (AQ) x (SP) - (AQ) x (AP)
OR
Materials Price Variance = (Actual Price – Standard Price) x Actual Quantity
MVP = (AP – SP) x AQ

OR
Materials Price Variance = Difference in Price x Actual Quantity
MVP = DP x AQ

We have three ways to compute the price variance.

Slide 16

Mate rials Price Varianc e = Actual Quantity x Standard Price - Actual Quantity x Actual Price
MVP = (AQ) x (SP) - (AQ) x (AP)
= (5,625 x P20) – (5,625 x P20.25)
= 112,500 – 113,906.25
= P1,406.25 UF

Mate rials Pric e Variance = (Actual Price – Standard Price ) x Ac tual Quantity
MVP = (AP – SP) x AQ
= (P20.25 – P20.00) x 5,625
= P1,406.25 UF

Ma te ria ls Price Va ria nce = Diffe re nce in Price x Actua l Qua ntity
MVP = DP x AQ
CRE DITS: This presentation =template
P0.25 UFwas created by S lidesgo, including
x 5,625
icons by Flaticon and infographics
= P1,406.25&UF images by Freepik.

So gamitin natin yung tatlong formula kanina sa pakuha ng price variance under Bengram
products. So kahit alin dun sa tatlo yung gamitin niyo, same lang yung results

The total price variance in this case is described as unfavorable because the company spent
P0.25 more for each piece of material purchased. It should have paid P20.00 but it actually paid
P20.25
Slide 17

DIRECT MATERIAL QUANTITY (USAGE)

VARIANCE

The difference between a ctua l

qua ntity of direct ma teria ls a nd
sta nda rd qua ntity a llowed
multiplied by the sta nda rd price
per unit equa ls the direct ma teria l
efficiency va ria nce.

The production department or cost center that controls the input of direct materials into
the production process is assigned the responsibility for this variance. If the actual
quantity used exceeds the standard quantity, there is an unfavorable materials quantity,
or usage variance. On the other hand, if the actual quantity is less than the standard
quantity, there is favorable materials quantity or usage variance.
Slide 18

T H E VAR I ANCE I S COM P UT E D AS F OL L OW S:

Materials Quantity Variance = Standard Quantity x Standard Price - Actual Quantity x Standard Price
MQV = (SQ) x (SP) - (AQ) x (SP)

OR
Materials Quantity Variance = (Actual Quantity – Standard Quantity) x Standard price
MQV = (AQ – SQ) x SP

OR
Materials Quantity Variance = Difference in Quantity x Standard Price
MQV = DP x SP
Slide 19

Ma te ria ls Qua ntity Va ria nce = Sta ndard Quantity x Sta ndard Price - Ac tual Qua ntity x Standard Price
MQV = (SQ) x (SP) - (AQ) x (SP)
= (5,400 x P20.00) – (5,625 x P20.00)
= 108,000 – 112,500
= P4,500 UF

Mate rials Quantity Variance = (Actual Quantity – Standard Quantity) x Standard price
MQV = (AQ – SQ) x SP
= (5 ,625 – 5,40 0) x P20 .00
= P4 ,50 0 UF

Mate rials Quantity Variance = Diffe re nce in Quantity x Standard Price

MQVtemplate
CRE DITS: This presentation = DP x was
SP created by S lidesgo, including
icons by Flaticon and=infographics
P4,500 UF & images by Freepik.

The unfavorable quantity variance of P4,500 resulted from overusing 225 pieces of materials.
Note that the company actually used 5,625 pieces, instead of the standard quantity od 5,400
pieces of materials for the actual production of 900 units of Bengram. To determine the peso
amount involved, the difference in quantity is multiplied by the standard price.
Slide 20

s umma ry
Comput a t ion o f To ta l Va ria nce :
Ac tu a l Ma te ria ls Cos t = AQ x AP = 5,625 x P 20.25 = P113 ,90 6.25
Le s s : Sta nda rd Ma t e ria ls Cos t = SQ x SP = 5,400 x P 20 .00 = 1 08,00 0.00

