Variance Analysis ACCA PM | Exam Guide
Variance Analysis ACCA PM: Complete Exam Guide
Variance analysis in ACCA PM compares actual financial results against budgeted or standard figures to identify favourable and adverse differences. It is the most heavily tested topic in the Performance Management exam, regularly appearing as a 20-mark Section C constructed-response question.
This guide covers every variance type tested in PM — from basic material and labour variances through advanced mix and yield, planning and operational, and market size and share variances — with formulas, worked examples, and the exact discussion framework examiners reward with full marks.
💡 Key Takeaway
- Variance analysis is ACCA PM's highest-weighted exam topic — worth up to 20 marks in Section C.
- PM uses marginal costing, so always calculate the sales volume variance using contribution, not profit.
- Advanced variances (mix & yield, planning & operational, market size & share) are PM-specific — basic variances are assumed knowledge from MA.
- Discussion and interpretation marks account for roughly 9 out of 20 marks — calculation alone will not pass you.
- Always identify interrelationships between variances (e.g., a favourable mix variance often causes an adverse yield variance).
Table of Contents
- What Is Variance Analysis in ACCA PM?
- How Are Basic Variances Calculated in ACCA PM?
- What Are Mix and Yield Variances in ACCA PM?
- How Do Planning and Operational Variances Work?
- What Are Sales Mix, Quantity, and Market Variances?
- Complete Variance Formula Reference Table
- How Do You Score Discussion Marks on Variance Questions?
- Variance Interrelationship Matrix
- Exam Technique for 20-Mark Variance Questions
- Frequently Asked Questions
What Is Variance Analysis in ACCA PM?
Variance analysis is a management accounting technique that compares actual performance against budgeted or standard cost figures to identify and investigate differences. In ACCA PM, it sits within Syllabus Section D (Budgeting and Control) and connects to performance measurement across the entire paper.
A variance is classified as favourable (F) when actual results are better than budget (higher revenue or lower costs), or adverse (A) when actual results are worse than budget. The PM exam goes beyond simple calculations — it tests your ability to interpret what variances mean for the business and recommend appropriate management action.
Key Definitions
Standard cost — a predetermined unit cost calculated from expected levels of efficiency and prices, used as the benchmark for comparison.
Flexed budget — a budget adjusted to the actual activity level achieved, enabling like-for-like comparison against actual results.
Marginal costing — the costing method used in PM variance analysis, where only variable costs are charged to cost units and fixed costs are treated as period costs.
The PM exam builds on basic variance knowledge from the Management Accounting (MA) paper. Basic material, labour, and sales variances are assumed knowledge. PM introduces four groups of advanced variances: material mix and yield, planning and operational, sales mix and quantity, and market size and market share.
Variance analysis in ACCA PM is not an isolated topic. It directly links to the Balanced Scorecard framework, where financial perspective measures rely on variance data, and to transfer pricing questions, where divisional profit variances must be interpreted in context.
How Are Basic Variances Calculated in ACCA PM?
Basic variances form the foundation of all PM variance analysis. While these are assumed knowledge from MA, the PM examiner expects fluent, rapid calculation as a starting point for more complex analysis. Every advanced variance builds directly on these basics.
Material Price Variance Formula
Material Price Variance = (Standard Price – Actual Price) × Actual Quantity Purchased
A positive result is favourable (paid less than standard); a negative result is adverse (paid more).
Possible causes of an adverse material price variance include supplier price increases, emergency purchases, lower quantity discounts, or exchange rate movements on imported materials.
Material Usage Variance Formula
Material Usage Variance = (Standard Quantity for Actual Output – Actual Quantity Used) × Standard Price
This variance is the one that splits into mix and yield components when multiple materials are involved — a core PM skill.
Labour Rate and Efficiency Variances
Labour Rate Variance = (Standard Rate – Actual Rate) × Actual Hours Paid
Labour Efficiency Variance = (Standard Hours for Actual Output – Actual Hours Worked) × Standard Rate
Sales Price and Volume Variances
Sales Price Variance = (Actual Selling Price – Standard Selling Price) × Actual Quantity Sold
Sales Volume Variance = (Actual Quantity Sold – Budgeted Quantity) × Standard Contribution per Unit
⚠️ Important:
PM uses marginal costing. Always use standard contribution per unit for the sales volume variance — never standard profit per unit. This is one of the most common errors identified in examiner reports.
