Variance analysis help please… why is the formula for calculating volume/quantity variance…?
It may help to think of it this way. The total variance is (AQ X AP) – (BQ X BP). And Total variance = Price Variance + Quantity Variance. This can be represented by a rectangle with quantities on the horizontal edge and prices on the vertical edge. To diagram it, in the rectangle assume that AQ is greater than BQ and assume that AP is greater than BP. The bigger rectangle with area AQ X AP can now be seen to consist of three smaller rectangles, the budget rectangle with area BP X BQ, and the variance rectangles with areas (AP-BP) X AQ and (AQ-BQ) X BP It’s a convention that the price variance is calculated based on the actual quantity as (AP-BP) X AQ, so the quantity variance has to be based on the budgeted price not the actual price. (Otherwise the variance rectangles would overlap and consequently you would be counting a part of the variance (AP-BP) * (AQ-BQ) twice. The variances wouldn’t add back up to the total variance.) If you draw it out, I think you’ll see what I mean.
