Advanced Variance Analysis Flashcards
What are planning variances?
Planning variances relate to the portion of a variance that is outside management’s control.
What is an example of a planning variance?
A large adverse direct material price variance due to an increase in the price of oil.
What are operational variances?
Operational variances are variances that are within the control of management.
What factors could lead to operational variances?
- Careless purchasing
- Using higher-quality materials
Why are planning variances seldom investigated?
They are often outside the organisation’s influence and are generally unavoidable.
What is the calculation for selling price variance?
Actual selling price - Standard selling price x Sales volume (units)
Fill in the blank: A sales volume variance arises from a difference in a company’s income as a consequence of a different _______ of a product being sold.
[quantity]
What is the formula for calculating a sales volume profit variance?
(Budgeted unit sales - Actual unit sales) x Standard profit per unit
What are the two types of variances calculated in the sales volume variance?
- Sales volume contribution variance
- Sales volume revenue variance
True or False: Planning variances are considered controllable from an operational standpoint.
False
What does a favourable selling price operational variance suggest?
Management was unable to take advantage of the market’s highest possible prices.
What is indicated by an adverse material price operational variance?
Management paid more for materials than expected due to factors within their control.
What is the importance of investigating planning variances?
Certain factors could reasonably be expected to change, indicating potential faults in the standard setting process.
What is the significance of using revised standards in variance analysis?
It allows for a more accurate assessment of management’s performance against achievable standards.
What is a sales volume variance?
A difference between the budgeted quantity of a product sold and the actual quantity sold.
How is the sales volume profit variance calculated?
(Budgeted unit sales – actual unit sales) x standard profit per unit.
What is the sales volume contribution variance?
Calculated by replacing ‘profit’ in the sales volume profit variance equation with ‘contribution’.
What is the sales volume revenue variance?
Calculated by replacing ‘profit’ in the sales volume profit variance equation with ‘revenue’.
What are mix and quantity variances in sales volume variance?
Breakdowns of sales volume variance for companies selling multiple substitutable products.
What is the scenario used to illustrate sales volume variances?
A soft drink factory producing blended apple and orange juice sold in cans and bottles.
What does a sales volume profit variance of £15 adverse indicate?
The overall profit decreased due to lower unit sales.
How is the sales quantity profit variance calculated?
Total actual sales (units) subtracted from total budgeted sales (units) multiplied by average standard profit per unit.
What does the sales mix profit variance measure?
The difference between the actual mix and standard mix multiplied by the standard profit.
What is a material variance?
Any difference between the standard cost and the actual cost incurred.
When is a variance considered favourable?
When the actual cost is lower than the standard cost.
What is the direct material cost variance in the example?
£320 adverse.
How is the direct material price variance calculated?
Standard cost of actual materials used compared to actual cost of actual materials used.
What are some common causes of variances?
- Material price changes
- Material usage efficiency
- Labour rate changes
- Labour efficiency issues
- Fixed overhead expenditure variations.
What is the importance of identifying the causes of variances?
To understand the underlying issues and determine if they can be resolved.
What does interdependence of variances mean?
Variances can influence each other’s outcomes and should not be treated as independent.
In Scenario 1, why might hiring a specialist car tester be beneficial despite increasing the labour rate variance?
The specialist may complete testing faster, reducing overall labour hours and improving labour efficiency variance.
What was the outcome of Manager Bob’s actions in Scenario 2?
A favourable material price variance but a large decrease in profit due to poor material quality.
What factors influence whether to investigate a variance?
- Size of the variance
- Controllability of the variance
- Cost of an investigation
- Interrelationship of the variance.
What is the potential problem with investigating every variance?
It may be too time-consuming and expensive.
What should management do if a product’s price increase leads to an adverse material price variance?
Consider the controllability of the variance and whether an investigation is necessary.
What happens to product costs when oil prices increase significantly?
There is little that can be done about it.
When is an investigation into a variance necessary?
Only if the variance has had an overall negative effect on profit.
Why might an investigation into a £1,000 variance be counterproductive?
The investigation itself will cost £10,000.
What does an adverse material price variance indicate?
It may not require investigation if it translates into a favourable material usage variance.
What is an example of a situation where an adverse material price variance may be justified?
More expensive material leading to more efficient material usage.
Fill in the blank: An investigation into a variance is unnecessary if management already knows the _______.
cause of the inevitable adverse material price variance.
