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|Interpretation of Variance|
Mathematical InterpretationThe variances that we calculate are all value variances i.e. any Variance that we calculate is the difference between two values.
⇒ Variance = Value1 − Value2
⇒ Variance = (Quantity1 × Price1) − (Quantity2 × Price2) [Since Value = Quantity × Price.]
Adverse/Negative/Unfavourable VarianceThe variance is said to be either negative (−) or Adverse (Adv) or Unfavourable (Unf) if it indicates a loss.
This type of variance is indicated by either a negative sign (−) placed before the value of the variance or by writing the letters UF or Unf or Adv after the value.
Positive/Favourable VarianceThe variance is said to be either Positive (+/Pos) or Favourable (Fav) if it indicates a gain position or beneficial position.
This type of variance is indicated by either a positive sign (+) placed before the value of the variance or by writing the letters Fav or F or Pos after the value.
|Variance Formulae » Standard − Actual (Or) Actual − Standard ??|
Many a times students would get struck up with deciding whether the standard data comes first or the actual data. The basic idea behind all variances being Variance = Value 1 − Value 2, the standard value should come first in case of cost variances and the actual value should come first in case of sales variances.
To have a clear understanding assume an example and spend a few seconds to think over and decide every time you are in doubt. Never mug it up. The below explanation is given as an aid.
This would give an idea of how much more or less cost had been incurred when the actuals are compared to plans. However, it does not give a scope for pin pointing the responsibility for the variance and thereby take corrective actions.
We cannot identify whether the variance is on account of more or less purchase price being paid (in which case, the purchases department should be held responsible) or on account of more or less quantity of materials being used (in which case the production department should be held responsible) etc.
Therefore to enable derivation of data that would be useful, material cost variance is analysed further into its constituent parts.
|Material Cost Variance as a Synthesis of its Constituent Variances|
The analysis of material cost variance into its constituent parts gives an idea of the material variance in various other angles. This possibility for anlaysis arises on account of the fact that material cost is a product of (thereby is influence by) two factors, i.e. the quantity of materials and the price of materials .
All the variances involving materials which are collectively called "Material variances" and their inter relationships are depicted in the illustration below:
This can be understood as the "Material Cost Variance" broken down into its constituent parts and the constituent parts further broken down wherever possible.
Inter-relationshipsThe inter-relationships as can be interpreted from the above illustration are
These inter-relationships can be useful in problem solving for deriving the required answers as well as in checking for the correctness of answers.
|Author Credit : The Edifier||... Continued Page M:6|