Tot a l Ma t e ria ls Co s t Va ria nc e P 5,90 6.25 UF

An a lys is :
Price Va ria n ce = DP x AQ = P0 .25 UF x 5 ,62 5 = P 1,40 6.25 UF
Qua nt ity Va ria n ce = DQ x SP = 22 5 UF x P20 = 4,5 00 .00 UF

Tot a l Va ria n ce P5 ,9 06 .25 UF

The total unfavorable materials cost variance of P5,906.25 is due to the unfavorable price
variance of P4,500.00. Note that the two variances were simply added in summarizing the
variances because they have the same descriptions (both of them are unfavorable). If they were
both favorable, they should have likewise been added.. However if their descriptions were not
the same (one is favorable and the other is unfavorable), the net amount should have been
obtained in determining the total of the price and quantity variances, and such net variance will
bear the description of the factor showing the higher amount of variance.
Slide 21

GRAP HICAL ILLUS TRATION

PRICE

ACTUAL PRICE P 20.25

PRICE VARIANCE (UF) PV = (2 0.25 – 20) x 5,62 5 = 1,40 6.25 UF
STD. PRICE P20.00

VARIANCE (UF)
QV = (5,625 – 5,400 ) x 2 0 = 4,500 UF

QUANTITY
QUANTITY
5,4 00 5,625
STD. ACTUAL
QTY. QTY.

The graph shows the standard and actual costs for materials used during the period of
production of Bengram. Standard and actual prices are plotted on the vertical axis, and the
standard and actual quantities on the horizontal axis. The standard cost is the dark blue area
formed by the standard price or P20.00 and the standard quantity of 5,400 pcs. of materials.

Both the actual price and quantity are greater than the standard. Hence, the actual cost is
greater than the standard as shown by the rectangle formed by the actual price of P20.25 and
actual quantity of 5,625 pcs. of plywood. The difference in are between the standard cost
rectangle and actual cost rectangle is the total materials cost variance for plywood. It is
composed of the price variance, which is the difference between the actual and standard prices
multiplied by the actual quantity [(P20.25 – P20) x 5,625 = P1,406.25 UF], and is represented
by the orange area on top of the standard cost rectangle and the quantity variance, which is the
difference between the actual and standard quantities multiplied by the standard price [(5,625 –
5,400) x P20 = 4,500 UF], and is represented by the yellow area on the right side of the
standard cost rectangle.
Slide 22

CAUSES OF MATERIALS VARIANCES

Materials Price Variance – fa ct ors t ha t a ffect t he p rice p a id for ra w ma t eria ls include:

(p urcha sing dep a rt ment)

AVAILABILITY OF QUANTITY AND CASH

DISCOUNTS
QUALITY OF THE MATERIALS REQUESTED
DELIVERY METHOD USED

Materials Quantity Variance – if the va ria nce is due t o inexperienced workers,

fa ulty ma chinery, or ca relessness, the product ion depa rt ment is responsible

After computing the amount of variances for a certain period, management should conduct a
careful investigation to know the causes of such variances. If possible, responsibility for such
variances should be established, so management could immediately take the necessary and
appropriate course of action.

For instance, the unfavorable price variance can be traced to the purchasing department.
Management can request the purchasing officer to explain why the company paid P20.25 than
the standard price of P20.00 for each unit of material. The reason to be cited will, of course, be
based on the situation or circumstances that occurred during the period, like: an unexpected
increase in prices of gasoline which caused an increase in prices of other commodities,
including the materials for Bengram; a shortage in the supply of materials experienced during
the period, which forced the purchasing department to buy the needed supply even at a higher
price to meet the production requirements; the requisitions were all ‘RUSH’, and the purchasing
department did not have ample time to do the usual canvassing from different suppliers; the
materials purchased for the period’s production were of better quality than those higher price;
the company’s regular supplier announced an increase in prices, but just the same the company
ordered the possible reasons, which management should carefully and thoroughly study to
know the appropriate action should be taken.

