1.

ONE-WAY
2. TWO-WAY
3. THREE-WAY
4. FOUR-WAY
 End of presentation

God bless!

Source:
De Leon, Norma; De Leon, Ellery; De Leon, Guillermo, Jr., /Cost Accounting and Control 2019 Edition
• It is simply the difference between the actual factory overhead
incurred and factory overhead applied. (Used in JOB ORDER
COSTING DISCUSSION)

Actual Factory Overhead P xxx,xxx

Less: Factory Overhead Applied xxx,xxx
OVERHEAD VARIANCE P XXX,XXX

Take Note: The application of factory overhead shall be based

on actual outputs multiplied to the standard overhead rate.
• In 2-WAY, 3-WAY and 4-WAY FOH
Variance Analysis, it is just an analysis
of the totality of the FOH VARIANCE.
It answers the question “ What Factors
contributes to the FOH VARIANCE?”
TO ILLUSTRATE 2-WAY
VARIANCE ANALYSIS
1
CONTROLLABLE/BUDGET
VARIANCE

FOH VARIANCE (1-WAY)

2
VOLUME VARIANCE

IN 2-WAY VARIANCE ANALYSIS, ONLY TWO FACTORS/VARIANCES ARE ANALYZED TO

DETERMINE WHAT FACTORS CONTRIBUTE TO THE TOTALITY OF THE FOH VARIANCE.
• BUDGETED COST
- PLANNED COST FOR A CERTAIN LEVEL OF ACTIVITY. BASED ON
PROJECTED PRODUCTION ON SHORT-TERM BASIS (E.G. MONTHLY)
( E.G. RATE PER HR.)

STANDARD COST
- BASED ON PROJECTED PRODUCTION ON LONG-TERM BASIS
( E.G. ANNUALLY)
- COST PER UNIT ( E.G. STANDARD COST PER UNIT PRODUCED )
CONTROLLABLE/ BUDGET VARIANCE

The controllable variance is the difference between actual

expenses incurred and the budget allowance based on
standard hours allowed for work performed.

FORMULA: CONTROLLABLE/VARIANCE

ACTUAL FACTORY OVERHEAD

ACTUAL VARIABLE COSTS XXX
ACTUAL FIXED COSTS XXX XXX
LESS: BUDGETED ALLOWED BASED ON STD. HOURS
BUDGETED VC ( SH X Budgeted VC) XXX
BUDGETED FC XXX XXX
CONTROLLABLE/BUDGET VARIANCE XXX
VOLUME VARIANCE

FORMULA: VOLUME VARIANCE

BUDGETED ALLOWED BASED ON STD. HOURS

BUDGETED VC ( AQ X Budgeted VC) XXX
BUDGETED FC XXX XXX
LESS: STD FOH APPLIED TO PRODUCTION ( SH X SR ) XXX
VOLUME VARIANCE XXX

Based on the formula, the definition of VOLUME VARIANCE IS

THE DIFFERENCE BETWEEN THE BUDGETED OVERHEAD based
on standard activity and the factory overhead applied to the
production.
• USING TWO-WAY VARIANCE ANALYSIS, THE BUDGETED
COSTS/ACTIVITY ARE NOT GIVEN. CAN YOU STILL COMPUTE FOR
THE FOH VARIANCE?

ANSWER: YES BUT CANNOT COMPUTE FOR BUDGET VARIANCE AND

VOLUME VARIANCE.

MATHEMATICALLY: DISTRIBUTE
FOH VARIANCE = ( AFOH – BASH ) + ( BASH – APPLIED FOH)
FOH VARIANCE = AFOH – BASH + BASH – APPLIED FOH
FOH VARIANCE = AFOH – APPLIED FOH ( BACK TO ONE-WAY
ANALYSIS )
• ACTUAL FOH AFOH

