Advanced Variance Analysis

Question 1

What are planning variances?

Answer 1

Planning variances relate to the portion of a variance that is outside management’s control.

Question 2

What is an example of a planning variance?

Answer 2

A large adverse direct material price variance due to an increase in the price of oil.

Question 3

What are operational variances?

Answer 3

Operational variances are variances that are within the control of management.

Question 4

What factors could lead to operational variances?

Answer 4

• Careless purchasing
• Using higher-quality materials

Question 5

Why are planning variances seldom investigated?

Answer 5

They are often outside the organisation’s influence and are generally unavoidable.

Question 6

What is the calculation for selling price variance?

Answer 6

Actual selling price - Standard selling price x Sales volume (units)

Question 7

Fill in the blank: A sales volume variance arises from a difference in a company’s income as a consequence of a different _______ of a product being sold.

Answer 7

[quantity]

Question 8

What is the formula for calculating a sales volume profit variance?

Answer 8

(Budgeted unit sales - Actual unit sales) x Standard profit per unit

Question 9

What are the two types of variances calculated in the sales volume variance?

Answer 9

• Sales volume contribution variance
• Sales volume revenue variance

Question 10

True or False: Planning variances are considered controllable from an operational standpoint.

Answer 10

False

Question 11

What does a favourable selling price operational variance suggest?

Answer 11

Management was unable to take advantage of the market’s highest possible prices.

Question 12

What is indicated by an adverse material price operational variance?

Answer 12

Management paid more for materials than expected due to factors within their control.

Question 13

What is the importance of investigating planning variances?

Answer 13

Certain factors could reasonably be expected to change, indicating potential faults in the standard setting process.

Question 14

What is the significance of using revised standards in variance analysis?

Answer 14

It allows for a more accurate assessment of management’s performance against achievable standards.

Question 15

What is a sales volume variance?

Answer 15

A difference between the budgeted quantity of a product sold and the actual quantity sold.

Question 16

How is the sales volume profit variance calculated?

Answer 16

(Budgeted unit sales – actual unit sales) x standard profit per unit.

Question 17

What is the sales volume contribution variance?

Answer 17

Calculated by replacing ‘profit’ in the sales volume profit variance equation with ‘contribution’.

Question 18

What is the sales volume revenue variance?

Answer 18

Calculated by replacing ‘profit’ in the sales volume profit variance equation with ‘revenue’.

Question 19

What are mix and quantity variances in sales volume variance?

Answer 19

Breakdowns of sales volume variance for companies selling multiple substitutable products.

Question 20

What is the scenario used to illustrate sales volume variances?

Answer 20

A soft drink factory producing blended apple and orange juice sold in cans and bottles.

Question 21

What does a sales volume profit variance of £15 adverse indicate?

Answer 21

The overall profit decreased due to lower unit sales.

Question 22

How is the sales quantity profit variance calculated?

Answer 22

Total actual sales (units) subtracted from total budgeted sales (units) multiplied by average standard profit per unit.

Question 23

What does the sales mix profit variance measure?

Answer 23

The difference between the actual mix and standard mix multiplied by the standard profit.

Question 24

What is a material variance?

Answer 24

Any difference between the standard cost and the actual cost incurred.

Question 25

When is a variance considered favourable?

Answer 25

When the actual cost is lower than the standard cost.

Question 26

What is the direct material cost variance in the example?

Answer 26

£320 adverse.

Question 27

How is the direct material price variance calculated?

Answer 27

Standard cost of actual materials used compared to actual cost of actual materials used.

Question 28

What are some common causes of variances?

Answer 28

* Material price changes * Material usage efficiency * Labour rate changes * Labour efficiency issues * Fixed overhead expenditure variations.

Question 29

What is the importance of identifying the causes of variances?

Answer 29

To understand the underlying issues and determine if they can be resolved.

Question 30

What does interdependence of variances mean?

Answer 30

Variances can influence each other’s outcomes and should not be treated as independent.

Question 31

In Scenario 1, why might hiring a specialist car tester be beneficial despite increasing the labour rate variance?

Answer 31

The specialist may complete testing faster, reducing overall labour hours and improving labour efficiency variance.

Question 32

What was the outcome of Manager Bob's actions in Scenario 2?

Answer 32

A favourable material price variance but a large decrease in profit due to poor material quality.

Question 33

What factors influence whether to investigate a variance?

Answer 33

* Size of the variance * Controllability of the variance * Cost of an investigation * Interrelationship of the variance.

Question 34

What is the potential problem with investigating every variance?

Answer 34

It may be too time-consuming and expensive.

Question 35

What should management do if a product's price increase leads to an adverse material price variance?

Answer 35

Consider the controllability of the variance and whether an investigation is necessary.

Question 36

What happens to product costs when oil prices increase significantly?

Answer 36

There is little that can be done about it.

Question 37

When is an investigation into a variance necessary?

Answer 37

Only if the variance has had an overall negative effect on profit.

Question 38

Why might an investigation into a £1,000 variance be counterproductive?

Answer 38

The investigation itself will cost £10,000.

Question 39

What does an adverse material price variance indicate?

Answer 39

It may not require investigation if it translates into a favourable material usage variance.

Question 40

What is an example of a situation where an adverse material price variance may be justified?

Answer 40

More expensive material leading to more efficient material usage.

Question 41

Fill in the blank: An investigation into a variance is unnecessary if management already knows the _______.

Answer 41

cause of the inevitable adverse material price variance.