Definition
Revision Variance, also known as Planning Variance, in standard costing refers to the variance that arises due to the difference between the original standard and the current standard, as modified to reflect changed circumstances. This variance helps organizations understand how changes in plans or expectations impact performance.
Examples
-
Material Price Revision Variance: Suppose a company originally expects to purchase raw materials at $5 per unit. Due to changes in market conditions, the price increases to $6 per unit. The revision variance would account for the difference of $1 per unit. If the company uses 1,000 units, the revision variance would be $1,000.
-
Labor Rate Revision Variance: If the standard labor rate is set at $20 per hour and later revised to $22 per hour due to increased wage rates, the revision variance would be $2 per hour. If 500 hours are worked, the total revision variance would be $1,000.
-
Overhead Revision Variance: A manufacturing company expects its overhead costs to be $10,000 but due to newer equipment or higher utility rates, it revises these costs to $12,000. The revision variance in this scenario would be $2,000.
Frequently Asked Questions
1. What is the purpose of calculating revision variance?
Calculating revision variance helps in identifying how much of the overall variance is due to changes in planning assumptions or standards. It allows organizations to separate the effect of these changes from actual operational performance issues.
2. How is revision variance different from operational variance?
Revision variance deals with changes between the original and revised standards, often due to external factors. Operational variance measures the difference between the revised standards and actual performance, thus focusing on the efficiency and effectiveness of operations.
3. Can revision variance be both favorable and unfavorable?
Yes, revision variance can be favorable or unfavorable. If the revised standard leads to lower costs or better performance than the original, it is favorable. Conversely, if it leads to higher costs or worse performance, it is unfavorable.
4. What types of standards are typically revised in revision variance analysis?
Standards that are typically revised include material prices, labor rates, and overhead costs. These standards may need to be adjusted due to changes in market prices, wage rates, or other economic factors.
5. How often should companies calculate revision variance?
The frequency of calculating revision variance depends on the company’s industry and the stability of the cost factors. In highly dynamic industries, it may be calculated monthly or quarterly, while in more stable environments, an annual calculation might suffice.
Related Terms
- Standard Costing: A method in cost accounting where all costs involved in production are apportioned according to standard rates rather than actual rates.
- Variance: The difference between what was budgeted or expected and what actually occurred.
- Current Standard: The revised standard that reflects the most recent and realistic levels of efficiency and cost.
- Operational Variance: The variance that measures the difference between the revised (current) standards and the actual performance.
Online References
- Investopedia on Standard Costing
- Difference Between Planning and Operational Variances
- ACCA Global - Resource for comprehensive accounting and finance terms and updates.
Suggested Books for Further Studies
- Management and Cost Accounting by Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan.
- Cost Accounting: A Managerial Emphasis by Charles T. Horngren, Srikant M. Datar, George Foster.
- Principles of Cost Accounting by Edward J. Vanderbeck, Maria R. Mitchell.
- Cost and Management Accounting: An Introduction by Drury Colin.
Accounting Basics: “Revision Variance (Planning Variance)” Fundamentals Quiz
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!