Variance Analysis

Question 1

What is budgetary control?

Answer 1

Actual results are compared to planned outcomes- significant differences are called variances

Question 2

What is control?

Answer 2

• Monitoring and looking back to determine what
  actually happened
• Taking corrective action over variances

Question 3

What are standard costs?

Answer 3

The expected costs under normal conditions

Question 4

What is the purpose of standard costs?

Answer 4

Used as a benchmark for standards when completing variance analysis

Question 5

What do standard costs tends to be expressed in terms of?

Answer 5

Expressed on a per unit basis

Question 6

What is a cost card?

Answer 6

List of standard costs of what a business has set

Question 7

What are the main two types of standards when concerning standard costs?

Answer 7

Quantity standards and price standards

Question 8

What are quantity standards?

Answer 8

How much of an input
should be used to make
a product or provide a
service

Question 9

What are price standards?

Answer 9

How much should be
paid for each unit of input

Question 10

What does the expression of standard costs depend on?

Answer 10

the type of company. E.g manufacturing per unit of airline per travelled km

Question 11

Compare standard costs and budgets

Answer 11

Standard costs = target costs to make one unit of product
Budget = target costs at the total planned level of production

Question 12

What do standard costs facilitate?

Answer 12

management by exception – focuses attention on significant
deviations from standards.

Act as a benchmark

Question 13

What are tolerance limits?

Answer 13

Managers express a benchmark using standard costs, if the actual costs fall out of this limit not good

Question 14

What is variance?

Answer 14

Difference between what happens and what you express in the budget

Question 15

When is variance analysis possible?

Answer 15

when there are standards

Question 16

What do detailed price and quantities allow for?

Answer 16

the variance to be broken down further to uncover
specific factors causing the variance

Question 17

What is adverse variance?

Answer 17

Unfavourable
variance- actual worse than budgeted

Question 18

What is favourable variance?

Answer 18

Actual sales/costs better than budgeted

Question 19

What must you do in the exam in variance analysis labelling?

Answer 19

Always label F or A/U depending on how favourable the variance is

Question 20

What is the problem with variance analysis by taking the budget away from the actual? How can you counteract this?

Answer 20

No adjustments have been made, need to consider amount of production

Use a flexed budget

Question 21

What is a flexed budget?

Answer 21

Adjust original budget to the actual level of output so that what should happen at that production level

Question 22

What costs need to be flexed and which ones don’t need to?

Answer 22

Variable costs and sales are flexed. Fixed costs are not.

Question 23

How are budgets flexed?

Answer 23

Just off a relative basis. If you only produce 900 but budgeted 1000, divide by 1000 and times by 900

Question 24

What are usually the key variances that a company would calculate?

Answer 24

Raw materials and labour

Question 25

What is the total direct material variance?

Answer 25

Actual Direct Material Cost – Flexed Budget Direct Material Cost

Question 26

How can we go into more detail about what the answering how to solve the total direct material variance?

Answer 26

(AP x AQ) – (SP x SQ) AP = Actual material price (per unit of material) AQ = Actual quantity of material used to make actual output SP = Standard material price (per unit of material) SQ = Standard quantity of material used, flexed to actual output (i.e., budgeted material usage at actual output level)

Question 27

How can total direct material variance = (AP x AQ) – (SP x SQ) be broken down?

Answer 27

= (AP x AQ) – (AQ x SP) + (AQ x SP) – (SP x SQ) = (AP – SP) x AQ + (AQ – SQ) x SP Where (AP – SP) x AQ is direct material price variance and (AQ – SQ) x SP is the direct material usage variance

Question 28

What can adverse direct material price mean?

Answer 28

* Poor buying decisions; poor negotiation skills of buying manager * Change in market conditions, e.g., unexpected material shortage

Question 29

What can adverse direct material usage show?

Answer 29

* Faulty machinery * Poor material quality leading to wastage * Poor worker performance * Misconduct e.g., theft

Question 30

How do we calculate total direct labour variance?

Answer 30

Actual Direct Labour Cost – Flexed Budget Direct Labour Cost

Question 31

How do we calculate total direct labour variance?

