Chapter 7: Variance Analysis Flashcards
Investigating Variances considerations:
- The size of the variance
- The controllability of the variance
-The cost of investigating the variance further
- Interrelationships with other variances
- Trend
What is the Total direct material cost variance split into?
Material Price variance (based on actual purchases - kg)
-Should cost (at standard cost / kg)
-Did cost
Variance £
Material Usage (based on actual production volume - units)
-Should cost (at standard usage/unit)
-Did cost
-Variance KG
-Valued at standard cost per kg
-Variance £
What is the Total direct labour cost variance split into?
Labour Rate variance (based on labour hours paid)
-Should cost (at standard cost/hour)
-Did cost
-Variance £
Labour Idle Time variance
-Actual hours paid
-Actual hours worked
-Variance (hours)
-Valued at the standard cost /hour
-Variance £
Labour efficiency variance
-Based on actual production volume (units)
-Should take (at standard hours/unit)
-Did take
-Variance (hours)
-Valued at the standard cost per hour
-Variance £
Sales price and volume variances
Sales price Variance (based on actual sales volume)
-Should sell for (at standard SP/unit)
-Did sell for
-Variance
Sales volume variance
-Budgeted sales volume (units)
-Actual sales volume (units)
-Variance (units)
-Valued at the standard profit or standard contribution per unit
-Variance £
If the company is using marginal costing then value at standard contribution per unit, however if they are using absorption costing then we should value at standard profit per unit
Variable overhead expenditure and efficiency variances
Variable overhead expenditure variance
Based on labour hours worked
-Should cost (at standard cost/hour)
-Did cost
-Variance £
Variable overhead efficiency
Based on actual production volume
-Should take (at standard hours/unit)
-Did take
-Variance (hours)
-Valued at the standard cost per hour
-Variance £
Fixed overhead variance
Fixed overhead expenditure variance
-Budgeted cost (budgeted cost @ standard cost per unit)
-Actual cost
-Variance £
Fixed overhead volume
-Budgeted production (units)
-Actual production (units)
-Variance (units)
-Valued at the standard cost per unit
-Variance £
Interpreting variances - Material variances
Material price variance shows whether the actual price paid for material was more or less than the standard price.
Material usage variance shows whether the actual amount of material used to produce each unit was more or less material than expected.
Interrelationship
example - using cheaper, lower quality materials may cause a favourable price variance but could lead to greater wastage and therefore an adverse usage variance
Interpreting variances - labour variances
Labour rate variance shows whether the actual hourly rate paid to staff was more or less than the standard rate.
Labour efficiency variance shows whether our staff took more or less time than expected to make each unit.
Interrelationship
Example - if we use staff who are more experienced and have a higher level of skill than normal, we will probably suffer an adverse labour rate variance as they are likely to be more expensive. However this could cause a favourable labour efficiency variance as the staff may work faster
Interpreting variances - The sales variance
The sale price shows whether the actual selling price charged to customers was more or less than the standard selling price.
The sales volume variance shows the financial effect of selling more or less units than budgeted.
Interrelationship
Example - if we raise the prices we will have a favourable selling price variance but this may lead to an adverse sales volume variance
Interpreting variances - the variable overhead variances
The variable overhead expenditure variance shows whether the actual hourly rate for variable overheads was more or less than the standard rate.
The variable overhead efficiency variance shows whether our staff took more or less time than expected to make each unit.
Interpreting variances - the fixed overhead variance
Fixed overhead expenditure variance shows whether the actual fixed overheads incurred was more than or less than the budgeted figure. An adverse variance means than we have spent more than expected which may have been due to:
-taking on more space which increased the rent charge
-our landlord increasing rent prices unexpectedly
-more machinery was purchased which increased the depreciation charge
Fixed overhead volume variance shows changes in volume that we were able to generate from our production facility
Variance caused by the planning process
-Sometimes managers do not spend adequate time preparing a meaningful budget then it is highly likely that variances will arise but this does not mean that there were operational problems that need to be dealt with.
-If an organisation uses ideal standard to set targets then the variances will always be adverse
