Variances

Question 1

Standard cost card (Budget)

Answer 1

ensure same measurements, units, batches are used

Materials X
Labour X
Total variable cost X
Contribution X
selling price X

Question 2

sales variance - sales price variance, sales volume variance

Answer 2

This is split into Price and Volume variance

Sales price variance = AP - SP * batches actually sold

Sales volume variance = ASV-BSV * standard margin (contribution)

Fall in price should lead to increase in volume and vice versa

• ASV - Actual sales volume

Question 3

Materials variance - Materials price variance, material usage variance

Answer 3

This is also split into Price and usage variance

Materials price variance = AP - SP * actual materials purchase

material usage variance = AMU - SMA* standard purchase price

*SMA - standard material allowed

Fall in price should lead to increase in volume and vice versa

Question 4

Labour variance - labour rate variance, labour efficiency variance

Answer 4

This is split into labour rate and labour efficiency

Labour rate variance = AR - SR * actual hours paid for

Labour efficiency rate = AHA - SHA * standard rate

*AHA - Actual hours worked
* SHA is standard cost * actual hours(flexed)

Question 5

variances - causes, performance improvement strategies in response to variance

Answer 5

Consider direction of variances when discussing causes, if variance is adverse it is due to spending more

add value after spotting main causes from question

Examiner can ask what can be done about a poor performance or how to repeat a good performance

Question 6

Fixed cost variances - Expenditure variances

Answer 6

This is the difference between actual and budget

check for causes in question, performance improvement measures

Question 7

Planning and operational variances

Answer 7

If the original budget includes factors outside the control of the business or person being assessed, then revising that budget prior to any performance evaluation is sensible.

Original budget needs to be flexed

Challenge reasons for revision for price and quantity

Materials price variance = AP - RP * actual materials purchase

material usage variance = AMU - RMA* standard purchase price

*RMA - Revised material allowed

Question 8

Variances potential errors

Answer 8

Profiling errors - issues include seasonality, control issues, standard may also be out of date in fast moving environment.

Planning errors - fixed exchange rate is outside the control of buyers, they should be flexed to take into account actual exchange rates

Lack of flexing original budget -

Responsibility allocation - variances should be allocated to individuals but peoples actions have knock on effect on the supply chain e.g. cheap buying and poor production

Presumption of investigation -
1. There should be a limit for investigation small variances should be
ignored
2. Limit should be both absolute and relative
3. ignoring all favourable variances is not sensible, the business
needs to learn from good performance, it also might be due to
cost savings which may bad in the long run