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ACCA Performance Management > Chapter 12: Advanced variances > Flashcards

Chapter 12: Advanced variances Flashcards

1
Q

What is variance analysis?

A

total difference between standard & actual results is analysed

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2
Q

What variables can we calculate for basic variances

A

Sales, materials, labour, variable OH and Fixed OH

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3
Q

What are the sales variances?

A

Sales price variances - did each unit sell for more or less than the budgeted selling price

Sales volume variance- did the organisation sell more or less units than budgeted?

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4
Q

What is the price variance calculation?

A

1) Actual quantity sold * actual price
2) Actual quantity sold * standard price

1-2

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5
Q

What is the volume variance calculation?

A

1) Actual quantity sold * standard margin

2) Budget quantity sold * standard margin

1-2

Margin = contribution per unit or profit per unit

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6
Q

Favourable causes of sales price variance

A

Unexpected price increase due to:

Higher than anticipated customer demand
Lower than anticipated demand for competitor’s products
improvement in quality or performance

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7
Q

Adverse causes of sales price variance

A

Unexpected price decrease due to:

Lower than anticipated customer demand
Higher than anticipated demand for competitors products
Reduction in quality or performance

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8
Q

Favourable causes of sales volume variance

A

Unexpected increase in demand due to:
Lower price
Improve quality or performance
fall in quality or performance of competitor’s products
successful marketing campaign

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9
Q

Adverse causes of sales volume variance

A

Unexpected fall in demand due to:
higher price
lower quality or performance of product
increase in quality or performance of competitors product
unsuccessful marketing campaign

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10
Q

What are the total material variances?

A

1) Material price variance- did each unit of material cost more or less than expected?

2) Materials Usage variance- did actual production use more or less units of materials than expected?

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11
Q

What is the calculation for material price variance

A

1) Actual quantity purchased * actual price

2) Actual quantity purchased * standard price

1- 2

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12
Q

What is the calculation for material usage variance

A

1) Actual quantity used * standard price

2) Standard quantity used * standard price

1-2

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13
Q

Causes of favourable material price variance

A

Poorer quality materials
Discounts given for bulk buying
change to a cheaper supplier
incorrect budgeting

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14
Q

Causes of adverse material price variance

A

Higher quality materials
Change to a more expensive supplier
Unexpected price increase encountered
Incorrect budgeting

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15
Q

Causes of favourable material usage variance

A

Higher quality materials
More efficient use of material
Change in product specification
Incorrect budgeting

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16
Q

Causes of adverse material usage variance

A

Poorer quality materials
Less experienced staff using more materials
Change in product specification
Incorrect budgeting

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17
Q

What makes total labour variance

A

1) Labour rate variance - does labour cost more/ less per hour than expected

2) labour efficiency variance- did production take more or less hours than expected

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18
Q

How to calculate the labour rate variance

A

1) Actual hours x actual labour rate

2) actual hours x standard labour rate

1-2

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19
Q

How to calculate the labour efficiency variance

A

2) Actual hours x standard labour rate

3) standard hours (for actual level of production) x standard labour rate

3-2

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20
Q

What are the fixed OH variance calculations

A

1) Fixed OH expenditure variance- did they cost more/ less than expected

2) Fixed OH volume variance- did the org absorb more/less OH than expected?
a) Fixed OH capacity variance- did employees work more/less hrs than expected
b) Fixed OH efficiency variance- did they work faster/slower than expected?

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21
Q

What is a marginal costing system?

A

No OH absorbed
Amount of OH written off to the P&L

Only fixed OH variances is the diff between what was budgeted to be spent vs actually spent (fixed OH expenditure variance)

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22
Q

What is the absorption costing system?

A

Underabsorption costing = using an OH absorption rate to absorb OH- variances occur when rate is incorrect

Calc fix OH expenditure variance + fixed OH volume variance

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23
Q

How to calculate the Fixed OH expenditure variance

A

1) Actual cost
2) Budgeted hours x standard rate

1-2

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24
Q

How to calculate the Fixed OH capacity variance

A

1) Budgeted hours x standard rate
2) Actual hours x standard rate
2-1

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25
Q

How to calculate the Fixed OH efficiency variance

A

1)actual hours x standard rate
2) Standard hours x standard rate (for actual production)
1-2

