Managers can apply the concepts of variance analysis to construct new variance definitions to fit new situations. For example, consider a production plant that plans to produce 50 units per hour and work 8 hours per day for a total planned production of 400 units each day. On 23 March, the plant produced just 276 units for a total unfavorable production variance of 124 units.

Because of machine breakdowns, the plant operated for only 6 hours that day. Using a three-column framework like that used in Exhibit 8.8, define variances that separate how much of the 124-unit shortfall in production was caused by operating only 6 hours versus how much was caused by low production efficiency during the 6 hours of actual operation.

Exhibit 8.8

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In general Direct materials Direct labour A Actual cost incurred: actual input quantities X actual prices €xxx A Price variance (A-B) 36,800 kg x €1.90/kg = €69,920 Actual input quantities X standard prices €yyy 3,750 hr x €16.40/hr = €61,500 B Flexible budget: standard input quantities allowed for outputs achieved x standard prices €Zzz Quantity variance (B-C) Flexible-budget variance (A-C) 36,800 kg x €2.00/kg 7,000 units x 5 kgx €2.00 = €70,000 = €73,600 Price variance Quantity variance (A-B) = (B-C)= €69,920-€73,600 = €73,600-€70,000 = €3,680 F €3,600 U Flexible-budget variance (A-C) €69,920 - €70,000 = €80 F Price variance (A - B)= €61,500-€60,000 €1,500 U 3,750 hr x €16.00/hr 7,000 units x 5 hr x €16.00 = €60,000 = €56,000 Quantity variance (B-C)= €60,000-€56,000 = €4,000 U Flexible-budget variance (A - C) €61,500 - €56,000 = €5,500 U