Question

What is the difference between a two-variance analysis and a three-variance analysis?

Answer 1

Both two-variance and three-variance analysis are used to show the difference in budgeted overhead and the actual overhead.

In two way variance the difference in actual and budgeted overhead is split into two components : Budgeted (Controllable) Variance and Volume variance.

Budgeted Variance = Actual Factory overhead - Budgeted overhead based on standard hours

Volume Variance = Budgeted overhead based on standard hours - Standard Budgeted overhead

In three way variance the difference in actual and budgeted overhead is split into three components : spending variance, efficiency variance and volume variance.

Spending Variance = Actual Overhead -Budgeted overhead based in actual hours

Efficiency Variance = Budgeted overhead based in actual hours - Budgeted overhead based on standard hours

Volume Variance = Budgeted overhead based on standard hours - Standard Budgeted overhead