Question

Standard cost variance can usually be broken own into two basic types of variances. Identify and describe these two types of variances.

Answer 1

A variance is the difference between the actual cost incurred and the standard cost against which it is measured. A variance can also be used to measure the difference between actual and expected sales. Thus, variance analysis can be used to review the performance of both revenue and expenses.

There are two basic types of variances from a standard that can arise, which are the rate variance and the volume variance. Here is more information about both types of variances:

• Rate Variance : A rate variance (which is also known as a price variance) is the difference between the actual price paid for something and the expected price, multiplied by the actual quantity purchased. The “rate” variance designation is most commonly applied to the labour rate variance which involves the actual cost of Direct labour in comparison to the standard cost of direct labour. The rate variance uses a different designation when applied to the purchase of materials, and may be called the Purchase price variance or the material price variance. It is generally denoted as : Actual Quantity*( Actual Qty – Std qty)
• Volume Variance : A volume variance is the difference between the actual quantity sold or consumed and the budgeted amount, multiplied by the standard price or cost per unit. If the variance relates to the sale of goods, it is called the Sales volume variance. If it relates to the use of direct materials, it is called the material quantity variance. If the variance relates to the use of direct labour, it is called the labour efficiency variance. It is generally denoted as : Std Rate*( Std qty – Actual qty)