Chapter 6 - Further Variance Analysis

Sales Mix & Quantity Variances

• They split the sales volume variance into two parts.

• Suitable for when an organisation sells more than one product that are RELATED and SUBSTITUTIONAL.

Sales Mix Variance

• Has the profit changed because the relative proportion of each product sold changed?

Sales Quantity Variance

• Has the profit changed because the organisation sold more/less products overall?

Sales Mix Variance - Individual Units 5 Step Method

1. Actual Sales/Quantity Actual Mix

2. Actual Quantity in Budgeted Mix

3. Difference

4. Standard Margin / Unit (Marginal - Standard Contribution, Absorption - Standard Profit)

5. Variance

Budgeted/Standard Mix

• Is the key to the sales mix variance calculation.

• These proportions are calculated form the originals planned sales and then are then applied to the actual total sales to find the ‘actual quantity in budgeted mix’.

Sales Mix Variance - Weighted Average Contribution 5 Step Method

1. Actual Sales Quantity, Actual Mix

2. Actual Quantity in Budgeted Mix

3. Difference

4. SM - Weighted Average Cont./Unit

5. Variance

Superiority of Weighted Average Method

• It shows the impact of changes in each product/service when measured against the average margin.

Sales Quantity Variance

• Difference between actual sales volume and budgeted sales valued at the weighted average profit per unit.

Benefits of Splitting Sales Volume Variance

1. Identify trends in sales of individual elements of it’s total product sales.

2. Indicate changes in the size of the market and/or the change int he market share.

3. Identifying and exploiting their causes.

4. Gauges the success or failure of new marketing campaigns.

5. Responsibility accounting is improved as different managers might be responsible for different elements of sales.

Problems of Splitting Sales Volume Variance

• Responsibility accounting is only improved if the mix is controllable.

• The variances may be inter-dependent.

• The sales mix variance is only relevant if the products have some sort of relationship between them.

• It can sometimes be difficult to apply these techniques in organisation which have very broad product ranges.

Traditional Variance

• Compares actual results with the original (flexed) budget.

Operational Variance

• Compares actual results with the revised (flexed) budget.

• Calculated using the same methods as traditional variances except that we now compare the actual results with the revised standard.

• Deemed controllable. Management held responsible for operational variances.

Causes of Planning Variances

• A change in working methods/procedures technological advances reducing the standard time per unit.

• Unexpected change in pay such as government increases to national minimum wage.

• Unexpected increases in material prices worldwide shortages pushing up market prices.

Benefits of Determining Planning Variances

1. Useful in volatile environments.

2. More up to date.

3. Better for motivation.

4. Identifies poor planning.

Problems of Determining Planning Variances

1. Subjective.

2. Time Consuming.

3. Can be manipulated.

Working Backwards - Technique

1. Use the variance format/formula.

2. Put the figures you know from the question.

3. Rearrange the formula to determine the missing value.

Working Backwards - For Costs

• Actual = Standard - Favourable Variance

• Standard = Actual + Favourable Variance

Working Backwards - For Sales

• Actual = Standard + Favourable Variance

• Standard = Actual - Favourable Variance