What Are Mix and Yield Variances in ACCA PM?
Material mix and yield variances split the material usage variance into two components when a production process uses more than one input material. The mix variance measures the cost impact of changing the proportion of materials used, while the yield variance measures the efficiency of converting total inputs into finished output.
These variances are relevant when a production manager can substitute one material for another — for example, using more of a cheaper ingredient and less of an expensive one. The mix variance captures the cost effect of that substitution. The yield variance captures whether the substitution affected the volume of output achieved.
How to Calculate Material Mix Variance Step by Step
Step-by-Step: Material Mix Variance
- Total actual input: Add up the actual quantity of all materials used.
- Standard mix of actual input: Apply standard proportions to the total actual input quantity.
- Difference per material: For each material, calculate (Standard mix quantity – Actual quantity used).
- Value at standard price: Multiply each difference by that material's standard price per unit.
- Total: Sum across all materials. A positive total means the cheaper mix saved money (Favourable).
Mix Variance = (Actual Qty in Standard Mix – Actual Qty in Actual Mix) × Standard Price per unit
How to Calculate Material Yield Variance
Step-by-Step: Material Yield Variance
- Expected output: Using the standard input-to-output ratio, calculate the expected output from the actual total input.
- Output difference: Subtract expected output from actual output (in units of finished product).
- Value: Multiply the output difference by the standard material cost per unit of output.
Yield Variance = (Actual Output – Expected Output from Actual Input) × Standard Cost per Unit of Output
Key relationship: Material Usage Variance = Mix Variance + Yield Variance
✅ Pro Tip:
In your exam answer, always prove that Mix Variance + Yield Variance = Usage Variance. This reconciliation demonstrates understanding and earns easy marks. The examiner has specifically noted that students who show this reconciliation score higher.
A favourable mix variance combined with an adverse yield variance is one of the most commonly examined scenarios. It tells the examiner a story: the production manager substituted cheaper materials (saving money on the mix) but this reduced output quality or quantity (costing money on the yield). Always discuss this trade-off in your answer.
How Do Planning and Operational Variances Work?
Planning and operational variances split any total variance into two components: an uncontrollable portion caused by unrealistic or outdated standards (the planning variance), and a controllable portion reflecting actual managerial performance against a fair, revised benchmark (the operational variance). This split is essential for fair performance appraisal in ACCA PM.
Standard costing systems rely on predetermined standards. When external conditions change — for example, a global commodity price spike or new legislation affecting labour hours — the original standard becomes unrealistic. Blaming a cost centre manager for an adverse variance caused by market forces is neither fair nor motivating.
When Should You Use Planning vs Operational Variances?
Use this split whenever a question states or implies that the original standard was unrealistic, outdated, or affected by uncontrollable factors. Common exam triggers include phrases such as "unexpected market price increase," "new regulation changed working practices," or "the standard was set two years ago."
Planning Variance = (Original Standard – Revised Standard) × Actual Quantity
Operational Variance = (Revised Standard – Actual) × Actual Quantity
Key relationship: Total Variance = Planning Variance + Operational Variance
Worked Example: Planning and Operational Price Variance
Original standard price for Material Q: $5/kg
Revised standard due to unexpected supply shortage: $7/kg
Actual price paid: $7.20/kg | Actual quantity purchased: 2,000 kg
Planning price variance: ($5 – $7) × 2,000 = $4,000 Adverse
Operational price variance: ($7 – $7.20) × 2,000 = $400 Adverse
Total price variance: $4,400 Adverse (= $4,000 + $400 ✓)
In this example, $4,000 of the total adverse variance was caused by market forces outside the buyer's control. Only $400 reflects the buyer's actual performance against realistic conditions. Performance appraisal should focus on the $400 operational variance — the controllable element.
Planning variances highlight weaknesses in the budgeting process itself. If planning variances are consistently large, the organisation should revisit how it sets standards — perhaps adopting rolling budgets or more frequent standard revisions. This links directly to the budgeting systems topic covered in activity-based budgeting for ACCA PM.
