5.1 Variance analysis - Sales variances

Question 1

Standard costing is a technique which

Answer 1

• Establishes predetermined estimates of the costs of products and then compares these with actual costs as they are incurred
• The predetermined costs are known as standard costs and they represent target costs which are useful for planning, control and decision making

Question 2

There are four main types of standard:

Answer 2

• Attainable standards
• Basic standards
• Current standards
• Ideal standards

Question 3

Attainable standards

Answer 3

• They are based upon efficient (but not perfect) operating conditions
• They will include allowances for normal material losses, realistic allowances for fatigue, machine breakdowns, etc
• These are mostly frequently encountered std
• They may motivate employees to work harder since they provide a realistic but challenging target

Question 4

Basic standards

Answer 4

• These are long term stds which remain unchanged over a period of years
• Their sole use is to show trends over time for items such as material prices, labour rates and efficiency and the effect of changing methods
• They can’t be used to highlight current efficiency
• These stds may demotivate employees if over time they become too easy to achieve and as a result employees may feel bored and unchallenged

Question 5

Current standards

Answer 5

• These are stds based on current working conditions (including current inefficiencies and current wastage)
• The disadvantage is they do not attempt to motivate employees to improve upon current working conditions and as a result employees may feel unchallenged

Question 6

Ideal standards

Answer 6

• These are based upon perfect operating conditions
• This means there is not wastage or scrap, no breakdowns, no stoppages or idle time (no inefficiencies)
• Japanese companies use these for pinpointing areas where close examination may result in large cost savings
• Ideal stds may have an adverse motivational impact since employees may feel that the std is impossible to achieve

Question 7

Criticism of standard costing in modern bus environment:

Answer 7

• Std costing was developed when bus environments were more stable, in present dynamic environment it is more difficult to set a std cost which will remain appropriate over a period of time
• Attaining the std used to be judged as satisfactory but today the aim must be continuous improvement in order to remain competitive
• The emphasis on labour variances is less appropriate with the increasing use of automated production methods
• Many modern products are digital and costs will change quickly and in unpredictable ways, it may be difficult to have a std at all

Question 8

For comparison between actual and std costs to be meaningful, the std must be

Answer 8

• Valid and relevant
• It must be kept as up to date as possible (must represent latest methods and prices)
• Any significant changes should be adjusted for as soon as they are known

Question 9

Variance analysis is the

Answer 9

• Process by which the total difference between actual cost and std is broken down into it’s different elements
• Cost and sales variances together can be used to explain difference between budgeted profit for a period and actual profit

Question 10

A variance is the

Answer 10

• Difference between actual results and the budget or std
• A favourable (F) variance = where results are better than expected
• An adverse (A) variance = where actual results are worse than expected

Question 11

Variances can be divided into three main groups

Answer 11

• Sales variances
• Variable cost variances
  
  • material variances
  • labour variances
  • variable overhead variances
• Fixed overhead variances

Question 12

Total sales variances =

Answer 12

• Sales price variance = Difference between actual and std sales prices (shows effect on profit of actual selling price differing from budgeted)
• Sales volume variance = Difference between actual budgeted sales volume (shows effect on contribution / profit of not achieving budgeted volume of sales)

Question 13

Sales price variance pro forma

Answer 13

Actual sales revenue = Actual selling price X Actual sales units
Less: Budgeted sales revenue = Std sales prices X Actual sales units
= Sales price variance

Question 14

Sales volume variance pro forma

Answer 14

Actual sales volume
Less: Budgeted sales volume
= Sales volume variance (in units)
X Std profit (absorption) / contribution (marginal) / revenue
= Sales volume variance (in monetary terms)

Question 15

Potential causes for sales price variances

Answer 15

• Higher than expected discounts offered to customer to persuade them to buy larger bulk quantities (A)
• Lower than expected discounts perhaps due to strength of sales demand (F)
• The effect of low price offers during a marketing campaign (A)
• Market conditions forcing an industry wide price change (prices down= A; Prices up = F)

Question 16

Potential causes for sales volume variances

Answer 16

• Successful (F) or unsuccessful (A) direct selling efforts
• Successful (F) or unsuccessful (A) marketing efforts, eg: effects of marketing campaign
• Unexpected changes in customers needs and buying habits (increased demand = F; reduced demand = A)
• Failure to satisfy demand due to production difficulties (A)
• Higher demand due to a cut in selling prices, or lower demand due to an increase in sales prices (A)