Variance Analysis Flashcards
What are the three material variances and their definitions?
Total variance
Difference between actual and standard direct material costs of the output produced
Material Price variance
(actual quantity of material purchased x standard price) – actual cost of material purchased
Material Usage variance
(actual production x standard material cost per unit) – (actual material used x standard cost per unit of materials)
What are the three labour variances and their definitions?
Total variance
Difference between the actual and standard direct labour costs of the output produced
Direct labour rate variance
(actual hours paid x standard labour rate per hour) – (actual hours paid x actual direct labour rate per hour)
Direct labour efficiency variance
( actual production in standard hours x standard direct labour rate per hour) – (actual direct labour hours worked x standard direct labour rate per hour)
How do you calculate labour variances?
Labour rate variance £ Actual hours @ standard price Actual cost Labour efficiency variance hours Actual units should have used x ? hours Actual units did use X standard hourly rate £
What are ideal time variances?
Idle time is where the workforce aren’t working
If there is idle time this needs to be separated out from the efficiency variance
The efficiency variance will then only record the active working hours
Idle time is always adverse
What are the three variable Overhead variances and their definitions?
Total variance
Difference between the actual and standard direct variable overhead costs of the output produced
Variable overhead expenditure variance
actual overhead cost incurred – (actual hours worked x standard variable production overhead absorption rate per hour)
Variable overhead efficiency variance
(actual hours worked x standard variable production overhead absorption rate per hour) – (actual production in standard hours x standard variable overhead absorption rate per hour)
How do you calculate the variable overhead variances?
Variable overhead expenditure overhead £
Actual hours @ standard price
Actual cost
Variable overhead efficiency variance hours
Actual units should have used x ? hours
Actual units did use
X standard hourly rate £
What are the three sales variances?
Sales Price Variance
(Actual sales volume x standard selling price per unit) – actual sales revenue
Sales volume variance Budgeted sales units – actual sales units Then value at: x standard gross profit per unit x standard contribution per unit x standard revenue per unit
What are the three fixed overhead variances?
Fixed Overhead total Variance
Overheads absorbed x
Actual overhead incurred y
Fixed production overhead total variance x–y
Fixed Overhead expenditure variance
Budgeted fixed overheads x
Actual fixed overheads y
Fixed overhead expenditure variance x–y
How do you calculate fixed production overhead volume variances?
Fixed production overhead volume variance
Actual output x
Budgeted output y
Volume variance in units x-y
X standard fixed overhead rate per unit £z
Fixed production overhead volume variance £z x (x-y)
How do you present the operating statement?
Absorption costing: £ Budgeted gross profit x Sales volume profit variance x Sales price variance x x Cost variances x Actual gross profit x
Include fixed overhead expenditure and fixed overhead volume variances in cost variances
How do you present the operating statement for marginal costing?
£ Budgeted contribution x Sales volume contribution variance x Sales price Variance x x Cost variances x Actual contribution x Budgeted overheads x Fixed overhead expenditure variance x Actual profit x
What could the causes for material price variances be?
Using a different supplier
Bulk buying – extra discounts
Unexpected increase in prices
Change in material quality
What could the causes for material usage variances be?
More or less scrap or wastage Change in material quality Change in quality control More efficient work procedures Change in material mix
What could the causes for labour rate variances be?
Increase in basic wages
Payment of bonuses
Using labour less or more experienced
Change in mix of labour force
What could the causes for labour efficiency variances be?
Using labour less or more experienced Change in mix and therefore efficiency Improved working methods Industrial action Poor supervision
What could the causes for sales price variances be?
Change in discounts offered
Low price offers
Unexpected price changes
What could the causes for sales volume variances be?
Effect of selling/marketing efforts
Change in customer needs and buying
habits
Change in demand linked to change in selling price
What could the causes for overhead variances be?
Overhead variances:
Fixed overhead expenditure variances would require more detailed information to establish why actual overhead was higher or lower than budgeted
Fixed overhead volume variances again would require further information to determine the reasons for output being different from expected
Variable overhead efficiency variances will be similar to the reasons for labour efficiency variances
Always look for possible interdependence of variances. For control purposes these variances should be looked at together rather than in isolation
When should a variance be investigated?
Size of the variance Likelihood of the variance being controllable Likely cost of an investigation Interrelationship of variances Type of standard set
What is the controllability principal?
The extent that a manager has control over costs and revenue
A manager should only be made accountable for those costs and revenue that he/she can control directly
Therefore variances should only be reported to the managers who are in a position to control the cost or revenue to which the variances relate
Why might standard costing not be appropriate in the modern production environment?
Non-standard products Standard cost become out-dated quickly Production is highly automated Ideal standard used Emphasis on continuous improvement Detailed information is required Monitoring performance is important McDonaldization
What are the two methods for sales mix variances?
Individual units method
Weighted average contribution method
How do you calculate the sales mix variance?
Step 1 – the standard mix
Compare the changes in the proportion of sales made up by each product
Step 2 – valuation
Determine the impact of step 1 on profits
How do you calculate sales mix individual units method?
In this method the product’s variance is multiplied by the standard margin
If using marginal costing this will be standard contribution per unit
If using absorption costing this will be standard profit per unit
How do you calculate sales mix weighted average contribution method?
Calculate a weighted average contribution
Deduct this from the contribution per unit
It is the relationship between sales and contribution differences that determine if a variance is A or F
Which is the best sales mix variances method?
Weighted average method is superior as gives better variances for control purposes
Easier to see the impact of each product when it is measured against the average price
What is the impact of selling more or less units than budgeted on profit/contribution?
Focuses on the impact of profit from selling more or less units than budgeted
So no longer considering the mix
Budgeted sales volume for each product is deducted from the standard mix
This can be valued in total using weighted average contribution/profit or
By product using the individual units contribution/profit
What is the individual method compared to?
Standard mix is compared to budgeted sales for each product
The difference is valued at the standard contribution/profit
What is the weighted average method compared to?
Total difference between the actual sales and the budgeted sales
The difference is valued at weighted average contribution/profit
What are the benefits of mix and quantity variances?
Sales mix variance allows a company to identify trends of products
Sales mix indicates future directions for sales strategies
Sales mix can be used to gauge success or failure of new marketing campaigns
Sales quantity can be used to indicate changes in the size of the market
Responsibility accounting evident
What are the problems of mix and quantity variances?
Controllability principle needs to be applied
Need to consider interdependence of variances
Sales mix only relevant if there is a relationship between products
If broad product ranges it is difficult to apply these techniques
