MA 4 Budgeting - Variance Analysis

Question 1

What two things are variances used to assess? Define them.

Answer 1

Efficiency - doing things with lease amount of effort or waste
Effectiveness - doing things in a way that meets the objectives

Question 2

4 steps for variance analysis

Answer 2

1. Understand the objective
2. Decide which variances are worth investigating. Cost/benefit, frequency, ability to control, nature of item
3. Investigate the why
4. Recommend response

Question 3

Static budget variance formula and significane

Answer 3

AQ x AP - SQ x SP

where AQ = actual quantity
AP = actual price

SQ = standard or budgeted quantity
SP = standard or budgeted price

determines that variances exist but cannot determine whether it’s due to change in volume or performance

static budget variance = actual result - static budget amount

Question 4

Flexible budget variances

Answer 4

(AP - SP) x AQ
useful for analysing variable costs. adjustes for sales prices.

= actual result - flexible budget amount

Question 5

Sales volume variance

Answer 5

(AQ - SQ) x SP
highlights how much of the results are attributed to a change in the volume sold based on the standard price.

= flex budget amount - static budget amount

Question 6

formulas for actual results, flexible budgets and static budgets

Answer 6

AQ x AP - actual
AQ x SP - flexible
SQ x SP - static

Question 7

formula for rate variance

Answer 7

(AP - SP) x AQ

(actual rate of input - standard rate of input) x actual quantity of input

reflects deviations from budget in prices paid for resources or DM used in production

Question 8

formula for efficiency variance

Answer 8

(AQ - SQ) x SP

(actual quantity of input - budgeted quantity of input allowed for actual output units achieved) x budgeted rate of input

looks at difference between actual quantity of input used and the standard quantity of input that SHOULD have been used, multiplied by the budgeted rate