Usefulness of Variance Analysis
Carefully note that while prices are being charged to production, it can be done at the actual or standard price. For purposes of making variances analysis useful, instant and easily understood, we will suppose that the process of production changes the costs to production units at the standard costs. When units are changed along with standard costs, it is now extremely easily to compare the standard cost along with the actual costs and compute the variance immediately: thus, the responsibility for the variances can also be assigned immediately and corrective measures implemented.
We will see at variances in the given order as:
a) Direct Material Total Variance
b) Direct Labour Total Variance
c) Variable Overhead Total Variance
d) Fixed Overhead Total Variance.
For purposes of our calculations, we will suppose the given basic data for a company:
The standard cost for the production of a radio cassette model named as stereo F262 is given as:
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Inputs
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Standard quantity
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Standard price (shs)
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Direct materials:
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3 kg
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4.00
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Direct labour:
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2.5 hrs
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14.00
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Throughout the month, 6,500 kg of raw materials were purchased at shs.3.80 per kilo and all of it was utilized to produce 2000 units of finished products. And 4,500 hours of direct labour time were utilized also at a total cost of shs.64,350.