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26
Q

Causes of a favourable OH expenditure

A

decrease in price
seasonal effects

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27
Q

Causes of a adverse OH expenditure

A

increase in price
seasonal effects

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28
Q

Causes of a favourable OH volume

A

increased production volume
increased demand
change in productivity of labour

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29
Q

Causes of a adverse OH volume

A

decreased production volume
decreased demand
production lost through strikes

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30
Q

Causes of a favourable fixed OH capacity

A

hours worked greater than budget

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31
Q

Causes of a adverse fixed OH capacity

A

Hours worked less than budget

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32
Q

Causes of a favourable fixed OH efficiency & labour efficiency & var OH efficiency

A

higher skilled staff
improved staff motivation
incorrect budgeting

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33
Q

Causes of a adverse fixed OH efficiency & labour efficiency & var OH efficiency

A

lower skilled staff
fall in staff motivation
incorrect budgeting

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34
Q

What is the variable OH variances

A

1) variable OH expenditure variance- cost more/less per hour than expected

2) Variable OH efficiency variance- production take more/ less labour hours than expected?

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35
Q

How to calculate the variable OH expenditure variance

A

1) actual hours x actual variable OH rate

2) actual hours x standard variable OH

2-1

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36
Q

How to calculate the variable OH efficiency variance

A

1) Actual hours x standard variable OH rate

2) Standard hours (for actual production) x standard variable OH rate

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37
Q

Causes of favourable variable OH expenditure

A

unexpected saving in cost of service
More economic use of services
incorrect budgeting

38
Q

Causes of adverse variable OH expenditure

A

unexpected increase in cost of services
less economic use of services
incorrect budgeting

39
Q

Difference between operating statement of absorption costing vs marginal costing

A

Marginal = budgetied contribution and sales volume contribution variance/ standard contribution on actual sales
After arriving at actual contribution deduct budgeted fixed production OH/ fixed OH expenditure variance to get to profit

Absorption= budget profit and sales volume
profit variance/ standard profit on actual sales
Include Fixed OH production expenditure, capacity & efficiency

40
Q

What is idle time?

A

When employees are paid for time they’re not working e.g machine breakdowns. low demand or stockouts

If idle time exists an idle time labour variance should be calculated

41
Q

How to calculate idle time variance

A

Falls under labour efficiency variance
1) Productive efficiency variance- did production take more/ less than expected hours (based on hours worked)

2) idle time variance- (actual hours x standard rate)- (actual hours worked x standard rate)

42
Q

How to calculate the productive efficiency variance

A

1) actual hours worked x standard rate
2) standard hours worked for actual production x standard rate

43
Q

How to control idle time?

A

1) proper maintenance of tools/ machinery
2) advanced production planning
3) timely procurement of stores
4) assurance of supply of power
5) advance planning for machine utilisation

44
Q

What is material waste

A

normal part of process. Can be caused by evaporation, scrapping, testing

Affects material usage variance- order correct quantity & quality at most favourable price, ensure it arrives at the right time in process, prevent theft, deterioration, breakage + extra storage costs

45
Q

What factors affect when a variance should be investigated

A

1) size - fixed size of variance e.g above a threshold, fixed % rule, statistical decision rule (e.g liklihood <5% of it happening)

2) fav or adverse

3) cost- must be less than benefits of correcting variance

4) past pattern- focus on steadily worsening trends

5) budget- if they’re unreliable/ unrealistic= change budget/ process

6) reliability of figures- variances would be meaningless. Can set control limits

46
Q

When to calculate a material mix and yield variance

A

1) product contains more than 1 type of material
2)materials are interchangeable
3) change in proportions of input materials

47
Q

How to calculate the total material variance

A

1) Material price variance - calc unchanged but done per type of material

2) material usage variance
a) material mix variance- impact on profit of a change in mix of materials
b) material yield variance- impact on profit of a different output being produced from a given input than standard

48
Q

Method to calculate the mix variance

A

1) look at actual input of each material (actual total quantity split in actual mix) AQAM

2) Take the total input and put in another column. Work back to calc the split between materials (AQSM)

3) diff between standard mix and actual mix (AQSM-AQAM). Must add to 0 in total

4) multiply the difference between standard price per kg

49
Q

What does a material yield variance measure

A

efficiency of turning the inputs to outputs

Adverse= actual output< expected - labour inefficiencies. higher waste, inferior materials, cheaper mix

50
Q

What is the yield variance method : total

A

Actual outputs in units
Expected output from actual input in units

difference - fav/ adverse
Multiplied by standard material cost per unit of output

Yield variance: fav/ adverse

51
Q

What is the yield variance method : individual

A

Standard quantity of material used for actual production shared in a standard mix (SQSM)

1) copy AQSM from mix variance
2) calc SQSM for each material: material quantity used per unit from standard costcard x total actual output produced
or calc total standard quantity of all materials for actual output shared between them using standard proportion from cost card

