Spending variance and activity variance are two important concepts in cost accounting that measure the difference between actual and budgeted costs. Spending variance measures the difference between the actual cost of materials, labor, and overhead and the budgeted cost of these items. Activity variance measures the difference between the actual level of activity and the budgeted level of activity. Analyzing spending variance and activity variance can help managers identify areas where costs are out of control and take corrective action.
Understanding Spending Variance vs. Activity Variance
Spending Variance:
- Represents the difference between the actual amount spent and the budgeted amount for a specific expense.
- It indicates how much more or less was spent than planned.
- Formula: Actual Expense – Budgeted Expense
Activity Variance:
- Represents the difference between the actual level of activity and the budgeted level of activity.
- It measures the impact of changes in activity on the actual expenses incurred.
- Formula: (Actual Activity – Budgeted Activity) x Standard Rate
Key Differences:
| Feature | Spending Variance | Activity Variance |
|---|---|---|
| Purpose | Measures the difference between actual and budgeted expenses | Measures the impact of activity level on expenses |
| Formula | Actual Expense – Budgeted Expense | (Actual Activity – Budgeted Activity) x Standard Rate |
| Root Cause | Inefficient spending, changes in prices | Changes in activity levels |
| Impact on Net Income | Direct impact (increases or decreases profit) | Indirect impact (affects cost per unit, which can impact net income) |
Table Summarizing Key Differences:
| Spending Variance | Activity Variance | |
|---|---|---|
| Focus | Amount spent | Level of activity |
| Formula | Actual – Budgeted Expense | (Actual – Budgeted Activity) x Standard Rate |
| Root Cause | Inefficient spending, price changes | Activity level changes |
| Impact on Net Income | Direct (+$/$-) | Indirect (cost per unit) |
Example:
- Suppose a company budgets $100,000 for advertising and actually spends $120,000.
-
Spending Variance: $120,000 – $100,000 = $20,000 (unfavorable)
-
Now, let’s say the company realized that the actual activity level was 110% of the budgeted level.
-
Activity Variance: (1.1 x $100,000) – $100,000 = $10,000 (favorable)
-
The spending variance shows that the company overspent by $20,000.
- The activity variance shows that the increase in activity contributed to an additional $10,000 in expenses.
By analyzing both spending and activity variances, companies can better understand the reasons for deviations from budget and identify opportunities for improvement.
Question 1:
What is the fundamental difference between spending variance and activity variance?
Answer:
Spending variance measures the difference between actual spending and budgeted spending, while activity variance measures the difference between actual activity and budgeted activity.
Question 2:
How does spending variance differ from revenue variance?
Answer:
Spending variance focuses on the comparison of actual spending to budgeted spending, while revenue variance compares actual revenue to budgeted revenue.
Question 3:
What is the importance of understanding both spending and activity variances?
Answer:
Understanding both spending and activity variances provides a comprehensive view of financial performance, allowing organizations to identify inefficiencies in resource allocation and take corrective actions to improve profitability.
Well there you have it. Now you can impress your friends (or coworkers) with your newfound knowledge of spending and activity variances. You might be surprised to learn that, at the end of the day, they’re just trying to do the same thing: help you understand the difference between what you planned and what actually happened. So next time you see these two variances, give them a friendly nod and thank them for helping you make sense of your budget. And remember, if you ever need a refresher, this article will always be here for you. Thanks for reading, and see you next time!