212 Understanding the Numbers
“I can even tell you what that means in words: The overhead portion of the
variable cost declined 16.67% from the f lexible budget because the hourly
overhead rate fell by 33.33% while the overhead used per ream rose 25%. How
do you like that explanation?”
Variance Analysis
“Another way, in fact the more traditional way, to think about this,” said Jane,
“is to focus on the numbers rather than the percentages. The cost of the paper
fell 0.001 cents per page while the company used 600,000 pages (500 pages per
ream × 1,200 reams.) This price drop saved $600; since this price variance is
favorable, it’s denoted by an F.The company used the amount of paper that was
budgeted, so the usage variance is zero.
“In the case of labor, the wage paid was $1.00 per hour more than
planned, which over the 300 hours that were worked meant an unfavorable
wage variance of $300 denoted by a U.Employees actually worked 300 hours
(0.25 hours per ream × 1,200 reams), whereas the plan was for them to work
360 hours (0.30× 1,200 reams). That saved 60 hours, which, at the standard
wage rate of $5.00, saved $300. The wage variance and the use variance offset
one another here.
“Finally, the variable overhead rate was $5.00 per machine hour less than ex-
pected. This gives a favorable rate variance of $750 or $5.00 × 150 actual ma-
chine hours. The base on which variable overhead was applied, namely
machine hours, increased by 30 hours since the budget called for just 120 ma-
chine hours. At the standard rate of $15.00 per hour this gives an unfavorable
usage variance of $450 or $15.00× 30 machine hours. This leaves a favorable
difference of $300.
“All this is summarized in Exhibit 7.4.”
Overhead Variance 150 0 hours $15.00 per hour10.00 per hour 1 0 hours=−[]()×+−[]()×
=1215 00 5
300$.
$Labor Variance 300 60 hours $5.00 per hour6.00 per hour 300 hours=−[]()×+−[]()×
=3500
0$.
$Materials Variance 600, 000 600, 000 pages $0.008 per page
0.007 per page 600, 000 pages=−[]()×
+−[]()×
=$.
$0 008
600 F