3) calc diff between SQSM and AQSM per material

4) multiply diff by standard price per kg

52
Q

What does a fav mix variance show

A

higher proportion of a cheaper material being used - reduced average cost per unit

53
Q

What does a adverse yield variance show

A

less output achieved for a given inpu. More input than expected output

fav mix variance can lead to adverse yield variance - diff in quality

54
Q

What is the total sales variance

A

1) Sales price variance - calc separate variance per product
2) Sales volume variance
a) sales mix variance - impact on profit of a change in sales mix of products sold
b) sales quantity variance- impact on profit of a different total quantity of products actually sold to budget

55
Q

What does the sales mix variance show

A

Effect on profit of changing the mix of actual sales from the standard mix

2 methods to calculate
1) diff between total quantity sold in standard mix and actual quantities sold valued at standard profit per unit

2) diff between actual sales & budgeted sales valued at standard profit per unit less budgeted weighted average profit per unit

56
Q

What are the steps for method 1 sales mix variance

A

1)write down actual sales quantity for each product in a column (AQAM)

2) actual sales quantity and copy to another column work back to standard % split (AQSM)

3) Calc diff between AQAM and AQSM in units - adds to 0

4) multiply diff by the standard margin per unit

57
Q

What is the sales quantity variances

A

effect on profit of selling a different total quantity from budget

Calculated in 2 ways
1) diff between actual sales in standard mix and budgeted sales valued at standard profit per unit

2) diff between actual sales volume & budgeted sales valued at the weighted average profit per unit

58
Q

What is method 1 for the sales quantity variances?

A

1) copy AQSM from mix variance method
2) copy BQSM (budgeted sales units under budgeted sales quantity standard mix)
3) calc diff between AQSM and BQSM
4) multiply diff by standard margin per unit

59
Q

What is method 2 for the sales quantity variances?

A

1) Sales quantity variance =(actual total sales quantity- budgeted total sales quantity) x standard weighted average margin

Actual total sales quantities (units)
Budgeted total sales quantity (units)
Difference favourable/ adverse
Multiplied by standard weighted average margin per unit
Sales quantity variance: favourable/ adverse

60
Q

What is the standard

A

part of the budgeting process which occurs before the period it relates to

Diff between standard and actual can occur due to unrealistic budgets not always operational

Budget may need to be revised to enable actual performance to be compared with standard that reflects these changed conditions.W

61
Q

What are traditional variances

A

Compares actual results with original (flexed) budget

62
Q

What are planning variances

A

compares the revised (flexed) budget and original (flexed) budget
Often deemed to be uncontrollable. Management should not be held accountable

63
Q

What are operational variances

A

Compares actual results with revised (flexed) budget
Deemed controllable. Management held responsible for operational variances

64
Q

Original flexed budget vs revised budget

A

Original - ex-ante (flexed budget based on standards before the budget has been revised)

Revised- ex post (flexed budget based on the standards after budget is revised)

65
Q

Why would planning and operational variances need calculating

A

sales, materials, labour
operating statement would include a separate line per variance
each variance will be reviewed in turn

66
Q

Benefits of planning and operational variances

A

1) good in volatile/ changing environments to use standard costing
2) operational= up to date info on current efficiency levels
3)operational= likely to make standard costing more acceptable & positive impact on motivation
4) emphasises importance of planning in preparing standards & identifying planning deficiencies

67
Q

What are the problems of planning & operational variances

A

1) subjectivity in determining ex post standards as to what’s realistic
2) large labour time to keep up to date & additional variances
3) temptation to put variances down to outside uncontrollable factors e.g planning
4) conflict between operating and planning staff

68
Q

What is market share variance (operational)

A

1) actual sales quantity x standard margin
2) revised budget sales x standard margin (to achieve target share of actual market)

2-1

69
Q

What is market size variance (planning)

A

2) revised budget sales x standard margin (to achieve target share of actual market)
3) original budget sales x standard margin

3-2

70
Q

How to revise the budget

A

Flex the original and revised budgets to actual production levels

Operating variance= actual results- revised (flexed) budget

Planning variance= original (flexed) budget

71
Q

When should budgets be revised?