Answer 31

(AR x AH) – (SR x SH) AR = Actual labour wage rate, £ per hour AH = Actual labour hours used to make actual output SR = Standard labour wage rate, £ per hour SH = Standard labour hours flexed to actual output (i.e., budgeted labour hours for the actual output level)

Question 32

What can total direct labour variance = = (AR x AH) – (SR x SH) be broken down into?

Answer 32

= (AR x AH) – (AH x SR) + (AH x SR) – (SR x SH) = (AR – SR) x AH + (AH – SH) x SR where (AR – SR) x AH is direct labour rate variance and (AH – SH) x SR is direct labour efficiency variance

Question 33

What can explain adverse labour rate?

Answer 33

* Change in labour market conditions * Use of higher skilled labour

Question 34

What can explain adverse labour efficiency?

Answer 34

Poor worker performance * Poor supervision * Faulty machinery/poor maintenance * Inadequate training * Poor quality materials slowing down production

Question 35

What does the quality of variance analysis depend largely on?

Answer 35

on the quality of standards used

Question 36

How do you calculate the fixed overhead spending variance?

Answer 36

Budgeted fixed OH – actual fixed OH

Question 37

What is included in the fixed OH and what could cause it to increase?

Answer 37

* Increase in supervisor salaries? * Increase in indirect machine costs due to poorer quality material used?

Question 38

Exercising control over fixed overheads is more challenging compared to direct labour and direct material, why is this?

Answer 38

responsibility for overhead costs is more difficult to determine

Question 39

What is the fixed overhead variance assumption?

Answer 39

The implicit assumption here is that the business uses a marginalcosting system, in which all fixed costs including fixed production overheads are treated as period costs and not assigned to specific products.

Question 40

If an absorption costing system was used instead for Fixed overhead variance, what happens?

Answer 40

all production costs including fixed production overheads would be assigned to products. It would then be possible to calculate both FOH spending variance and volume variance

Question 41

What are the two sales variances needed for the exam?

Answer 41

Sales margin volume variance Sales price variance

Question 42

How do you calculate sales margin volume variance? (Not needed for exam)

Answer 42

=(Actual sales volume - static budget sales volume) x standard contribution margin per unit where standard contribution margin per unit = standard sales price per unit - standard variable costs per unit

Question 43

How do you calculate sales price variance?

Answer 43

=(Actual price per unit - standard sales price per unit) x actual sales volume

Question 44

What are some of the considerations of setting standard costs?

Answer 44

Who sets the standards? What information needs to be gathered and how is it gathered? What kind of standards should be used?

Question 45

What are set seperately?

Answer 45

Price and quantity standards are set separately

Question 46

Buying and usage of inputs are two different spheres of activity and responsibility, why?

Answer 46

* Different timings * Different personnel responsible

Question 47

Setting standard costs: What kind of information is needed to set standards? How might it be gathered?

Answer 47

Historical data analysis Engineering studies External benchmarking

Question 48

What are engineering studies?

Answer 48

Detailed technical analysis and interviews to estimate input usage and prices

Question 49

What is external benchmarking?

Answer 49

Input consumed and input prices of peer firms with similar production processes – but such data usually limited

Question 50

Setting standard costs: What are 3 types of standards?

Answer 50

Basic standards Currently attainable standards Ideal standards

Question 51

What are basic standards?

Answer 51

Standards left unchanged over long periods

Question 52

What are currently attainable standards?

Answer 52

- Difficult but not impossible to achieve * Allowances made for normal spoilage, machine breakdowns etc * Achievable under efficient operating conditions

Question 53

What are ideal standards?

Answer 53

Achievable only under the best of circumstances

Question 54

What are limitations of standard costs and variance analysis ?

Answer 54

Not applicable in all production settings, more suited to highly standardized, repetitive production. - Standards become obsolete quickly in certain environments – volatile prices, and/or fast changing production processes Undesirable consequences of using standard costs as a control tool, e.g., neglecting quality in quest to attain favourable price variances - Unrealistic standards may demotivate employees Use of standards may inhibit “out of the box” thinking –promote mentality of conforming to existing standards rather than outperforming or setting new standards