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 Emmanuel I. Awen
Department of Business Management
 Henry T. Gbashima
  Department of Accounting , University of Mkar, Mkar, Benue State, Nigeria
The term variance as applied to manufacturing firms is the difference between the standard cost and actual cost.  And variance analysis is the process by which the total difference between actual cost and standard cost is broken down into its different elements.  The paper has included in it the purpose of variance analysis which is mainly to provide pointers to the causes of off-standard performance so that management can improve operations, increase efficiency, utilize resources more effectively and reduce costs as well as report exceptional variances to management for action.  This means that the purpose of variance analysis focuses on performance evaluation, cost control and management by exception.  The paper also includes in it types of variances with their calculations, causes of the various types of variances managerial uses of variances and lastly conclusion.
Keywords: Management; cost; variance; performance

It may be acceptable to say that variances are found in all works of life; be it in our religious, social or economic expectations etc.  Variances could also exist in the daily expectations of individuals, groups, organizations and even the government.  This research work is therefore poised to avail us with variances that exist, especially in productive (manufacturing) organizations, and how management exercise control based on variance analysis reports received.

Definition of Variance and Variance Analysis
The difference between the standard cost and actual cost is known as variance; and the process by which the total difference between actual cost and standard cost is broken down into its different elements is known as variance analysis, (Lucey, 2002).  Variance analysis explains the difference between actual results and expected results. 

The expected results are the standard cost and standard revenue.  Standard costs are predetermined or target costs that should be incurred under efficient operating conditions and standard revenue is target revenue that should be realized under efficient operating conditions. 

The Purpose of Variance Analysis
According to Lucey (2002), the main purpose of variance analysis is to provide pointers to the causes of off-standard performance so that management can improve operations, increase efficiency, utilize resources more effectively and reduce costs. Moscow et al (1990) have also said that one of the principal reasons for incorporating standard costs into a cost accounting system is to provide management with control information regarding areas of efficiency and inefficiency within production operations.   Through the use of variance analysis, the cost accountant attempts to provide management with timely control information reports concerning who is responsible for variances.  Once management receives performance reports of variance analysis information that pinpoint responsibilities, it can initiate corrective action in those departments that have unfavourable variances and provide positive inducements (such as bonus pay) to the individuals working in departments that are responsible for favourable variances.

A favourable variance occurs if actual cost is less than standard cost.  Ordinarily, favourable variance is assumed to imply efficient performance.    An unfavourable variance arises if actual cost exceeds standard cost.  An unfavourable variance is supposed to indicate inefficient performance.  However, whether performance is really efficient or inefficient will be known only when variances are analysed in detail by their causes.

Computation of Variance Types
Before a causal analysis of variances is undertaken, the amount of variances should be calculated. Variance analysis for determining the causes should generally be restricted to those variances that are significant in the opinion of management.  The significance of a variance depends upon its magnitude and frequency of occurrence.  This implies that the greater the variance percentage in relation to standard cost, the more significance it will assume for detailed investigation.  More importantly, the more frequently a variance occur, the greater significance will be accorded to it.  A variance is calculated by comparing actual costs with standard costs.  The variance of the following costs is therefore calculated below:

Materials Cost Variance (MCV)
The analysis of the materials cost variances starts with the calculation of a net, or overall, materials cost variance.  The net materials cost variance is the difference between the actual cost of materials and its standard cost.  The formula for calculating the net materials cost variance (MCV) is as follows:
MCV = (Standard Quantity                   X         Standard Price)
Allowed for actual output
                        (Actual Quantity                                  X         Actual Price)
i.e. MCV =       (S Q     X  S P) – (AQ X AP).

The net materials cost variance is an aggregate variance, and results due to the differences between standard price and actual price of materials purchased and between standard quantity and actual quantity of materials used.   The net materials cost variance may, thus, be analysed into:

  1. Materials Price Variance (MPV)
  2. Materials Usage (or Quantity) Variance (MUV)

When several kinds of materials (that is, a mix of materials) are used to manufacture a single

product, the materials usage variance may be sub-divided into the following variances:

  1. Materials Mix Variance (MMV)
  2. Materials Yield Variance (MYV).

Materials Price Variance (MPV)

