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COST SYSTEMS AND CONTROL

Topics Discussed :
Variance Analysis Sales Variance Profit(or Loss) Variance Investigation of Variance

Variance
Difference between the budgeted level of costs and revenue and the actual level of costs and revenue

Favorable and Unfavorable Variance Controllable and Uncontrollable Variance

Sales Variance
Sales variance represents the difference between the actual sales incurred and standard sales.
The formula for the measurement of sales variance (SLV) will be: SLV = (BU x BP) - (AU x AP) where BU-Budgeted units, AU-Actual units,

BP-Budgeted price,
AP-Actual price.

Profit (or Loss) Variance


Disaggregate a change in profit/loss from one period to another by isolating major contributing factors ( e.g.: Volume, Price, Productivity )

Investigation of Variance
All variances are not worth investigating

Differences between actual results and what was expected will almost always occur.
If every variance were investigated, management would waste a great deal of time tracking down nickel-and-dime differences. Variances may occur for any of a variety of reasons - only some of which are significant and warrant management attention. A variance should only be investigated when it is unusual relative to that normal level of random fluctuation.

a) Calendar Variance
It is the difference of actual production days and standard production days with same standard rate per hour of fixed overhead.

b) Capacity Variance
Capacity variance is the difference between actual working hours for production and standard working hours of actual days with same standard rate per hour of fixed overhead.

c) Efficiency Variance
Efficiency variance is the difference between standard working hours of actual output and actual hours of working with same standard rate per hour of fixed overhead.

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