Chapter 6 - Further variance analysis Flashcards
What is the standard mix?
Compares changes in proportion of sales made up by each product, determine actual sales
What is actual total sales in units?
Split between products based on originally planned proportions
How are the mix and quantity variances valued?
Using standard margin:
- MC costing is standard contribution
- AC is standard profit
What are the 2 ways valuation can be done?
- Individual units method
- Weighted average contribution method
What is the individual units method?
Each product’s variance multiplied by standard margin
What are the steps of the weighted average contribution method?
- Calc weighted average contribution for products
- Deduct from standard contribution per unit for each product
- Difference = ans, shows diff between contribution generated and average contribution
How is the weighted average contribution calculated?
Total budgeted contribution/total budgeted sales
How is total budgeted contribution calculated?
Budgeted sales x contribution
For all products
What does a positive difference mean?
Product generates an above average contribution
What does a negative difference mean?
Product generates a below average contribution
Which method is superior?
Weighted average method:
- provides better variances for control purposes
- easier to see impact
What does the sales quantity variance do?
Ignores change in mix and focusses on impact of profit from selling more/less than budgeted
How is sales quantity variance calculated?
weighted average margin (actual sales quantity - budgeted sales quantity)
What are the benefits of mix and quantity variances?
- Identification of trends
- Indicate changes in market size
- Future sales strategies
- Gauge effect of marketing campaigns
- Responsibility accounting improved
What are the problems of mix and quantity variances?
- Controllability needs considering
- Considered as whole
- Sales mix variance only relevant if products are related
- Techniques difficult to apply
How is total variance split?
- Planning
- Operational
What are planning variances?
- Compares revised budget and original
- Deemed to be uncontrollable
- Management should not be held accountable
When is a planning variance favourable?
Revised standard cost < original standard cost
When is a planning variance adverse?
Revised standard cost > original standard cost
Why are planning variances uncontrollable?
Original standard was not reflective of attainable standard
What are operational variances?
- Compares actual results with revised budget
- Deemed controllable
- Management held responsible
What are some good reasons for a change in the original standard cost?
- Change in main material
- Unexpected increase in material price
- Change in working methods
- Unexpected change in pay rate
What are the benefits of planning variances?
- Useful
- Up to date
- Better for motivation
- Assesses planning
What are the negatives of planning variances?
- Subjective
- Time consuming
- Can be manipulated
- Can cause conflict
What are the benefits of planning and operational variances?
- More useful in volatile/changing environments
- Operational variances provide up to date info
- Operational variances have positive effect on motivation
- Emphasises importance of planning function
What are the negatives of planning and operational variances?
- Subjectivity
- Large amount of labour time
- Temptation to use uncontrollable factors as excuses
- Conflicts between planning and operational staff
What is a good way of testing whether operating variances are understood?
Work backwards
What is the formula for sales mix variance?
(Actual - standard mix) x standard profit per unit
