Variance in cost of labour and material as compared to standard or the target is often classified in two type according to cause of variances called quantity variance and price variance. The quantity variance is the result of the actual quantity of material or labour input being different from the standard quantity). The quantum of quantity variance is calculated as:
Quantity variance = (Standard Price) x (Actual quantity used - standard quantity)
Price variance is the result of actual price or rare paid for material of labour being different from the standard price. The quantum of price variance is calculated as:
Price variance = (Actual quantity used) x (actual price - Standard price)
In case of overheads usually there are no defined quantities or prices. Therefor overhead expenses are not analysed in terms of quantity and price variance. However for some specific items of expense under the general head of overhead may be amenable this type of analysis. For example interest expenses may be analyse in terms of effect of variation in amount of loan taken, and interest rate paid.
possible causes of material variance are as follows:
Material price variance:
Force of demand and supply:when the demand of a product is high, there is high tendency that the price will be high, and vise vase. This will lead to our material price variance.
Inferior or quality product:If we use inferior product to what we have budgeted, there is possible favourable variance and when we use more quality product than the standard, we are likely to have adverse variance.
Material usage variance:
Level of production: if we are producing more than we budgeted, we will be having adverse usage variance and when we produce less will we be having favourable usuage variance.
labour technical know how: the level of labour or type of labour used will also affect our variance. the type of labour use include unskilled, semi-skilled and skilled labour.