Further Variance Analysis

Question 1

When can should the sales volume variance be split into two?

Answer 1

We will split it into mix and quantity variances when:
1. the business sells more than one product
2. the proportion of units sold in mix is changeable and controllable
3. sales volume variance is limited value because of variability of mix meaning combined quantity variance is more useful for control

Question 2

Give a definition of the Sales mix variance?

Answer 2

occurs when proportions of various products sold are different than those in budget.

Question 3

Give a definition of Sales quantity variance?

Answer 3

shows the difference in contribution or profit due to a change in sales volume compared to the budgeted sales volume.

Question 4

What are the advantages of using sales mix and quantity variances?

Answer 4

1. Identify trends in demand for individual products by looking at sales mix over time. used to determine future marketing.
2. Improved responsibility accounting different manages responsible for different parts of sales process
3. Allows evaluation of marketing campaigns based on impact on sales and mix variance as well as overall sales.
4. Could be used to understand changes in market size

Question 5

What are the 2 Disadvantages of using Sales Mix and Quantity variances?

Answer 5

1.) Sales mix variance is only meaningful if there is a controllable relationship between demand for products.
2.) As with all variances, managers should only spend time evaluating controllable variances and should also think about the “big picture” and relationship between sales variances and other variances.

Question 6

What is a Planning Variance?

Answer 6

Compares the original standard with a revised standard that should or would have been used if planners had known in advance what was going to happen.

Question 7

What is an Operational variance?

Answer 7

Compares actual result with revised standard

Question 8

What are the advantages of planning and operational variances?

Answer 8

1. Highlights variances that are controllable and those that are uncontrollable.
2. Manager’s motivation is likely to increase if they know they will not be held responsible for poor planning and standard setting
3. Planning and standard-setting process should be improved
4. Operational variances will provide a ‘fairer’ reflection of actual performance

Question 9

What are the 3 Disadvantages of Planning and Operational Variances?

Answer 9

1.) Difficult to decide in hindsight what the realistic standard should have been
2.) Regular use of a revised budget may undermine original budget as a target as a motivator of future periods
3.) Employees may use this system to their advantage by excusing operating problems as poor planning if this method is used.