9: Variance Analysis

Question 1

What is a standard cost?

Answer 1

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

Question 2

Ads of standard costing?

Answer 2

Aids more accurate budgeting

Gives targets for employees

Provides a framework for scheduling activities

Simplifies accounting

Enables management by exception via variance analysis

Question 3

What is management by exception?

Answer 3

Management ignore activities which confirm to expectation and concentrate on activities which exceed acceptable to tolerable limits

Enabled by variance analysis

Question 4

Why can standard costing not be used in service environments?

Answer 4

Difficulty in establishing a measurable cost unit

Every cost unit will be different

Strong influence of the human influence on output

Question 5

What can variances be used to do?

Answer 5

Explain the difference between the budgeted profit for a period and the actual profit

Question 6

What are three different approaches to calculating variances?

Answer 6

Tabular approach

Did-should approach

Formulae approach

Only marginal costing needs to be used!

Question 7

What are the five types of variances you need to be able to calculate?

Answer 7

Sales variance

Materials variance

Labour variance

Variable overhead variance

Fixed overhead variance

Question 8

Two main types of bias with variances?

Answer 8

Omitted variable bias
- materials price variance favourable, but adverse sales volume

Cognitive bias

Question 9

What is the purpose of sales variance? And two types?

Answer 9

Determine the effect on contribution and therefore profit of differences

Volume - units

Price - cost

Question 10

Calc: Sales price?

Answer 10

£

AQU did sell for
AQU should sell for
—————————
Price variance

Question 11

Calc: sales volume?

Answer 11

Units - converted

Actual sales volume
Budgeted sales volume
——————————
Difference
——————————
Valued at CPU

Question 12

Purpose of material variance and two types?

Answer 12

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

Question 13

Calc: materials price?

Answer 13

£

AQM did cost
AQM should cost
————————
Price variance

Question 14

Calc: materials volume?

Answer 14

Kg - convert to £

AQU did use
AQU should use
———————
Difference
——————
Valued at standard material cost per £

Question 15

Purpose of labour variances and two types?

Answer 15

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

Question 16

Calc: labour rate?

Answer 16

£

AH paid did cost
AH paid should cost
——————————
Variance

Question 17

Calc: labour efficiency?

Answer 17

Hours - convert to £

AQU did take
AQU should take
————————
Difference
————————
Valued at LRPH (£)

Question 18

Purpose of variable overhead variance and two types?

Answer 18

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

Question 19

Calc: variable overhead expenditure?

Answer 19

£

AHW did cost
AHW should cost
————————
Price variance (£)

Question 20

Calc: variable overhead efficiency?

Answer 20

Hours - convert to £

AQU did take
AQU should take
————————
Difference
————————
Valued at VORPH (£)

Question 21

Purpose of fixed overhead variance?

Answer 21

Difference between budgeted and actual expenditure on fixed overheads

No volume, it’s fixed!

Only caused by expenditure differences

Question 22

Calc: fixed overhead variances?

Answer 22

£

Actual expenditure
Budgeted expenditure
——————————
Fixed overhead variance

Question 23

What costs are adverse and favourable in all five types of variance?

Answer 23

X - adverse
(X) - favourable

UNLESS it’s sales, then the other way round!

Question 24

Are interrelationships between variables possible?

Answer 24

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

Question 25

What is an operating statement?

Answer 25

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

Question 26

Everything on an operating statement? Will have to know!

Answer 26

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

Question 27

Tips to working backwards?

Answer 27

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!