Variance Analysis for Engineering and Financial Cost: Monthly Budget Report, Lecture notes of Financial Management

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Engineering and Financial Cost Analysis

Variance Analysis

A Monthly Budget Variance

Report

The Variance Format

AQ = Actual Quantity or Actual Volume or Actual Hours

AP = Actual Price or Actual Rate

SQ = Standard Quantity or Standard Volume or Standard Hours

SP = Standard Price or Standard Rate

ACTUAL QUANTITY AT

ACTUAL PRICE (ACTUALS)

AQ x A P

ACTUAL QUANTITY AT

STANDARD PRICE

AQ x SP

STANDARD QUANTITY AT

STANDARD PRICE

SQ x S P

1 – 2 = PRICE VARIANCE

AQ(AP-SP)

2 – 3 = QUANTITY VARIANCE

SP(AQ-SQ)

TOTAL VARIANCE (1 - 2) + (2 - 3)

• Negative values are Favorable for Expense Model (credit to OH Variance)

• Positive values are Unfavorable for Expense Model (debit to OH Variance)

Where is the information found?

SPENDING VARIANCE

VOLUME VARIANCE

TOTAL VARIANCE (1 - 2) + (2 - 3)

ACTUAL COSTS

(PROVIDED BY ACCOUNTING)

ACTUAL AMOUNT OF RESOURCE

AT STANDARD PRICE

(CALCULATED)

BUDGETED COSTS

(PROVIDED BY ACCOUNTING)

(1) Actual $$$ given on monthly Variance Analysis report (3) Budgeted $$$ given on monthly Variance Analysis report (2) Calculated by getting AQ and SP from Accounting or other source of budget information = AQ x AP = AQ x SP = SQ x SP

A Monthly Budget Variance

Report

Overhead Variances under Full-

absorption Costing

• Variation for

Y = mx + b Where Y = Volume-adjusted overhead budget m = Variable Overhead rate (budgeted) x = actual quantity of overhead vehicle (i.e. hours) b = Fixed Overhead expenses (budgeted) ACTUAL QUANTITY AT ACTUAL PRICE (ACTUALS) AQ x A P

ACTUAL QUANTITY AT

STANDARD PRICE

Y = mx + b

STANDARD QUANTITY AT

STANDARD PRICE (ALLOCATED)

SQ x S P

1 – 2 = PRICE VARIANCE

AQ(AP-SP)

2 – 3 = QUANTITY VARIANCE

SP(AQ-SQ)

TOTAL VARIANCE (1 - 2) + (2 - 3)