When the actual price per unit of materials purchased is different from its standard price per unit, the unit material price variance is obtained.  The unit price variance is multiplied by the quantity of materials purchased (or used) to obtain the aggregate amount of materials price variance.  The formula to compute materials price variances is as follows:
MPV= (Standard Price – Actual Price)  X Actual
                        Quantity Purchased (or used).
i.e. MPV=        (SP-AP) X AQ.
Materials Usage Variance (MUV)
The materials usage variance is the difference between the actual quantities of materials used and the standard quantity of materials allowed for the actual output multiplied by the standard price.   The formula for computing materials usage variance is as follows:
MUV=             (Standard Quantity for Actual Output - Actual Quantity used)  X        Standard Price             
i.e. MUV=        (SQ-AQ) X SP.
Illustration 1:
Assume that a furniture company needs 140 square feet plywood per conference table at a cost of N120 per square foot.  Suppose that the company manufactured 200 tables during a year using 4850 square feet plywood at N 90.5 per square foot, using the above information, calculate (a) Materials cost variance (b) Material price variance (c) Materials usage variance.
(a)        MCV    =          (SQ X SP) – AQ X AP)
                        =          (28,000 X N120) – (4850 X N90.5)


=          N 3,360,000 – N438,925
                        =          N 2,921,075
(b)        MPV    =          (SP – AP) X AQ
=          (N 120 – N90.5) X 4850
                        =          N 29.5 X 4850
                        =          N 143,075
(c)        MUV   =          (SQ – AQ) X AP
=          (N 28,000 – N 4850) X N 120
                        =          N 23,150 X N 120
                        =          N 2,778,000
Materials Mix Variance (MMV)
Materials Mix Variance is computed as the difference between the actual quantities of materials used and the standard quantities (or proportions) of actual input used (Revised Standard Quantity) multiplied by the standard price.  The mix variance is sometimes called the blend variance.  Mix variance is possible when the production process involves mixing different materials inputs to make the required output.  Example could include the manufacture of fertilizers, steel, plastics, food products, etc.  The formula for calculating the materials mix variances is a follows:
MMV=             (Standard Quantities of Actual Input - Actual Quantity used)  X         Standard Price 
i.e. MMV=       (RSQ-AQ) X SP and
      RSQ=         Standard Quantities of a Materials  X Actual Input
            Standard Quantities of all Materials

Materials Yield Variance (MYV)
Yield is the quantity of the finished product manufactured from a given combination and quantities of materials.  A yield variance will


result if the out put (yield) obtained is different from the output (yield) expected from the actual input used.  The difference between the actual output and the standard (expected) output is multiplied by the price per unit of standard output to compute the materials yield variance.  A feature of materials yield variance includes the existence of process losses through impurities, evaporation, breakages, machinery failures, etc.  The formula to calculate the materials yield variance is as follows:
MYV=             (Actual Yield – Standard Yield) X Average     Standard Materials output price                      
i.e. MYV=        (AY-SY) X ASMOP and
      SY=           Unit Output X Actual Input
                        Materials Units


Illustration 2:
Assume that to manufacture one unit of a product, the standard specifications for materials are as follows:
Material X: 6 units @ N 2.50 per unit = N 15.00
Material Y: 4 units @ N 3.00 per unit = N 12.00
fsfgsf                                                               N 27.00
The units of the product manufactured during a month amounted to 2000.  The materials were used as follows:
Material X: 11200 units
Material Y: 6800 units
Use the above information to calculate (a) Materials Mix Variance (b) Materials Yield Variance.

Solution: Table 1


Standard quantities of input (units)

Actual Qualities used input (Units)

Difference (Units)

Standard price

Material mix variance


















(N) 200

The standard proportions for actual input of revised standard quantities calculated as follows:
Material X:       RSQ= 6 X 18,000 units=10,800 units
Material Y:       RSQ= 6 X 18,000 units=7,200 units

    1. Standard Yield=           1  X 18,000 units= 1,800 units

            Therefore, MYV          =(2,000 – 1,800) X N 27
                                                =200 X N 27

Labour Cost Variances (LCV)
The labour cost variance is the difference between the actual labour costs (i.e. actual wages) and the standard labour costs.  The formula given below can be used to calculate the net
LCV=               (Standard Hours Allowed for Actual output  X Standards Rate)  -       (Actual Hours X Actual Rate)               
i.e. LCV=         (SH X SR) – AH X AR)
      The labour cost variance can be disaggregated into two sub- variances:

  1. Labour Rate (or price) Variance (LCV)
  2. Labour Efficiency (or quantity) Variance (LEV)

Labour Rate Variance (LRV)
The labour rate arises when labour is paid at a rate different from the standard wage rate.  The difference between the standard wage rate and the actual wage rate is multiplied by the actual hours worked to obtain the labour rate variance.  Its formula is as below:
LRV=(Standard Rate – Actual Rate) X Actual Hours
i.e. LRV=(SR-AR) X AH

