Variances Flashcards
(9 cards)
Standard cost card (Budget)
ensure same measurements, units, batches are used
Materials X
Labour X
Total variable cost X
Contribution X
selling price X
calculate for both standard and actual
sales variance - sales price variance, sales volume variance
This is split into Price and Volume variance, Fall in price should lead to increase in volume and vice versa
Sales price variance = AP - SP * batches actually sold
Sales volume variance = ASV-BSV * standard margin (contribution)
- ASV - Actual sales volume
Materials variance - Materials price variance, material usage variance
This is also split into Price and usage variance
Materials price variance = AP - SP * actual materials purchase
material usage variance = AMU - SMA* standard purchase price
*SMA - standard material allowed- standard quantity given actual level of production (
Fall in price should lead to increase in volume and vice versa
Labour variance - labour rate variance, labour efficiency variance
This is split into labour rate and labour efficiency
Labour rate variance = AR - SR * actual hours paid for
Labour efficiency rate = AHA - SHA * standard rate
*AHA - Actual hours worked
* SHA is standard cost * actual hours(flexed)
variances - causes, performance improvement strategies in response to variance
Consider direction of variances when discussing causes, if variance is adverse it is due to spending more
add value after spotting main causes from question
Examiner can ask what can be done about a poor performance or how to repeat a good performance
1. Understand the causes of variances
2. Suggest improvement options based on cause of variance
Fixed cost variances - Expenditure variances
This is the difference between actual and budget
check for causes in question, performance improvement measures
Planning and operational variances
If the original budget includes factors outside the control of the business or person being assessed, then revising that budget prior to any performance evaluation is sensible.
Original budget needs to be flexed
Challenge reasons for revision for price and quantity
Materials price variance = AP - RP * actual materials purchase
material usage variance = AMU - RMA* standard purchase price
*RMA - Revised material allowed
Variance System errors
1.Profiling errors of budget - Budget divided equally over 12 months not taking into account seasonality, This leads to some months with adverse and some months with favorable variances. Budget may be wrong not actual performance
Control issues, standard may also be out of date in fast moving environment.
2.Planning errors - Any errors out of the control of the manager need to be excluded from analysis.
Examples include fixed exchange rate is outside the control of buyers, they should be flexed to take into account actual exchange rates.
Planning variance outside our control should be excluded, only operational variance should be used.
3.Lack of flexing original budget -
4.All variances being investigated - This leads to time being wasted on tiny differences and insufficient priority given to larger errors.
- Only Adverse variances investigated - favourable variances can have a poor cause e.g. buying low quality materials can often be cheaper.
Equally if favourable variance caused by good practice, it should be investigated to see if there is anything to learn.
This could also lead to managers being budget constrained meaning good ideas are simply ignored because they lead to overspend in an area. - Insufficient analysis - Always split into price and usage
- Failure to identify root cause - variance report without commentary or context. root cause is also needed to so a solution may be found
Responsibility allocation - variances should be allocated to individuals but peoples actions have knock on effect on the supply chain e.g. cheap buying and poor production
Presumption of investigation -
1. There should be a limit for investigation small variances should be
ignored
2. Limit should be both absolute and relative
3. ignoring all favourable variances is not sensible, the business
needs to learn from good performance, it also might be due to
cost savings which may bad in the long run
Exam Style
- Question is likely on errors in typical variance system
2 poor profiling causes in accurate variances and unnecessary investigations. - Planning variances are caused by budget errors or factors outside of control and these should not make up part of performance assessment
4.Operational variances should be part of performance assessment as they are within our control. - Always flex the budget prior to variance
- Do not flex fixed cost budgets
- investigate all serious variances favourable or adverse
- Total variance can conceal variance, complete analysis
- Identify root cause of variance
- solution to variance depends on root cause
