Variance Analysis

1
Variance Analysis

• Calculate, identify cause of, and interpret
• Explain effect of learning curve on labour
• Produce operating statements (marg / abs)
• Reconcile actual and budgeted profit
• Calculate effect of idle time and waste
• Explain possible causes of idle time waste
• Suggest methods of control
• Calculate ABC-based variances
• Explain methods for deciding whether to
  investigate
• Material mix and yield
• calculate, explain, identify cause
• explain wider issues
• identify and explain interrelationship between
  price, mix, yield
• suggest and justify alternatives methods of
  control

2
Variances included in SG

• Sales price
• volume
• Materials total
• price
• usage
• mix
• yield
• Labour total
• rate
• efficiency
• Variable overhead total
• expenditure
• efficiency
• Fixed overhead total
• expenditure
• volume, capacity, efficiency
• What do each of these represent?
• See table at start of chapter for explanation

3
Planning and operational

• Not explicitly on study guide (which refers to
  simple!!!)
• Planning is effect of changes in assumptions
• Operational is effect of changes in operation
• Effectively, a flexed budget removes planning
  variances
• Thus, we are considering operational

4
How are variances calculated?

• What should it have cost?
• What did it cost?

5
What do variances mean?

• Each variance is specific
• Ensure that you know what each one is measuring
• Pay particular attention to
• overhead variances
• materials mix and yield variances
• sales mix and quantity variances
• See table in text may (or may not be useful to
  memorise)

6
What causes variances?

• Consider
• the elements of the calculation
• what the variance seeks to measure
• the information in the question
• Try to link variances

7
What action should be taken?

• Action should be in response to causes
• Be realistic
• Try to be creative
• But not unduly so ...
• the company should improve cash flow by
  organising sponsored walks

8
Question The Thing

• Ensure that the solution in your text is covered
• Work through question
• Material A
• Standard cost is 200 pu
• Flexed budget for actual production is ...
• 200 x 800 units 160,000
• Actual expenditure was 159,900
• Thus total material variance is 100 Fav
• Price (3,900 Adv) Usage (4,000 Fav)

9
To calculate variances .

• What should have happened ..
• What did happen .
• efficiency and usage are the same
• price and rate are the same
• Thus, compare the volume for item in name what
  should it have been and
• what was it
• And multiply result by
• USE or AP
• (USAGE / Use Standard for Efficiency or Actual
  for Price)
• volume in other calculation
• For example ..

10
Materials Usage

• For actual output
• what should have been used 100 kg
• what was used 95 kg
• variance 5 kg Fav
• x (USE) Standard price per kg

11
Materials Price

• What should the price have been 10
• What was the price 11
• Variance is ADV 1
• Multiply by AP (actual)

12
Points to note

• Try it and adapt it for your own use
• Some Qs give standard unit cost, but actual total
  cost
• Thus, you can either multiply up or divide down
• Overhead variances can be used, but thought is
  also needed

13
Overhead variances - Variable

• Expenditure
• For actual hours
• the cost should have been
• the cost was
• Efficiency
• Actual output should have taken
• Actual output did take
• variance in hours
• x (USE) Standard cost

14
Overhead Variances - Fixed

• Expenditure diff between budgeted expenditure
  and actual expenditure
• Volume Budgeted volume vs Actual volume
• x Std cost per unit
• Volume is analysed into
• Efficiency Actual output should take
• Actual output did take
• x Standard cost per hour
• Capacity Budgeted capacity was
• Actual capacity used was
• x Standard cost per hour
• NB all use standard cost, as we are measuring
  efficiency (in use of facilities)

15
Summary of calculations

• Material
• Usage Actual output should use
• Actual output did use
• x Standard cost
• Price Cost should have been (standard)
• Cost actually was
• x Actual usage

16
Summary of calculations

• Labour
• Efficiency Actual output should have taken
• Actual output did take
• x Standard rate
• Rate Rate should have been (standard)
• Rate actually was
• x Actual hours used