Labour Efficiency Variance (LEV)
The labour efficiency variance is found out as the difference between actual hours and standard hours multiplied by the standard wage rate.  The formula for finding it is found below:
LCV=               (Standard Hours allowed - Actual Hours Worked)  X Standard Rate
i.e. LEV= (SH-AH) X SR
Illustration 3:
Assume that the standard wage rate for producing a product is N 300 per hour.  During a period 450 hours were actually worked, while the time allowed was 490 hours.  The labour was paid at the rate of N 270 for the hours worked.  Calculate (a) The labour rate variance (b) The labour efficiency variance (c) The labour cost variance.

  1. LRV     =(N 300 – N 270)  X 450

=N 30 X 450
=N 13,500

  1. LEV     =(N 490 – 450) X N 300

= 40 X N 300
=N 12,000

  1. LCV     =(490 X N 300) – (450 X N 270)

=N 147,000 – N 121500
=N 25,500



Variable-Overhead Variance (VOV)
The net variable-overhead variance is the difference between actual variable-overheads and the standards variance-overheads.  The formula for standards variable-overhead variance is as follows
VOV    =(Standard Variable-overheads for Standard Hours  X

Standard Variable Rate) – (Actual Variable-overheads X Actual Variable Rate).
i.e. VOV          =(SH X SVR) – AH X AVR)

Variable-Overhead Spending Variance (VOSV)
The variable-overhead spending variance is the difference between the standard variable-overheads for the actual hours and the actual variable-overheads incurred.  The formula for variable-overhead spending variance is as follows:
VOSV=            (Standard Variable-overheads for Actual Hours X standard Variable Rate) – (Actual Variable-Overheads  X Actual Variable Rate).
i.e. VOSV=(SH X SVR) – (AH X AVR)
Variable-Overhead Efficiency Variance (VOEV)
The variable-overhead efficiency variance measures the extent of cost saved or excess of cost incurred due to efficient or inefficient performance.  Its formula is as follows:
VOEV=            (Standard Variable-overheads for standard Hours allowed – Actual variable-overheads for Actual Hours used) X Standard Variable Rate.
i.e. VOEV=      (SH – AH) X SVR

Fixed-Overhead Variances (FOV)
If the actual fixed overheads differ from the fixed overheads applied (recovered or absorbed), an under-or over-recovery of overheads will result.  Its formula is as follows:
FOV=               (Standard Fixed-overhead cost for standard Hours allowed X standard

fixed Rate) – (Actual Fixed-overhead cost for Actual Hours worked X Actual Fixed Rate)
i.e. FOV=(SH X SFR) – (AH X AFR)
The fixed-overhead variance is, therefore, analysed into two variances:

  1. Fixed-overhead Spending Variance (FOSV)
  2. Volume Variance (VV)

Fixed-Overhead Spending Variance (FOSV)
This is the difference between the cost which should have been incurred, assuming the normal volume and the cost is actually incurred.  In other words, this variance is equal to the difference between budgeted fixed-overheads and actual fixed-overheads.  Its formula is as follows:
FOSV=             Budgeted Fixed-overhead Cost – Actual Fixed-Overhead Cost
Volume Variance (VV)
The volume variance is equal to the difference between the budgeted fixed-overheads and the standard fixed-overheads charged to production (i.e. fixed-overheads absorbed at standard hours).  Its formula is as follows:
VV=     Standard Fixed-overhead Cost – Budgeted Fixed-Overhead Cost X Standard Fixed Rate
i.e. VV=(SH –  BH) X SFR
The volume variance may be analysed into the following variances;

  1. Capacity Variance (CV)
  2. Efficiency Variance (EV)


Capacity Variance (CV)
Capacity variance is the difference budgeted fixed-overheads and fixed-overhead absorbed or recovered at actual hours.  Its formula is as follows:
CV=     (Fixed-Overheads absorbed at actual Hours – Budgeted Fixed-Overheads) X Standard Fixed Rate.


