With reference to cost management, explain following : (i) Material variance,(ii) Fixed overhead variance, (iii) Variable overhead variance, (iv) Labor variance, and (v) Sales variance.

In cost management, various variances are calculated to analyze the differences between actual costs incurred and standard costs expected for a particular level of output. Here's an explanation of different types of variances:

(i) Material Variance:

• Definition: Material variance measures the difference between the actual cost of materials used in production and the standard cost of materials allowed for the actual level of output.
• Formula: Material Variance = (Actual Quantity of Material Used × Actual Price) – (Standard Quantity of Material Allowed × Standard Price)
• Interpretation: A favorable material variance indicates that materials were acquired at a lower cost or used more efficiently than expected, while an unfavorable variance suggests higher material costs or excessive material usage.

(ii) Fixed Overhead Variance:

• Definition: Fixed overhead variance compares the actual fixed overhead costs incurred during production with the budgeted or standard fixed overhead costs.
• Formula: Fixed Overhead Variance = Actual Fixed Overhead Costs – Budgeted Fixed Overhead Costs
• Interpretation: A favorable fixed overhead variance indicates that actual fixed costs were lower than budgeted, while an unfavorable variance suggests higher-than-expected fixed costs.

(iii) Variable Overhead Variance:

• Definition: Variable overhead variance compares the actual variable overhead costs incurred during production with the standard variable overhead costs allowed for the actual level of output.
• Formula: Variable Overhead Variance = (Actual Hours Worked × Actual Variable Overhead Rate) – (Standard Hours Allowed × Standard Variable Overhead Rate)
• Interpretation: A favorable variable overhead variance indicates lower actual variable overhead costs or more efficient utilization of resources, while an unfavorable variance suggests higher variable costs or inefficient resource usage.

(iv) Labor Variance:

• Definition: Labor variance compares the actual labor costs incurred with the standard labor costs allowed for the actual level of output.
• Formula: Labor Variance = (Actual Hours Worked × Actual Labor Rate) – (Standard Hours Allowed × Standard Labor Rate)
• Interpretation: A favorable labor variance indicates lower actual labor costs or higher productivity, while an unfavorable variance suggests higher labor costs or lower productivity.

(v) Sales Variance:

• Definition: Sales variance measures the difference between the actual sales revenue earned and the budgeted or expected sales revenue.
• Formula: Sales Variance = Actual Sales Revenue – Budgeted Sales Revenue
• Interpretation: A favorable sales variance indicates higher-than-expected sales revenue, while an unfavorable variance suggests lower sales revenue than anticipated.

Conclusion:

Analyzing these variances helps management identify areas of inefficiency, make informed decisions, and take corrective actions to improve cost control, operational performance, and overall profitability.