The unfavorable quantity variance, on the other hand, can be traced to the production
department. An inquiry should be made on why the department used more pieces of materials
than what they were allowed to use in producing the units of Bengram during the period under
review. For this, the possible explanations that may be cited are: the materials delivered were
inferior quality, which resulted into a lot of wastages’ some factory workers lacked the required
skill in doing the job which caused rejects or wastages; a pilferage case involving some workers
who brought home some materials for their personal consumption; lack of necessary equipment
for systematic and efficient job processing; lack of warehouse facilities for proper storage of
materials, etc.
Slide 23

MATERIALS PURCHASE PRICE VARIANCE

Price va ria nce is computed ba sed

on the a ctua l qua ntity purcha sed.

PPV = DP x ‫۾ ۿ ۯ‬

WHERE:
PPV = Purchase Price Variance
DP = Difference in Price
‫ = ۾ ۿ ۯ‬Actual Quantity Purchased

In the foregoing illustrations, the price variance is computed based on actual quantity used
(difference in price times actual quantity used), that is why it is sometimes called usage price
variance.

There are cases, however, when price variance is computed based on actual quantity
purchased. This is called purchase price variance.
Slide 24

Purcha s e Price Va ria nce = Diffe re nce in Price x Act ua l Qua nt ity Purcha s e d
PPV = DP x ‫۾ ۿ ۯ‬
PPV = 0.2 5 UF X 5,6 80
PPV = P1 ,4 20 UF

CRE DITS: This presentation template was created by S lidesgo, including

icons by Flaticon and infographics & images by Freepik.

So if you still remember on our illustration, our actual quantity purchased is 5,680, so to get the
purchase price variance, we should multiply the difference in price which is yung actual price na
P20.25 less yung standard price na P20.00 equals to P.25 sa actual quantity purchased na
5,680. so the purchase price variance is P1,420 UF
Slide 25

P ROBLEM S OLVING
Slide 26

DIRECT MATERIAL VARIANCES

ILLUSTRATION:

Assume that to produce the order of 1,000 gallons of Product X, Zorro, Inc. purchased
4,100 kilos of direct materials DM-A1 at a cost of P30.10 per kilo. The total materials variance is
computed using the following formula:
Standard Quantity x Standard Price - Actual Quantity x Actual Price = Total Materials Variance

(SQ) x (SP) (AQ) x (AP) (TMV)

Slide 27

SOLUTION

For Material DM – A1, the total material variance is unfavorable, determined as follows:
4,000 standard quantity x P30 standard price P120,000
4,100 actual units x P30.10 actual price 123,410

Total material variance P 3,410 (UF)

Slide 28

ILLUSTRATION:
Assume that to produce the order of 1,000 gallons of Product X, Zorro, Inc.
purchased 4,100 kilos of direct materials DM-A1 at a cost of P30.10 per kilo
For Material DM-A1, the price variance is unfavorable (UF)
4,100 actual units purchased x P30 standard price per unit P123,000
4,100 actual units purchased x P30.10 actual price per unit 123,410
Materials price variance 410 (UF)
Slide 29

The ma t eria ls price ca n a lso be com puted by mult iplying

the a ctua l qua ntit y purcha sed by t he difference bet ween
t he a ct ua l a nd sta nda rd p rice per unit .

AQ(AP-SP)
4,100 units (P30.10 – P30.00)
= 410 (UF)
Slide 30

ILLUSTRATION:
Assume that to produce the order of 1,000 gallons of Product X, Zorro, Inc.
purchased 4,100 kilos of direct materials DM-A1 at a cost of P30.10 per kilo.
For Materials DM-A1, the quantity variance is unfavorable (UF)
4,100 actual quantity x P30 standard price per unit P120,000
4,100 standard quantity x P30 standard price per unit 123,000
Materials quantity variance P 3,000 (UF)
Slide 31

The m a teria ls qua nt ity va ria nce ca n a lso be comput ed by

mult iplying t he difference between the a ctua l a nd
st a nda rd qua nt it y used by t he st a nda rd price.

(AQ-SQ) SP
(4,000 – 4,100) x P30
= P3,000 (UF)
Slide 32