Quantity variance definition
/What is a Quantity Variance?
A quantity variance is the difference between the actual usage of something and its expected usage. For example, if a standard quantity of 10 pounds of iron is needed to construct a widget, but 11 pounds are actually used, then there is a quantity variance of one pound of iron. The variance typically applies to direct materials in the manufacture of a product, but it could apply to anything - the number of hours of machine time used, square footage used, and so on.
The quantity variance can be a relatively arbitrary number, since it is based on a derived baseline. Thus, a quantity variance for direct materials involves a baseline that is derived from the bill of materials for a product, which in turn is based on an engineering estimate of the quantity needed, factoring in a certain amount of standard scrap or spoilage. If this baseline is incorrect, then there will be a variance, even if the level of usage was, in fact, reasonable. Thus, an unfavorable quantity variance does not necessarily indicate a problem with the outcome; there may instead be a problem with how the baseline was formulated.
Similarly, a favorable quantity variance may be based on a baseline that is too generous. This means that an improperly high baseline will hide what may actually be an excessive amount of quantity usage.
Types of Quantity Variances
The main types of quantity variances are as follows:
Direct material quantity variance. This variance measures the difference between the actual quantity of materials used in production and the standard quantity expected for the output achieved. It isolates efficiency in material usage by holding the material price constant. A favorable variance occurs when less material is used than expected, while an unfavorable variance means excess usage. This helps identify issues like waste, theft, or production inefficiencies.
Direct labor efficiency variance. This variance compares the actual labor hours used to the standard hours allowed for the output achieved. It highlights how efficiently labor was used during production, independent of labor rates. A favorable variance suggests higher productivity or improved processes, while an unfavorable one may indicate idle time, untrained workers, or operational delays. It’s useful for monitoring workforce performance and productivity management.
Variable overhead efficiency variance. This variance shows the difference between the actual labor hours (or machine hours) used and the standard hours expected, applied to variable overhead rates. It reflects how efficiently the activity base for variable overhead was utilized. A favorable result means fewer hours were used, reducing overhead costs, while an unfavorable one suggests inefficiencies. It's most effective in settings where variable overhead closely follows labor or machine activity.
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Responsibility for Quantity Variances
A number of parties may be held responsible for an unfavorable quantity variance (or take credit for a favorable variance!). For example, the scrapping of a number of units in the production process may mean that the quality of incoming components was inadequate, which could be the problem of the purchasing department. Conversely, the same level of scrap may be caused by improper equipment setup, which is the responsibility of the industrial engineering staff. Or, the issue may be caused by improper training of the production staff, which is an issue for the production manager. Thus, some extra investigation is needed before the raw data represented by a quantity variance can be acted upon.
How to Calculate a Quantity Variance
To calculate a quantity variance, subtract the standard quantity used from the actual quantity used, and then multiply the result by the standard cost per unit. The formula is as follows:
(Actual quantity used - Standard quantity used) x Standard cost per unit = Quantity variance
Thus, the amount of the quantity variance is multiplied by the standard cost per unit. A separate variance, the rate variance, is used to derive any difference between the actual and standard price per unit.
Example of a Quantity Variance
As an example of the quantity variance, ABC International uses 5,000 pounds of steel during a month of production, when the bill of materials for the items produced indicate that only 4,200 pounds should have been used. This results in an unfavorable quantity variance of 800 pounds. Since the standard price of steel is $20 per pound, ABC can value this variance at $16,000.
FAQs
How Does the Quantity Variance Impact Financial Reporting?
Quantity variance impacts financial reporting by influencing the accuracy of the cost of goods sold and inventory valuation. An unfavorable quantity variance increases production costs, which can reduce gross profit and net income on the income statement. If significant or recurring, it may also indicate issues with operational efficiency or standard costing accuracy that warrant disclosure or adjustment.