CPA Exam Prep: A Deeper Look At Variance Analysis Formulas
Mastering multi-step word problems is one key to scoring high on the CPA Exam. Not only will competence with these questions boost your confidence, but also it will speed up your calculations, allowing you to allot time to other areas of the exam.
Summary of Variance Formulas
Two keys to solving variance problems are:
- Find clue words within the question to indicate which operation to do and which values to use, and
- Make sure that all values are in the same denomination, such as cost per pound or hours per widget.
Carson, Inc., a manufacturer of garden tools, uses variance analysis to measure the efficiency of manufacturing overhead. Information for the manufacture of shovels for the month of April can be found below:
|Variable OH costs||$2,000||$0.60/DL hour|
|Fixed overhead costs||$12,000||$11,250|
|Fixed OH per unit||$1.25 per unit ($11,250/7,500 units)|
|Direct labor hours||3,250||0.4 hour/shovel|
*Key Words: marked above in bold & italics
What is the variable overhead efficiency variance?
VOH efficiency variance: efficiency compares what was used to what was budgeted to be used.
(AQ – SQ) x SP
What quantity should be used in calculations: shovels or hours? Variable overhead costs (VOH) in this practice question are budgeted based upon direct labor (DL) hours, so the AQ and SQ must be hours.
[(Actual DL hours for 7,000 shovels) – (budgeted hours for 7,000 shovels)] x budgeted rate for VOH =
[3,250 – (7,000 x .4 hour)] x $0.60 =
(3,250 – 2,800) x $0.60 = $270 variance
Because an extra 450 hours were used above what was budgeted to be used, this is an Unfavorable variance.
Get More Hands-On Practice Questions
For more practice with variance analysis and access to an easy-to-use matrix that can be used instead of formulas, sign up for a Free Trial with MDS CPA Review.
After you sign up for the free trial:
- Sign in to access the Student Dashboard (or access it from the dropdown list in the Welcome tab).
- On the Dashboard, scroll to “Your Courses” and select “Business Environment and Concepts (BEC).”
- On the BEC video page, in Class 1, select video, “I.B.11. Cost Accounting (Variance Analysis)” to learn strategies and tools to use to conquer variance analysis problems.