What Are Sales Mix, Quantity, and Market Variances?
When a business sells multiple products, the total sales volume variance can be further analysed into sales mix and sales quantity variances. Separately, when external market data is available, the volume variance can instead be split into market size and market share variances. These advanced sales variances are unique to the PM syllabus and are frequently examined.
Sales Mix and Quantity Variances
The sales mix variance measures the profit impact of selling products in a different proportion than budgeted. The sales quantity variance measures the profit impact of total sales volume being different from the budget, assuming the standard mix was maintained.
Sales Mix Variance = (Actual Qty in Standard Mix – Actual Qty Sold) × Standard Contribution per Unit
Sales Quantity Variance = (Actual Total Qty in Standard Mix – Budgeted Qty) × Standard Contribution per Unit
Key relationship: Sales Volume Variance = Sales Mix Variance + Sales Quantity Variance
A favourable sales mix variance means the business sold proportionally more of its higher-contribution products. A favourable quantity variance means total units sold exceeded budget regardless of the mix.
Market Size and Market Share Variances Explained
These variances provide an external perspective on sales performance. The market size variance measures whether the total market grew or shrank versus expectations. The market share variance measures whether the business captured a larger or smaller share of that market than budgeted.
Market Size Variance = (Actual Market Size – Budgeted Market Size) × Budgeted Market Share × Std Contribution
Market Share Variance = (Actual Market Share – Budgeted Market Share) × Actual Market Size × Std Contribution
Market size variances are uncontrollable — they reflect industry-wide economic or seasonal trends. Market share variances are partially controllable — they reflect the effectiveness of marketing, pricing, and sales strategies. This distinction mirrors the planning and operational variance logic and is a key discussion point in exam answers.
Understanding divisional performance through these variances connects to the broader topic of transfer pricing in ACCA PM, where managers are evaluated based on controllable results.
Complete Variance Formula Reference Table
This is the only complete ACCA PM variance formula table available online — covering all 16 examinable variance formulas in one place. Bookmark this section for quick revision before your exam.
| Variance | Formula | PM Level |
|---|---|---|
| Material Price | (Std Price – Actual Price) × Actual Qty | Assumed (MA) |
| Material Usage | (Std Qty for Actual Output – Actual Qty) × Std Price | Assumed (MA) |
| Material Mix | (Actual Qty in Std Mix – Actual Qty in Actual Mix) × Std Price | PM Advanced |
| Material Yield | (Actual Output – Expected Output from Actual Input) × Std Cost per Unit | PM Advanced |
| Labour Rate | (Std Rate – Actual Rate) × Actual Hours Paid | Assumed (MA) |
| Labour Efficiency | (Std Hours for Actual Output – Actual Hours Worked) × Std Rate | Assumed (MA) |
| Sales Price | (Actual Selling Price – Std Selling Price) × Actual Qty Sold | Assumed (MA) |
| Sales Volume | (Actual Qty Sold – Budgeted Qty) × Std Contribution per Unit | Assumed (MA) |
| Sales Mix | (Actual Qty in Std Mix – Actual Qty Sold) × Std Contribution | PM Advanced |
| Sales Quantity | (Actual Total in Std Mix – Budgeted Qty) × Std Contribution | PM Advanced |
| Market Size | (Actual Mkt Size – Budgeted Mkt Size) × Budgeted Share × Std Contribution | PM Advanced |
| Market Share | (Actual Share – Budgeted Share) × Actual Mkt Size × Std Contribution | PM Advanced |
| Planning (Price) | (Original Std – Revised Std) × Actual Quantity | PM Advanced |
| Operational (Price) | (Revised Std – Actual) × Actual Quantity | PM Advanced |
| Planning (Efficiency) | (Original Std Hrs – Revised Std Hrs) × Std Rate | PM Advanced |
| Operational (Efficiency) | (Revised Std Hrs – Actual Hrs) × Std Rate | PM Advanced |
This table covers every variance formula examinable in the ACCA PM paper for the 2025-2026 syllabus. The eight "Assumed (MA)" variances must be calculated quickly and accurately — they are the foundation. The eight "PM Advanced" variances are where the real exam marks are earned.