i.e. CV=(AH – BH) X SFR

Efficiency Variance (EV)
The difference between actual hours taken to complete a job and standard hours allowed to do that job indicates the efficiency (or inefficiency) of performance. Its formula is as follows:
EV=     (Fixed-overheads absorbed at Actual Hours – Fixed-Overheads absorbed at Actual Hours) X Standard Fixed Rate.
i.e. EV=           (SH – AH) X SFR
Illustration 4:
 The Cherrywood Manufacturers Produces two products – P and Q.  To manufacture 1 unit each of product P and product Q, the standard time allowed is 20 minutes (1/3 hour) and 15 minutes (1/4 hour) respectively.  During year 2000 the firm will operate at a normal capacity of 120,000 machine hours.  The budgeted fixed manufacturing overheads are N 600,000 and variable manufacturing overheads are N 2.50 per machine hour.  The actual production during year 2000 was 129,000 units of product P in 45,000 hours and 200,000 units of product Q in 55,000 hours.  Actual variable manufacturing overheads were N 232,000 and the actual fixed manufacturing overheads were N 650,000.  Calculate the manufacturing overheads variances from the above information.
(1)        VOV    =(SH X SVR) – (AH X AVR0
                        =(93,000 X N 2.50) – (N 232,000)
                        =N 232500-N 232,000
                        =N 500

  1. VOSV=(AH X SUR) – (AH X AVR)

=(100,000 X N2.50) – (N 232,000)
=N 250,000 – N 232,000
=N 18,000


=(93,000 – 100,000) X 2.50
=N 70,000 X N 2.50
=N 17,500


(2)        FOV     =(SH X SFR) – (AH X AFR)

=(93,000 X N 5) – (N 650,000)
                        =N 465,000 - N 650,000
                        = - N 185,000


=600,000 – N 650,000
= - N 185,000

  1. VV=(SH - BH) X SFR

=(93,000 – 600,000) X 5
= - 500,000 X N 5
= - N 2,500,000

  1. CV       =(AH – BH) X SFR

=(100,000 – 600,000) X N 5
= - 500,000 X N 5
= - 2,500,000

  1. EV       =(SH – AH) X SFR

=(93,000 – 100,0000 X N 5
= - 7000 X N 5
= - N 35,000

Total Sales Margin Variance (TSMV)
This is the difference between the standard selling price of a product and its standard cost; and it is the same as the standard profit for the product.  Total sales margin variance comprises of:

  1. Sales margin price variance (SMPV)
  2. Sales margin quantity variance (SMQV)

Sales Margin Price Variance (SMPV)
It is the difference between the standard margin per unit and the actual margin per unit for the number of units sold in the period.

Sales Margin Quantity Variance (SMQV)
It is the difference between the budgeted number of units sold and the actual number sold valued at the standard margin per unit.  Sales margin quantity variance is sub-divided into:

  1. Sales margin mix variance (SMMV)
  2. Sales margin volume variance (SMVV)

Sale Margin Mix Variance (SMMV)
This is the difference between the actual total number of units at the actual mix and the actual

total number of units at standard mix valued at the standard margin per unit.

Sales Margin Volume Variance (SMVV)
It is the difference between the actual total quantity of units sold and the budgeted total


number of units at the standard mix valued at the standard margin per unit.


Illustration 5:
A company makes and sells three products, S, N and T.  During a period, budget and actual results were as follows:

Table 2: Calculate all the relevant sales margin variances.




Total Sales (N)






Budget Total Margin

Total Sales (N)




Actual Total Margin








































N 13,500




N 37,000





N 2,400


  1. SMPV= N 2400 - N 2250= N 150
  2. SMQV= N 2250 - N 2700= - N 450
  3. SMMV= N 2250 - N 2430= - N 180
  4. SMVV= N 2430 - N 2700= - N 270
  5. TSMV= N 2400 - N 2700= - N 300


Total Sales margin variance
- N 300

  The summary of the variance calculations is shown below, followed by explanatory notes as follows:

  1. Actual units

Actual mix

Sales margin price variance
N 150

  Actual margin  N 2,400

  1. Actual units                            

Actual mix                                          

Mix Variance
- N 180

  Standard margin N 2,250

  1. gfgfgActual units

Quantity Variance
- N 450

  Standard mix

Volume variance
- N 27

  Standard margin N 2,430

  1. Actual units

Standard mix
Standard margin N 2,700


  1. This is the actual total margin achieved as shown in the question, i.e.

(N 550 X 2) + (N 250 X 4) + (N 100 X 3)= N 2,400

  1. This is the actual units in the actual proportions, but at the budgeted margins, i.e.

(N 550 X 2) + (N 250 X 3) + (N 100 X 4)= N 2,250

This is the actual total number of units sold (900), but at the standard proportions, i.e. 50%, 30% and 20%, valued at standard margin, i.e.
(N 450 X 2) + (N 270 X 3) + (N 180 X 4)= N 2,430

  1. The total budgeted margin is as given in the question i.e.

(N 500 X 2) + (N 300 X 3) + (N 200 X 4)= N 2,700

Causes of Variances
Lucey (2002) has enumerated the causes of the various variances considered to include the following:
Causes of Material Variances
Under material variances, we have price variances and usage variances.  The causes of price variances include the following:

  1. Paying higher or lower prices than planned.
  2. Losing or gaining quantity discounts by buying in smaller or larger quantities than planned.
  3. Buying lower or higher quantity than planned
  4. Buying substitute material due to unavailability of planned material.

