9: Variance Analysis Flashcards
What is a standard cost?
A standard cost is a pre-determined unit cost which is prepared for each cost unit
Represents a ‘target cost’ against which performance can be measured with variance analysis
Standards provide expected cost for one unit
Budgets are compiled by reference to the standard cost card
Ads of standard costing?
Aids more accurate budgeting
Gives targets for employees
Provides a framework for scheduling activities
Simplifies accounting
Enables management by exception via variance analysis
What is management by exception?
Management ignore activities which confirm to expectation and concentrate on activities which exceed acceptable to tolerable limits
Enabled by variance analysis
Why can standard costing not be used in service environments?
Difficulty in establishing a measurable cost unit
Every cost unit will be different
Strong influence of the human influence on output
What can variances be used to do?
Explain the difference between the budgeted profit for a period and the actual profit
What are three different approaches to calculating variances?
Tabular approach
Did-should approach
Formulae approach
Only marginal costing needs to be used!
What are the five types of variances you need to be able to calculate?
Sales variance
Materials variance
Labour variance
Variable overhead variance
Fixed overhead variance
Two main types of bias with variances?
Omitted variable bias
- materials price variance favourable, but adverse sales volume
Cognitive bias
What is the purpose of sales variance? And two types?
Determine the effect on contribution and therefore profit of differences
Volume - units
Price - cost
Calc: Sales price?
£
AQU did sell for
AQU should sell for
—————————
Price variance
Calc: sales volume?
Units - converted
Actual sales volume
Budgeted sales volume
——————————
Difference
——————————
Valued at CPU
Purpose of material variance and two types?
Price - whether the company has paid more of less kg than expected for materials used or purchased
Usage - whether company has used more of less material than expected to produce the actual numbed of cost unit
Calc: materials price?
£
AQM did cost
AQM should cost
————————
Price variance
Calc: materials volume?
Kg - convert to £
AQU did use
AQU should use
———————
Difference
——————
Valued at standard material cost per £
Purpose of labour variances and two types?
Rate - ascertain whether the company paid more or less than expected in wages
Efficiency - whether employees worked more or less labour hours than expected to produce the actual volume of cost units
Calc: labour rate?
£
AH paid did cost
AH paid should cost
——————————
Variance
Calc: labour efficiency?
Hours - convert to £
AQU did take
AQU should take
————————
Difference
————————
Valued at LRPH (£)
Purpose of variable overhead variance and two types?
Expenditure - whether the company paid more of less per hour than expected for variable overheads
Efficiency - whether the company used more of less variable overheads by working more or less labour hours than expected
Calc: variable overhead expenditure?
£
AHW did cost
AHW should cost
————————
Price variance (£)
Calc: variable overhead efficiency?
Hours - convert to £
AQU did take
AQU should take
————————
Difference
————————
Valued at VORPH (£)
Purpose of fixed overhead variance?
Difference between budgeted and actual expenditure on fixed overheads
No volume, it’s fixed!
Only caused by expenditure differences
Calc: fixed overhead variances?
£
Actual expenditure
Budgeted expenditure
——————————
Fixed overhead variance
What costs are adverse and favourable in all five types of variance?
X - adverse
(X) - favourable
UNLESS it’s sales, then the other way round!
Are interrelationships between variables possible?
Yes! Examples:
- favourable price variance (cheaper product), could lead to adverse usage variance (causes more wastage)
- adverse fixed overhead expenditure (better machine), offset by favourable wages efficiency variance
- favourable labour efficiency (quicker workers), adverse material usage (more waste)
Can combine both variances and attribute them to a common cause
What is an operating statement?
Statement of variances
Shows the reconciliation between budgeted contribution and actual profit
Will have to offset the Fs and As for material, labour and variable overhead variances
Everything on an operating statement? Will have to know!
Budgeted contribution
- sales volume variance
Flexed budget contribution
- sales price variance
Cost variances (offset)
- material variance
- labour variance
- variable overhead variance
Actual contribution
- budgeted fixed overhead
- fixed overhead variance
Actual fixed overhead ()
Actual profit
Tips to working backwards?
Write out the format for the particular variance, and put in what you know
What you need will be the balancing figure
DEDUCE AND PRACTICE!
