Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

VARIANCE ANALYSIS
Variance -the difference between actual results and
budgeted or standard
...

Unexpected increase in the prices charged by a
supplier
...
g
...


AQ

AP- Actual Price
SP- Standard Price
SQ- Standard Quantity
RSQ- Revised Standard Quantity
AQ- Actual Quantity

-ve answer (Adverse)
Possible reasons:
Use of law quality material
Using unskilled labour
Worse quality control
Changing material mix
Defective materials

Material Price Variance
(SP x AQ) – (AP x AQ)

Material Mix Variance
(SP x SQ) – (SP x AQ)

+ve answer (Favourable)
Possible reasons:
Discount on large orders reducing the unit price
Purchasing low quality materials
efficient buying procedures
changing a supplier

+ve answer (Favourable)
Possible reasons:
Better material mix

-ve answer (Adverse)
Possible reasons:
inefficient buying procedures

-ve answer (Adverse)
Possible reasons:
Worse material mix

Material Yield Variance
(SP x SQ) – (SP x RSQ)

(£100 000 - £117 000)
= £17 000 A

+ve answer (Favourable)
Possible reasons:
Better material mix
Better supervision skills
Skilled workers resulting in efficient production

Example 2
ABC plc manufactures a product Z by mixing two
materials
...

Required
Calculate:
(a) Direct material price variance
(b) Direct material usage variance
Answer
Material Price Variance
(SP x AQ) – (AP x AQ)
(£10 x 11 700kg) – (£8
...
50 $30
Material Y 18 litres @ $3
...
The actual output was 72 units of
product Z
...
50 x 885
...
50 x 984)
(12/30 x 2214) (984 + 1230)
= $246 A
Y= (SP x SQ) – (SP x AQ)
= ($3 x 1328
...
20 F
Total = $295
...
2 F
Material Yield Variance
X= (SP x SQ) – (SP x RSQ)
= ($2
...
6) – ($2
...
4) – ($3 x 1296)

Material Price Planning Variance
(SP x RSQ) – (RSP x AQ)
= ($5 x 38 750) – ($5
...
2 A

(12 500 x 3
...
50 A

Total = $54 + $97
...
2 A

Material Usage Planning Variance
(SP x SQ) – (SP x RSQ)

Planning Variances (Replace Actual with Revised)
 Uncontrollable
 Unforseeable

= ($5 x 37 500) – ($5 x 38 750)
(12 500 x 3kg)
= $6 250 A

Operational Variances (Replace Standard with Revised)
 Controllable
 Forseeable
Example
Standard: 3kg/unit for $5/kg

Operational Variances (Replace Standard with Revised)

AP

PRICE

Actual:
Output 12 500 units
Usage 38 000kg
Cost $195 500

RSP

USAGE
RSQ

AQ

Revised: 3
...
15/kg
Calculate the material planning and operational variances
Answer
Planning Variances (Replace Actual with Revised)

Material Price Operational Variance
(RSP x AQ) – (AP x AQ)
= ($5
...
14 x 38 750)
($195 500 ÷ 38 000kg)
= $200 F
Material Usage Operational Variance
(RSP x RSQ) – (RSP x AQ)

RSP

PRICE
SP

= ($5
...
15 x 38 000)

USAGE
SQ

= $3 862
...
ov Efficiency Variance
(SR x SH) – (SR x AHW)
+ve answer (Favourable)
Possible reasons:
Motivation of workers
Improved working methods
-ve answer (Adverse)
Possible reasons:

Idle time = when workers are not doing anything, so it is
always adverse because it is wasted money
...

Machine breakdowns
...

Machine set-ups
...

Example 1
ABC Ltd makes a single product with the following
information:
Budget/Standard Output
1,000 units
Hours 6,000
Labour cost $42,000
Actual Output
900 units
Hours paid 5,500
Hours worked 5,200
Labour cost $39,100
Calculate appropriate variances for labour
Answer
Labour Rate Variance
(SR x AHP) – (AR x AHP)
($7 x 5 500) – ($7
...
ov Efficiency Variance
(SR x SH) – (SR x AHW)

following are possible causes of sales variances, followed
by an example
...


SALES VARIANCES
AP

PRICE
BP

VOLUME
Quantity
BQ

MIX
RBQ

AQ

AP- Actual Price
BP- Budgeted Price
BQ- Budgeted Quantity
RBQ- Revised Budgeted Quantity
AQ- Actual Quantity
By now you should be able to come up with the different
Formulae for the variances outlined in the table
...
10 000
B
...
9 000
Actual sales price and production
Sales Price A
...
50
B
...
50
C
...
00
Production A 9 500
B 13 500
C
...

(ii) The Sales Volume Profit Variance
...

(iv)The Sales Quantity Profit Volume Variance
...
50 x 9500) = $4 750F
B = ($15 x 13500) – ($15
...

Sales Mix Variance
(BP x RBQ) – (BP x AQ)
A = ($4 x 9844) – ($4 x 9500) = $1 376 A
(10000/32000 x 31 500)
B = ($5 x 12 797) – ($5 x 13500) = $3 515 F
C = ($5 x 8 859) – ($5 x 8500) = $1 795 A
Total : $344 F
Sales Quantity Profit Variance
(BP x BQ) – (BP x RBQ)
A = ($4 x 10 000) – ($4 x 9844) = $624A
B = ($5 x 13000) – ($5 x 12 797) = $1015 A
C = ($5 x 9 000) – ($5 x 8859) = $705A
Total : $2 344 A

EXPENDITURE
SR
VOLUME
EFFICIENCY
SH

CAPACITY

AHW

BH

AFO

AR- Actual Rate
SR-Standard Rate
SH-Standard Hours
AHW-Actual Hours Worked
BH- Budgeted Hours
AFO- Actual Fixed Overheads
Example
A company has the following information;
Budgeted sales and production was 19 0000 units
Overheads (3hrs at $1/hr)
Total fixed costs were $100 0000 absorbed on basis of
labour hours worked
...
25 x 57 600) – ($5
...
25 x 19 000) – ($5
...
75 x 61 500) – ($1

---