Revision Variance (Planning Variance)

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.

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

### What does revision variance measure in standard costing? - [ ] The difference between actual costs and budgeted costs. - [x] The expected difference between an original standard and a revised standard. - [ ] The financial impact of unexpected external factors. - [ ] Performance accuracy based on historical costs. > **Explanation:** Revision variance measures the expected difference between the original standard and the revised standard, reflecting changes due to updated assumptions or conditions. ### Who benefits from understanding revision variances? - [x] Management and financial analysts - [ ] Only operational staff - [ ] Customers and clients - [ ] Marketing teams > **Explanation:** Management and financial analysts benefit from understanding revision variances as they provide insights into the impact of changed conditions and help in better decision-making. ### Can revision variance impact financial planning? - [x] Yes - [ ] No > **Explanation:** Yes, revision variance can significantly impact financial planning by highlighting areas where budget assumptions have changed, allowing for more accurate forecasting and planning. ### Which of the following can cause a revision variance? - [ ] Differences in actual performance - [x] Changes in market conditions - [ ] Inaccurate data entry - [ ] Adjustments in allocation methods > **Explanation:** Changes in market conditions, such as increases in raw material prices or labor rates, can cause revision variance. ### Is a favorable revision variance always a positive indicator? - [ ] Yes, it always indicates better performance. - [x] No, it could indicate a reduction in the expected standard. - [ ] Yes, it always leads to cost savings. - [ ] No, it always leads to losses. > **Explanation:** A favorable revision variance indicates that revised standards are better than expected, but this does not always mean better performance. It could result from lower expectations. ### How often should revision variances be calculated in a dynamic industry? - [ ] Annually - [ ] Every five years - [ ] Bi-annually - [x] Monthly or quarterly > **Explanation:** In a dynamic industry where conditions change frequently, calculating revision variances monthly or quarterly helps keep cost controls up-to-date and relevant. ### Does revision variance consider the operational efficiency of the company? - [ ] Yes - [x] No, revision variance looks at changed standards, not efficiency. - [ ] It depends on the accounting method. - [ ] Sometimes > **Explanation:** Revision variance does not consider operational efficiency. It looks at the differences between the original and revised standards, not how efficiently the company operates under those standards. ### How do operational variances interact with revision variances? - [ ] They are calculated together. - [ ] They have no interaction. - [x] Operational variances measure effectiveness against revised standards. - [ ] They are synonymous. > **Explanation:** Operational variances measure the effectiveness of performance against the revised (current) standards, reflecting operational efficiency and performance. ### In which area would a labor rate revision variance most likely occur? - [x] Changes in wage rates - [ ] Adjustments in overhead allocation - [ ] Depreciation methods - [ ] Marketing expenses > **Explanation:** A labor rate revision variance occurs due to changes in wage rates, reflecting differences between original and revised labor cost estimates. ### What is a prerequisite for calculating revision variance? - [ ] Accurate evaluation of operational performance - [ ] Stable market conditions - [x] An initial standard and a revised standard - [ ] Consistent overhead costs > **Explanation:** An initial standard and a revised standard are prerequisites for calculating revision variance. These standards allow for the comparison necessary to identify the variance.

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