How Do You Score Discussion Marks on Variance Questions?
Discussion and interpretation marks typically account for 9 out of 20 marks in a Section C variance analysis question. Many students lose these marks by writing vague, generic comments instead of structured, scenario-specific analysis. The ACCA examining team has repeatedly highlighted this weakness in published examiner reports.
The 5-Step Discussion Framework for Full Marks
Use this framework for every variance you discuss. It mirrors the structure examiners reward and ensures you cover all marking criteria systematically.
The 5-Step Variance Discussion Framework
- State and classify: Name the variance, state its value, and classify it as favourable or adverse.
- Explain the meaning: In plain language, describe what the variance tells us about the business (e.g., "The company paid more per kilogram of material than the standard cost allowed").
- Identify causes: Suggest at least two specific, plausible causes using scenario information where available (e.g., supplier price increases, bulk discount losses, exchange rate changes).
- Discuss interrelationships: Link this variance to other variances that may be connected (e.g., "The favourable material price variance may have been achieved by purchasing cheaper, lower-quality material, which could explain the adverse material usage variance").
- Recommend action: Suggest what management should do — investigate further, renegotiate supplier contracts, revise the standard, retrain staff, or accept the variance as uncontrollable.
Common Mistakes That Cost Students Easy Marks
The following mistakes appear repeatedly in examiner reports and are entirely avoidable with proper technique:
- Not labelling F or A: Every calculated variance must be clearly marked as Favourable or Adverse. Leaving a number as positive or negative without a label risks losing the mark entirely.
- Using profit instead of contribution: PM uses marginal costing — the sales volume variance must use standard contribution per unit, never standard profit.
- Generic discussion: Writing "the variance is adverse which is bad for the company" earns zero marks. Discuss specific causes linked to the scenario.
- Ignoring interrelationships: Discussing each variance in isolation when the question clearly presents connected variances is a missed opportunity for easy marks.
- Skipping the reconciliation: Failing to prove that sub-variances add back to the parent variance (e.g., Mix + Yield = Usage) leaves marks on the table.
For a broader view of the most damaging exam errors, see our guide on 10 fatal ACCA PM mistakes that destroy student dreams.
Variance Interrelationship Matrix: Cause and Effect
Variance interrelationships are where the highest discussion marks are earned. The ACCA PM examiner expects you to recognise that a favourable variance in one area often causes an adverse variance in another — and to explain the commercial logic behind this trade-off. No other ACCA PM resource provides a complete interrelationship matrix like the one below.
| If This Variance Is... | It May Cause This Variance To Be... | Reason |
|---|---|---|
| Material Price — Favourable | Material Usage — Adverse | Cheaper materials may be lower quality, causing more waste or rework |
| Material Mix — Favourable | Material Yield — Adverse | Substituting cheaper inputs may reduce output volume or quality |
| Labour Rate — Favourable | Labour Efficiency — Adverse | Hiring less experienced or lower-paid workers may reduce productivity |
| Material Price — Adverse | Material Usage — Favourable | Higher-quality materials may produce less waste |
| Sales Price — Adverse (price cut) | Sales Volume — Favourable | Lowering prices typically stimulates demand and increases volume |
| Material Usage — Adverse | Labour Efficiency — Adverse | Poor-quality materials may be harder to work with, slowing production |
| Market Size — Adverse | Sales Volume — Adverse | A shrinking market reduces sales opportunities even for well-managed businesses |
| Labour Efficiency — Favourable | Sales Volume — Favourable | Faster production means more units available to sell in the period |
✅ Pro Tip:
In your exam answer, use the phrase "There is a possible interrelationship between [Variance A] and [Variance B]..." to signal to the examiner that you understand the connections. This phrasing directly mirrors model answers published by ACCA.
Exam Technique for 20-Mark Variance Questions
A 20-mark Section C variance analysis question gives you approximately 36 minutes (at 1.8 minutes per mark). How you allocate that time determines whether you pass or fail this question. The split between calculation marks and discussion marks demands a disciplined approach.
