variance analysis Flashcards
what is sales volume variance
The sales volume variance calculates the effect on profit of the actual sales volume being
different from that budgeted. The effect on profit will differ depending upon whether a marginal
or absorption costing system is being used
how are units valued in absorption costing
Under absorption costing any difference in units is valued at the standard profit per unit
how are units valued on marginal costing
Under marginal costing any difference in units is valued at the standard contribution per unit.
how to calc sales volume variance
(Actual quantity sold – Budget quantity sold) × Standard margin
what is the standard margin
The Standard margin is the standard contribution per unit (marginal costing), or the standard
profit per unit (absorption costing)
how to calc sales price variance
(Actual price – Budget price) × Actual quantity sold
what is the use of material price variance
A materials price variance analyses whether the company paid more or less than expected
for the materials purchased
what is the use of material usage variance
The purpose of the materials usage variance is to quantify the effect on profit of using a
different quantity of raw material from that expected for the actual production achieved.
Material price variance formula
(standard price - actual price) × Actual quantity purchased
material usage variance formula
(standard quantity used for actual production - actual quantity used)
× standard price
what is the use of labour rate variance
A labour rate variance analyses whether the company paid more or less than expected for
labour
what is the use of labour efficiency variance
A labour efficiency variance analyses whether the company used more or less labour hours
than expected
how to calc labour rate variance
Labour rate variance = (standard rate per hour - actual rate per hour) × Actual hours paid
how to calc labour efficiency variance
Labour Efficiency variance = (standard hours used for actual production - actual hours worked) × standard rate of labour per hour
what are Planning and operational variances used to find out ?
the difference between standard and actual may arise partly due to an unrealistic budget and not solely due to operational factors. The budget may need to be revised to enable actual performance to be compared with a standard that reflects these changed
conditions
this helps us understand whether the budget was set wrong or managers were inefficient
Material Price Planning Variance
(Original Standard price –Revised Standard Price) x Actual Quantity Purchased
Material Price Operational Variance
(Revised Standard price – Actual Price) x Actual Quantity Purchased
Material Usage Planning Variance
(Original Std. Quantity for Actual Production – Revised Std. Quantity for Actual Production) x Standard rate
Material Usage Operational Variance
(Revised standard Quantity for Actual Production –Actual quantity used) x Standard rate
Some possible causes of these variances include:
Some possible causes of these variances in the planning phase include:
Material price – error in original standard, market price change due to worldwide shortage or
surplus of the material, closure of a material supplier, unforeseen inflation
Material usage – error in original standard, changes in technology leading to more / less
material being required, changes in legal / regulatory requirements for the material, flood/fire
destroying material
Some possible causes of these variances in the planning phase include:
Material price – buy lower / higher quality material, deliberate change of supplier, bulk buying
discounts
Material usage – training or supervision of staff being better or worse than expected, quality of
material being different to what was expected
Labour Rate Planning Variance
(Original Standard rate –Revised Standard rate) x Actual hours paid
Labour Rate Operational Variance
(Revised Standard rate – Actual rate) x Actual hours paid
Labour Efficiency Planning Variance
(Original Std. hours for Actual Production – Revised Std. hours for Actual Production) x Standard rate
Labor Efficiency Operational Variance
(Revised standard hours for Actual Production –Actual hours worked) x Standard rate
Some possible causes of these variances in the planning phase include:
Labour rate – error in original standard, labour shortage or surplus in the market in general
leading to market wage rates changing, change in product specification due to change in law
causing a different grade of labour to be needed
Labour efficiency – error in original standard, change in work practices due to regulatory
requirements such as increased rest periods for staff, increased quality requirements set
externally.
If there is a learning effect with labour, then there may be an impact on the planning and
operational variances for labour efficiency
Some possible causes of these variances in the planning phase include:
Labour rate – overtime working required, employing different quality staff, staff bonuses paid for
increased productivity
Labour efficiency – different quality staff used, poor work scheduling leading to increased idle
time, training or supervision of staff being better or worse than expected.
Sales Price Planning Variance
(Original Standard Selling Price–Revised Standard Selling Price) x Actual unit sold
Sales Price Operational Variance
(Actual Selling Price – Revised Standard Selling Price) x Actual units sold
Sales Volume Planning Variance (Market Size Variance)
(Revised Budgeted Sales units – Budgeted sales units) x Std. profit or contribution per unit
Sales Volume Operational Variance (Market Share Variance)
(Actual Sales units – Revised Budgeted sales units) x Std. profit or contribution per unit
some possible reasons that cause the variances are
These variances may be caused by an upturn or downturn in general economic conditions,
changes in technology meaning a product is much more relevant now.
Operational sales variances look into the differences between actual results and the revised
budget. The operational sales volume variance is also referred to as the market share variance.
These variances could be due to new competitors, competitors leaving the industry, the
performance of the sales team, the quality of the product etc
what reasons should the original budget only be revised for
- Poor planning – if the mistake is a planning error e.g. someone putting down the wrong
figures - Uncontrollable factors – if the change is due to something which is outside of the control of
the organization e.g. supplier liquidation, government legislation or market downturn
what reasons should the original budget only be revised for