The causes of usage variances include the following:

  1. Greater or lower yield from material than planned.
  2. Gains or losses due to use of substitute or higher/lower quantity than planned.
  3. Greater or lower rate of scrap than anticipated. 

Causes of Labour Variances
Under labour variances, we have rate variances and efficiency variances.  The causes of labour rate variances include the following:

  1. Higher rates being paid than planned due to wage award.
  2. Higher or lower grade of worker being use than planned.
  3. Payment of unplanned overtime or bonus

The causes of labour efficiency variances include the following:

  1. Use of incorrect grade of labour
  2. Poor workshop organizations or supervision.
  3. Incorrect materials and or machine problems.
  4. Unexpectedly favourable conditions.

Causes of Variable-Overhead Variances
The standards for variable-overheads are based upon anticipated prices, usage and other operating conditions.  Therefore, any change in these expectations can cause a variance in the actual and budgeted costs.
Causes of fixed-overhead variances
The causes of fixed-overhead variances include the following:

  1. The fixed indirect labour cost would differ from the budgeted cost if salaries had to be revised because of an unanticipated agreement with worker’s union or a change in law governing the payment of salaries and wages.
  2. It could also arise if management employed more or less number of employees than decided earlier.
  3. Power costs and other utilities may be at variance with the budget as a result of the rate change and or wasteful consumption.
  4. Production bottleneck
  5. Lack of materials and tools
  6. Untrained or unskilled employees
  7. Ineffective repairs and maintenance.


Limitations of Sales Margin Variance Analysis 
The purpose of all variance analysis is to aid management control.  To do this variances must be relevant and within a manager’s control.  Because there are so many external factors involved, the control of sales volume, sales margins, and sales mix is extremely difficult and it is somewhat doubtful whether full variance analysis in this area is useful.

Managerial Uses of Variances

Moscove et al (1990) has highlighted the managerial uses of variances to include the following:

    1. Properly used, variances are valuable tools in maintaining managerial cost control over production operations.  If standards are realistic and challenging, management need not concern itself with operations that are proceeding according to plan.  Rather, managers’ attention must be directed to the exceptions, and it is the exceptions that variance analysis should stress.  Variance analysis figures extracted from a mass of cost data serve as signals to warn that events are not following a plan.  Variances separate the expected from the unexpected and warn of abnormal conditions affecting profit performance that may need managerial action.
    2. Like the gauges on the instrument panel of an automobile, variances do not pinpoint exactly where the trouble lies, but they do isolate the source of the trouble and narrow the scope of the investigation.  Variances give that all is not well and that a check should be made.  In addition, variance analysis points out where an investigation should be centered.  As a result of this investigation, management can hope to pinpoint the causes and the resultant responsibilities for the variances.
    3. For effective use of variance analysis in a company’s standard cost accounting system, timely management-by-exception reporting must be incorporated into the standard cost system.  As a result of using
    1. management-by-exceptions, for instance, only those unfabourable variances that are significant (that is, those that are outside of predetermined ranges of acceptability) and thus require managers’ attention are reported to them so that corrective action can be initiated on unfavourable performances.  Variance analysis becomes a useful behavioural device to motivate employees in the direction of operating efficiency when the employees are aware that significant favourable variances are reported to management and that they will receive positive recognition from management as a result.


Variance analysis brings out the significance of variances in terms of their sources, causes and responsibility.  This helps management in evaluating individual performance by highlighting the difference and desired performance.  According to Hansen etal (2000), because it is difficult to assess the costs and benefits of variance analysis on a case-by-case basis, many firms adopt the general guideline of investigating variances only if they fall outside of an acceptable range.

Hansen, D.R, and Mowen, M.M. (2000).  Management Accounting 5th ed., Ohio: South-Western College Publishing.
Lucey, T. (2002).  Costing 6th ed., London: Book Power.
Moscove, S.A., and Wright, A. (1990). Cost Accounting with Managerial Applications 6th ed., Boston: Houghton Miofflin Company.