Variance Analysis Flashcards
What is variance analysis
What is a sales variance
The difference between a budgeted profit and the actual profit achieved in a period explained by both cost variance and sales variance. Cost variances explain the difference between actual costs and budgeted or standard costs.
Sales variances explain the effect of differences between:
- Actual and standard sales prices
- Budgeted and actual sales volume
How is a sales price variance calculated and what are some of the causes
Sales Price Variance
Units sold should have sold for (Actual sales units x standard sales price per unit) X
They did sell for (Actual sales revenue) Y
Sales price variance X-Y
Causes of sales price variance
(1) Higher than expected discounts offered to customers to persuade them to buy larger, bulk quantities.
(2) Lower than expected discounts, perhaps due to strength in sales demand
(3) The effect of low price offers during a marketing campaign.
(4) Market conditions forcing an industry wide price change
How is a sales volume variance calculated and what are some of the causes
Sales Price Volume
Actual Sales Volume X
Budgeted Sales Volume Y
Sales Volume Variance X-Y * standard cost per unit
Causes of sales volume variance
(1) Successful or unsuccessful direct selling efforts
(2) Successful or unsuccessful marketing efforts (for example, the effects of an advertising campaign)
(3) Unexpected changes in customer needs and buying habits.
(4) Failure to satisfy demand due to production difficulties
(5) Higher demand due to a cut in selling prices, or lower demand due to an increase in sales price
What is a direct material total variance
The difference between:
(a) The standard direct material cost of the actual production and
(b) The actual direct material cost
The difference between:
(a) The standard direct material cost of the actual production and
(b) The actual direct material cost
Calculated
Actual quantity of output (should cost) X
(did cost) Y
Total cost variance X - Y
A total material variance actually conveys very little useful information. It needs to be analysed further. It can be analysed into two sub-variances:
(1) A direct material price variance, i.e. paying more or less than expected for materials and
(2) A direct material usage variance, i.e. using more or less material than expected for the actual output.
How is a direct material price variance calculated and what are the potential causes
Actual quantity of materials – Should cost X
Did cost Y
Direct material price variance X- Y * usage
(1) Using a different supplier, who is either cheaper or more expensive.
(2) Buying in larger-sized orders and getting larger bulk purchase discounts. Buying in smaller-sized orders and losing planned bulk purchase discounts.
(3) An unexpected increase in prices charged by supplier.
(4) Unexpected buying costs, such as high delivery charges.
(5) Efficient or inefficient buying procedures.
(6) A change in material quality, resulting in either higher or lower purchase prices.
How is material usage variances calculated and potential causes
Material usage Variance
(a) The difference between the standard quantity of material specified for the actual production and
(b) The actual quantity used
Multiplied by the standard purchase price
Material usage variance causes
(1) A higher than expected or lower than expected rate of scrap waste.
(2) Using a different quality of material (higher or lower quality) could affect the wastage rate.
(3) Defective materials
(4) Better quality control
(5) More efficient work procedures, resulting in better material usage rates.
(6) Changing the labour mix which impacts on wastage if different types of labour make more/less errors.
(7) Changing the materials mix to obtain a more expensive or less expensive mix than the standard
Explain direct labour total variance
It is the difference between:
(a) The standard direct labour cost of actual production and
(b) The actual cost of direct labour
It can also be split into two sub-variances
(1) A direct labour rate variance, i.e. paying more or less than expected for labour and
(2) A direct labour efficiency variance
How is direct labour rate variance calculated and what are some of the causes
The difference between:
(a) Standard rate per hour and the
(b) Actual rate per hour
Multiplied by the actual hours that where paid for.
Causes
(1) An unexpected increase in basic rates of pay.
(2) Payments of bonuses, where these are recorded as direct labour costs.
(3) Using labour that is more or less experienced (and so more or less expensive) than the ‘standard’.
(4) A change in the composition of the work force, and so a change in average rates of pay.
How is direct labour efficiency variance calculated and what are some of the causes
The difference between:
(a) The standard hours specified for the actual production and
(b) The actual hours worked
Multiplied by the standard hourly rate.
Causes
(1) Taking more or less time than expected to complete work, due to inefficient or efficient workings.
(2) Using labour that is more or less experienced ( and therefore more or less efficient) than the ‘standard’.
(3) A change in the composition or ix of the workforce, and so change in the level of efficiency.
(4) Improved working methods.
(5) Industrial action by the work force: ‘Working to Rule’.
(6) Poor supervision
(7) Improvements in efficiency due to an unexpected ‘learning effect’ amongst the work force.
(8) Unexpected lost time due to production bottlenecks and resource shortages.
Explain what a Variable overhead variance is
Variable overhead variances are similar to direct labour variances
- In standard costing, a variable production overhead total variance can be calculated, and this can be analysed into an expenditure variance and an efficiency variance.
- With service costing, a variable overhead total variance can be calculated, but this might not be analysed further.
Since variable production overheads are normally assumed to vary with labour hours worked, labour hours are used in calculations. This means, for example, that the variable production overhead efficiency rate uses exactly the same hours as the direct labour efficiency variance.
A total variable production overhead variance can also be analysed further. It can be analysed into two sub-variances:
(1) A variable production overhead expenditure variance, i.e. paying more or less than expected per hour for variable overheads and
(2) A variable production overhead efficiency variance, i.e. using more or less variable overheads per unit than expected.
How is a variable production overhead expenditure variance calculated and what are some of the causes.
The difference between:
(a) The standard cost for actual hours worked
(b) Actual cost
What is the fixed overhead expenditure variance
The difference between:
(a) Budgeted fixed overheads and
(b) Actual fixed production overheads
How is a fixed overhead volume variance calculated and what are potential causes.
(a) Budgeted output in units
(b) Actual output units multiplied by the standard fixed overhead cost per unit.
Cannot be used in marginal costing
How is a fixed overhead capacity and efficiency variances
In absorption costing systems, if the fixed overhead is absorbed based in hours, then the fixed overhead volume variance can be subdivided into capacity and efficiency variance.
- The capacity variance measures whether the workforce worked more or fewer hours than budgeted for the period:
Actual hours x FOAR per hour = X
Less budgeted expenditure = (X)
Fixed overhead capacity variance X
- The efficiency variance measures whether the workforce took more or less time than standard in producing their output for the period:
Standard hours for actual production x FOAR per hour = X
Less actual hours x FOAR per hour = (X)
Fixed overhead efficiency variance X