• LESS: BUDGETED ALLOWED BASED ON STD HRS. BASH

CONTROLLABLE VARIANCE

BUDGETED ALLOWED BASED ON STD HRS. BASH

FOH APPLIED ( SH (AQ X HRS PER UNIT ) X SR ) SHXSR

2-WAY FACTOR CODE: AFOH BASH BASH SHXSR

JUST REMEMBER THAT BASH CONSISTS OF BUDGETED VC AND BUDGETED FC

TO ILLUSTRATE 3-WAY 1 SPENDING VARIANCE
VARIANCE ANALYSIS VARIABLE SPENDING VARIANCE
FIXED SPENDING VARIANCE

CONTROLLABLE/BUDGET VARIANCE

FOH VARIANCE (1-WAY) 2 EFFICIENCY VARIANCE

VARIABLE EFFICIENCY VARIANCE

VOLUME VARIANCE
3
VOLUME VARIANCE

IN 3-WAY VARIANCE ANALYSIS, THREE FACTORS/VARIANCES ARE ANALYZED TO

DETERMINE WHAT FACTORS CONTRIBUTE TO THE TOTALITY OF THE FOH VARIANCE
NAMELY SPENDING VARIANCE, EFFICIENCY VARIANCE AND VOLUME VARIANCE
 ACTUAL VC + ACTUAL FC
ACTUAL FOH AFOH A
( AH X AVc ) + ACTUAL FC B
( AH X SVc ) + BUDGETED FC
1 SPENDING VARIANCE
A. VARIABLE SPENDING VARIANCE BAAH N/A
B. FIXED SPENDING VARIANCE
BUDGETED ALLOWED
BASED ON ACTUAL HRS

1 SPENDING VARIANCE
VARIABLE SPENDING VARIANCE BAAH ( AH X SVc ) + BUDGETED FC
FIXED SPENDING VARIANCE

2 EFFICIENCY VARIANCE BASH ( SH X SVc ) + BUDGETED FC

C VARIABLE EFFICIENCY VARIANCE

BASH
3
VOLUME VARIANCE
SHXSR
• VARIABLE SPENDING VARIANCE
( ACTUAL VC RATE – BUDGETED VC RATE ) X ACTUAL ACTIVITY ( HRS)

FIXED SPENDING VARIANCE

ACTUAL FIXED COST – BUDGETED FIXED COST

SPENDING VARIANCE
VARIABLE SPENDING VARIANCE + FIXED SPENDING VARIANCE
• BASED ON THE ALTERNATIVE SOLUTION, THE FORMULA:
( AH – SH ) X STD VARIABLE COST

KEY TAKEAWAY:
VARIABLE EFFICIENCY VARIANCE CAN BE COMPUTED WITHOUT
THE NEED FOR BUDGETED FIXED COST.
TO ILLUSTRATE 1-WAY
VARIANCE ANALYSIS
• AFOH ( 36,000 + 75,000) P 111,000

• LESS: SQ X SR or ( VC/Hr. + FC/Hr.)

(50,000 X .1) X ( 5 + 20 ) 125,000
FOH VARIANCE ( 14,000) FAVORABLE

The variance is favorable because the actual FOH is lower than the
standard/planned cost.

STD. FIXED COST PER UNIT:

P 80000/4000 = P 20 / UNIT

STD. VC PER UNIT:

5 PER UNIT ( GIVEN)
TO ILLUSTRATE 2-WAY
VARIANCE ANALYSIS
• AFOH BASH BASH SHXSR

AFOH 111,000
BASH BUDGETED VC ( 50,000 X .1X 5) 25,000
BUDGTED FC 80,000 105,000
CONTROLLABLE VARIANCE P 6,000-

BASH 105,000
SH X SR ( FROM PREVIOUS COMPUTATION) 125,000
VOLUME VARIANCE ( 20,000) F

TO CHECK: 6000 + ( 20000) = ( 14, 000 ) F

AFOH 111,000
BAAH VC BASED ON ACTUALHRS (60,000 X .1X 5) 30,000

FC 80,000 110,000
SPENDING VARIANCE P 1,000 U

BAAH ( ALTERNATIVE SOLUTION ) VC 30,000

BASH ( ALTERNATIVE SOLUTION) VC 25,000
VARIABLE EFFICIENCY VARIANCE 5,000 U

BASH ( PREVIOUS COMPUTATION ) 105,000

SH X SR 125,000
VOLUME VARIANCE (20,000) F

FOH VARIANCE = 1,000 + 5000 + ( 20,000 ) = ( 14,000 )

ACTUAL FIXED COST
FIXED SPENDING VARIANCE

BUDGETED FIXED COST

VOLUME VARIANCE

STANDARD FIXED COST

• ACTUAL FC 75,000

FIXED SPENDING VARIANCE 5,000 F

• BUDGETED FC 80,000

VOLUME VARIANCE
(20,000) F
• STANDARD FC
• ( 20 X 5000 ) 100,000
TO ILLUSTRATE 4-WAY VARIABLE SPENDING VARIANCE
VARIANCE ANALYSIS

CONTROLLABLE/BUDGET VARIANCE VARIABLE SPENDING VARIANCE

FOH VARIANCE (1-WAY)

VARIABLE EFFICIENCY VARIANCE

VOLUME VARIANCE

VOLUME VARIANCE

AS COMPARED TO 3-WAY VARIANCE ANALYSIS, THE SPENDING VARIANCE IS

SEPARATED IN TO VARIABLE SPENDING AND FIXED SPENDING VARIANCE