Chapter 5 - Variance analysis

Question 1

What are the 4 types of standard?

Answer 1

• Attainable
• Basic
• Current
• Ideal

Question 2

What is a variance?

Answer 2

Difference between actual and budget

Question 3

What are the 3 main groups of variances?

Answer 3

• Sales
• Variable cost
• Fixed overhead

Question 4

What are sales variances?

Answer 4

Differences between:
- Actual and standard sales prices
- Budgeted and actual sales volume

Question 5

How is a sales price variance calculated?

Answer 5

(actual selling price x actual units sold) - (standard selling price x actual units sold)

Question 6

How is sales volume variance calculated?

Answer 6

Actual - budgeted

Question 7

What are the different ways variance in units can be valued?

Answer 7

• Standard profit per unit
• Standard contribution per unit
• Standard revenue per unit

Question 8

How can sales price cause sales variances?

Answer 8

• Higher than expected discounts (adverse)
• Lower than expected discounts (favourable)
• Low price offers (adverse)
• Industry wide price change (adverse/favourable)

Question 9

How can sales volume cause sales variances?

Answer 9

• Direct selling efforts (adverse/favourable)
• Marketing efforts (adverse/favourable)
• Changes in customer needs (adverse/favourable)
• Failure to satisfy demand (adverse)
• Changes demand (adverse)

Question 10

How is direct material total variance calculated?

Answer 10

Actual direct material cost - standard direct material cost of actual production

Question 11

What 2 sub variances can total material variance be split into?

Answer 11

• Direct material price variance
• Direct material usage variance

Question 12

What is a total direct material variance?

Answer 12

Difference between standard material cost of output and material cost incurred

Question 13

How is direct material price variance calculated?

Answer 13

Actual purchase price - standard purchase price per kg x (actual quantity of material purchased/used)

Question 14

How is price variance calculated when raw material inventory is valued at standard cost?

Answer 14

• Calc based on material purchased
• Inventory carried forward valued at standard cost

Question 15

How is price variance calculated when raw material inventory is valued at actual cost?

Answer 15

• Calc based on material used

Question 16

How is direct material usage variance calculated?

Answer 16

Actual quantity used - (standard quantity of material specified for actual production x standard purchase price)

Question 17

How can material price cause material variances?

Answer 17

• Use of different supplier (adverse/favourable)
• Bulk purchase (favourable)
• Small orders (adverse)
• Supplier price increase (adverse)
• Unexpected buying costs (adverse)
• Buying procedures (adverse/favourable)
• Change in material quality (adverse/favourable)

Question 18

How can material useage cause material variances?

Answer 18

• Scrap rate (a/f)
• material quality (a/f)
• Defective materials (a)
• better quality control (f)
• More efficient work procedures (f)
• Changing labour mix (a/f)
• Changing materials mix (a/f)

Question 19

How is the direct labour total variance calculated?

Answer 19

Actual cost of direct labour - standard direct labour cost of actual production

Question 20

What does the total direct labour variance indicate?

Answer 20

Difference between standard direct labour cost of the output which has been produced and the actual direct labour cost incurred

Question 21

What does the direct labour rate variance indicate?

Answer 21

Actual cost of any change from the standard labour rate of remuneration

Question 22

What is the direct labour efficiency variance defined as?

Answer 22

Standard labour cost of any change from the standard level of labour efficiency

Question 23

How is the direct labour rate variance calculated?

Answer 23

Actual rate per hour - (standard rate per hour x actual hours paid for)

Question 24

How is the direct labour efficiency variance calculated?

Answer 24

Actual hrs worked - (standard hrs specified for actual production x standard hr rate)

Question 25

What should the efficiency variance be split into when idle time occurs?

Answer 25

- Idle time variance - Efficiency variance during active work hours

Question 26

If there is no standard idle time in the budget, what is the idle time variance?

Answer 26

Always adverse

Question 27

When does the direct labour idle time variance occur?

Answer 27

When hour paid exceeds hours worked and there is an extra cost caused by idle time

Question 28

How can changes in labour rate affect labour variances?

Answer 28

- Increase in pay (a) - Payment of bonusses (a) - Variance with standard cost (a/f) - Change in average rates of pay (a/f)

Question 29

How can changes in labour efficiency affect labour variances?

Answer 29

- More/less time then expected to complete work (a/f) - Labour more/less experienced than standard (a/f) - Change in composition of workforce (a/f) - Improved working methods (f)

Question 30

How is a variable production overhead total variance calculated?

Answer 30

Actual cost of variable production overheads - (standard variable overhead cost of actual production)

Question 31

How can a total variable production overhead variance be analysed further?

Answer 31

- Variable production overhead expenditure variance - variable production overhead efficiency variance

Question 32

What does a variable production overhead expenditure variance indicate?

Answer 32

Actual cost of any change from the standard rate per hour

Question 33

What is the variable production overhead efficiency variance?

Answer 33

Standard variable overhead cost of any change from the standard level of efficiency

Question 34

When there is idle time, what is the variable production overhead expenditure variance?

Answer 34

Standard variable overhead cost of the active hours worked - actual variable overhead cost

Question 35

How is the total cost variance calculated?

Answer 35

Actual fixed production overheads incurred - standard fixed production overhead cost absorbed by the actual production

Question 36

How is fixed production overhead expenditure variance calculated?

Answer 36

Actual fixed production overhead - budgeted fixed production overhead

Question 37

How is fixed production overhead volume variance calculated?

Answer 37

Actual output in units - budgeted output in units x FOAR per unit

Question 38

Does the fixed overhead volume variance occur in MC?

Answer 38

No

Question 39

If FOH is absorbed based on hours, how can the FOH volume variance be subdivided?

Answer 39

- Capacity variance - Efficiency variance

Question 40

What are the potential causes of fixed and variable overhead variances?

Answer 40

- FOH expenditure adverse variances caused by spending over budget - FOH volume variance caused by changes in production volume - Variable production overhead expenditure variances caused by changes in machine running costs

Question 41

When should variances be reported to management?

Answer 41

End of each control period

Question 42

What concept should be followed when reporting variances?

Answer 42

Responsibility accounting, variances reported to individual managers

Question 43

What is the formula for standard contribution?

Answer 43

Contribution to sales ratio x unit price

Question 44

How is the sales volume contribution calculated?

Answer 44

Sales volume variance in units x standard contribution per unit

Question 45

What is the formula for the fixed overhead volume variance?

Answer 45

(budgeted - actual production volume) x standard absorption rate per unit

Question 46

What can explain an adverse material usage variance?

Answer 46

- Lower quality materials purchased - Less experienced employees

Question 47

What variances would be impacted by a switch from AC to MC?

Answer 47

- Sales quantity profit variance - Fixed overhead capacity variance