Laspeyres Indexes for Variance Analysis in Cost Accounting.

Abstract The article presents the use of Laspeyres indexes, proposed by German economist Étienne Laspeyres, in calculating variances in direct costs and in production and sales. The Laspeyres indexes will be used throughout for calculating variances in direct costs and in production and sales. It should be noted that the conventional price variance includes the joint effect due to changes in quantities. Variance analysis in cost accounting has been given an economic meaning in this paper. By using Laspeyres indexes the meaning of variance analysis in direct costs and in production and sales has been elucidated. The quantity variance is often split into two components: mix and volume variances. The price and quantity variances are found to be multiplication of the total budget by the respective average change. Further, a way to allocate the joint variance between price and quantity variances is suggested. The new interpretation of variance analysis, as developed in this paper, has an additional advantages that it is more informative to managers and it is easier to compute.