Spending Variance Analysis

Spending Variance. Garrison et al. (2015) define a spending variance as “the difference between the actual amount of the cost and how much the cost should have been, given the actual level of activity” (p. 401). A spending variance would be favorable if the cost is less than expected and unfavorable if a cost is more than expected for a period. Variances in spending can occur from a changing level in activity as well as changes in amounts purchased or changes in the prices of items that were purchased. Within the category of spending variance also fall price and quantity variances. Price variance occurs because of differences between actual amounts paid and what was expected to be paid, while quantity variances occur due to the difference …show more content…
The other types of variance left to cover in this paper are materials variance, labor variance, efficiency variance, and capacity variance. All of these types of variance tend to be similar and fit together in one way or another. Materials variance is just another more specific way of measuring spending variance, particularly for the differences in price and quantity of materials. Just like the general price and quantity variances, materials price variance and materials quantity variances are computed to see if resources are being used effectively and correcting any issues. As for labor variance, it is usually broken up into labor rate variance and labor efficiency variance (Garrison et al., 2015). The labor efficiency variance can probably just be generalized as efficiency variance. The labor rate variance measures the difference between what the calculated labor rate actually was for the period compared to what the standard labor rate is supposed to be. Labor rates can vary due to how effectively labor is being used as well as any overtime that is being …show more content…
Using multiple cost drivers in the cost formulas can help provide better accuracy when computing variance (Garrison et al., 2015). For example, sometimes a business might calculate their expenses based solely on hours of operation, but another way of doing it with multiple cost drivers would be to calculate the expenses based on hours of operation and number of customers served. There will be differences between flexible budgets using one cost drive and flexible budgets using multiple cost drivers, with the one using multiple cost drivers being more