Recommended Time Allocation: 20-Mark Variance Question
- Read and plan (3 minutes): Identify what variances are being asked for. Note the mark split between calculations and discussion. Identify if planning/operational split is required.
- Set up your spreadsheet layout (2 minutes): Use the CBE spreadsheet to create clear column headers — Material, Standard Qty, Actual Qty, Standard Price, Variance, F/A.
- Calculate variances (15 minutes): Work through each variance systematically. Label every result as F or A. Show reconciliations (e.g., Mix + Yield = Usage).
- Write discussion (14 minutes): Use the 5-Step Discussion Framework for each significant variance. Cover interrelationships. Recommend actions.
- Review (2 minutes): Check all F/A labels are present. Verify reconciliations add up. Ensure discussion references specific scenario details.
⚠️ Important:
If you are running out of time, prioritise the discussion section over finishing every calculation. A well-structured discussion of the variances you have calculated will earn more marks than completing all calculations with no interpretation. According to the ACCA PM examiner report for the March 2024 sitting, the average score on discussion requirements was only 3.2 out of 9 — meaning most marks are still available for students who write structured analysis.
The PM exam is computer-based (CBE) and uses a spreadsheet response area for calculations. Practise building variance tables in spreadsheet format before exam day — the how to pass ACCA F5 guide covers CBE spreadsheet techniques in detail.
Variance analysis also connects to performance measurement frameworks. When discussing the implications of variances, consider how they feed into the Balanced Scorecard's financial perspective or the Building Block Model's standards and rewards dimensions.
About the Author
Vicky Sarin — CA with 25+ years of experience in finance, accounting, and professional education. INSEAD Alumni and founder of Eduyush, a platform that has helped over 10,000 students across 40 countries prepare for ACCA, CPA, CMA, and other professional qualifications. Vicky has personally coached students through ACCA PM exam preparation and draws on real examiner report insights to create exam-focused content.
Frequently Asked Questions
What is variance analysis in ACCA PM?
Variance analysis in ACCA PM is a management accounting technique that compares actual results against standard or budgeted figures to identify favourable and adverse differences. It covers cost variances (material, labour), sales variances, and advanced splits including mix and yield, planning and operational, and market size and share variances across the PM syllabus Section D.
How many marks is variance analysis worth in ACCA PM?
Variance analysis typically appears as a 20-mark Section C constructed-response question in ACCA PM. The marks usually split approximately 11 marks for calculations and 9 marks for discussion and interpretation. It can also appear in Section A (2-mark MCQs) and Section B (scenario-based objective test questions worth 10 marks total).
What is the difference between mix and yield variances?
The mix variance measures the cost impact of using input materials in a different proportion than the standard recipe. The yield variance measures the efficiency of converting total inputs into finished output. Together they equal the total material usage variance. A favourable mix variance from substituting cheaper materials often causes an adverse yield variance from reduced output quality.
Should I use absorption or marginal costing for ACCA PM variance analysis?
ACCA PM uses marginal costing for variance analysis. This means the sales volume variance is calculated using standard contribution per unit, not standard profit per unit. Fixed overheads are not absorbed into unit costs for variance purposes in PM. This is a critical distinction from the MA paper where absorption costing variances may also be tested.
What are planning and operational variances in ACCA PM?
Planning variances measure the difference between the original standard and a revised, realistic standard — they highlight inaccurate budgeting or uncontrollable external changes. Operational variances measure actual performance against the revised standard — they reflect controllable managerial efficiency. Only operational variances should be used for individual performance appraisal.
How do I score discussion marks in variance analysis questions?
Use a structured 5-step framework: (1) state the variance and classify as F or A, (2) explain what it means in practical terms, (3) identify at least two specific causes, (4) discuss interrelationships with other variances, and (5) recommend management actions. Avoid generic comments — always reference the specific scenario information provided in the question.
How does variance analysis link to performance measurement in ACCA PM?
Variance analysis feeds directly into performance measurement frameworks examined in PM. Financial variances populate the financial perspective of the Balanced Scorecard. The controllability principle behind planning and operational variances connects to the Building Block Model's standards and rewards dimensions. Transfer pricing questions often require divisional variance interpretation for fair performance evaluation.
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