Cost Variance Analysis Report: Budget vs. Actual Costs, Finance

This report provides a detailed analysis of cost variances, focusing on price and efficiency variances within a business context. It examines the variances for champagne, main ingredients (beef), and labor. The analysis includes calculating and interpreting price variances, which reflect procurement costs, and efficiency variances, which relate to resource consumption. For champagne, the report highlights a favorable price variance due to lower procurement costs and a positive efficiency variance due to lower consumption. For the main ingredient (beef), a positive price variance is observed due to cheaper procurement costs, but a negative efficiency variance indicates higher consumption than budgeted. Similarly, the labor variance analysis reveals a positive direct labor rate variance due to lower labor costs and a negative direct labor efficiency variance due to increased labor hours. The report emphasizes the importance of understanding these variances to assess financial performance and make informed decisions.

The variances are calculated between budgeted cost and actual cost to check whether the costs are
understated or overstated.
The price variance is the difference between the standard price and actual price multiplied with actual
quantity. And reflects the procurement price of the product. If the price variance is positive then it means
that the business has managed to procure the products at the price below the budgeted price.
The usage variance or the efficiency variance is the difference between standard quantity with actual
quantity multiplied by standard price. If this variance is positive, then it means that the business has
managed to consume lesser raw material in production of finished goods.
Explaining the Champagne variance
In the given case, the Champagne price variances and efficiency variances are calculated and found to be
favorable.
The result of Champagne price variance is positive which means that the company has procured the
material at a cheap rate than budgeted. So, the budget was to purchase a bottle at $40 whereas in actual
the company managed to procure at $39.50, it means the company is able to make a savings of $0.50 per
bottle. This has resulted in a total savings of $1,044 towards price only.
On the other hand, the company has budgeted to use 2160 bottle of champagne as per budget to provide
the 10,800 meals whereas in actual the company has consumed 2088 bottles to serve 10,800 meals
meaning thereby the company has consumed lesser quantity of Champagne, hence the resultant variance
is positive.
Explaining the Main Ingredient variance
In the given case, the main ingredient price variance is positive and the efficiency variance is negative.
The price variance is positive at 16,200 which means that the ingredient has been procured at a cheap
price than budgeted. In budget the cost per kg of beef was budgeted at $30 whereas in actual the company
has managed to procure it at $25. Hence the variance is positive.
Whereas on the other hand, the company has budgeted to use 2,700 kg of beef to serve 10,800 meals
whereas in actual the company has consumed 3,240 kg of beef, that’s why the efficiency variance is
negative.
Explaining the Labor variance
Similar to above, the labor variance is also calculated for checking the outcomes of budgets. In the given
case, the direct labor rate variance is positive whereas the direct labor efficiency variance is negative.
The company has budgeted to procure labor hours at $25 per hour whereas in actual the company has
procured the labor hours at $22.30. Meaning thereby the company has procured the labor hours at a cheap
cost, that’s why the direct labor rate variance is positive or favorable.

The direct labor efficiency variance shows the efficiency or labor hours consumed to produce the meals.
The company has budgeted to use 3,780 hours to serve 10,800 meals whereas in actual the company has
consumed 5,400 hours to serve 10,800 meals, it means the labor hours consumed were more than
budgeted. That’s why the direct labor efficiency variance is negative.