A

1) change in 1 of the main materials used to make a product/ provide a service
2) unexpected increase in price of materials due to rapid increase in world market prices
3) change in working methods/ procedures that change expected labour time
4) unexpected change in rate of pay of workers

72
Q

Advantages of revising the budget

A

1) more relevant variances (especially in turbulent environments)
2) operational variances give fair reflection of actual results achieved in the actual condition
3) managers meant to be more motivated by variances reported- better measure
4) analysis so more useful standards in future

73
Q

Disadvantages of revising the budget

A

1) establishing ex-post budgets is difficult- managers w/ poor performance unlikely to accept them

2) a lot of admin - analyse traditional variances then decide what’s (un) controllable

3) exaggerate interrelationships of variances- pre packed list of excuses for below standard performance. Poor performance is often excused as being the fault of badly set budget

4) frequent demands for budget revisions may results in bias

74
Q

Why might variance analysis not be appropriate

A

1) non standard products
2) standard costs become outdated quickly
3) production is highly automated
4) Ideal standard used
5) JIT and TQM
6) emphasis on continuous improvement
7) detailed info is required
8) monitoring performance is important

75
Q

Why variance analysis may not be good for non standard products

A

standard product costs are good for identical products and processes
can’t deal with customisations

76
Q

Why variance analysis may not be good for when standard costs become outdated quickly

A

shorter product life cycles in a modern environment- need to be reviewed & updated frequently
increases costs of operating a standard cost system
if not updated- limited use for planning & control

77
Q

Why variance analysis may not be good for highly automated production

A

control exercised by concentrating of efficiency of workforce
Direct labour efficiency seen as key to control

78
Q

Why variance analysis may not be good for ideal standards used

A

depends on type of standard costing used

79
Q

Why variance analysis may not be good for Just in time (JIT) and Total Quality Management (JQM)

A

implement ideal standard with emphasis on continuous improvement and high quality
adverse variances with an ideal standard are different to that of a current standard

don’t carry excess stock = up to date consumer prices e.g suez canal 2022. Increases competitiveness and effective PM

80
Q

Why variance analysis may not be good when emphasis is on continuous improvement

A

standard costing is inconsistent with concept of continuous improvement

81
Q

Why variance analysis may not be good when detailed info is required

A

often varied out on an aggregate basis (totals) but in a complex and changing environment more detailed info is required for effective management control

82
Q

Why variance analysis may not be good when monitoring performance is important

A

usually available at end of reporting period
now need more real time info

83
Q

Which variances are unuseful in a JIT/ TQM environment

A

1) material price variance- JIT= business is prepared to pay a higher price for materials as suppliers will constantly deliver raw materials with no defect
TQM= prepared to pay more for better quality to get it right first time

2) labour, Variable and fixed OH efficiency- TQM= labour to min waste and improve quality. In a traditional standard costing environment= adverse but could be allowed in TQM if final product meets customer expectation

3) Material usage variance- JIT= fast workforce can mean more wastage
TQM= more material might be used to get it fault free for customer. Only quality finished goods are acceptable

84
Q

What are the aims of setting standards?

A

1) setting target for performance
2) motivating managers responsible to achieve targets
3) holding managers accountable for actual performance
4) could reward managers for good performance and criticise for poor performance

85
Q

Reactions to different standards set

A

1) ideal standard- if too high employees and managers will recognise they can’t achieve it so might not try to get near

2) Current standard- not challenging so could get content to achieve without improving performance

3) attainable standard- if realistic can provide a target. some employees motivated some will avoid need to work harder

4) basic standard- motivate employees as it gives them a LT target but can become out of date quickly= demotivates

86
Q

Problems with standard costing in a changing environment

A

1) focuses on reduced costs not quality and customer satisfaction (TQM) but measured in terms of internal/ external failure costs (not traditionally identified)

2) too much emphasis on direct labour costs- now largely automated so only small proportion

3) too much emphasis on control of st variable costs - most are now fixed (at least ST)

4) most appropriate in a stable, standardised, repetitive environment- modern = dynamic, unstable, competitive

5) standards are acceptable but now the focus is on continuous improvement

6) produce control statements weekly/ monthly but managers need more prompt control info

87
Q

In favour of participation in standard setting

A

Motivate employees to set higher standards for achievement
Staff more likely to accept standards they’ve been involved in setting
morale and actual performance levels improved
Staff will understand more clearly expectations

88
Q

Against participation in standard setting

A

Seniors reluctant to share budgeting responsibilities
standard setting process could be time consuming
staff may want to set standards they can achieve e.g build in slack
conflicts rather than collaboration
staff feel suggestions ignored

89
Q

Pay as a motivator

A

Can work as incentive if targets are reached

but if offered as a bonus for achieving standard cost= incentive to set low standards of performance (e.g include slack)

90
Q
A

ACCA Performance Management (15 decks)

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