Lecture 10: Variance Analysis

What are the components of planned, flexible and actual budget and what is total variance

Planned

• planned price

• planned cost per unit

• planned volume

Flexible

• planned price

• planned cost per unit

• actual volume

Actual

• actual price

• actual cost per unit

• actual volume

Total variance consists of the sales volume variance component and the flexible variance which consists of the price variance and efficiency variance

What is the purpose of flexible budgets and how else can flexed variance be broken down

• they are a variance analysis tool

• help detangle the reasons for variance

  • they help separate volume effects from other effects

flexed variance can also be broken down into flexed selling price, flexed variable cost variance and fixed cost variance

• flexed variable cost per unit of output can differ because of a change in the usage on inputs required to make one output or cuz the cost of inputs changes

variable cost , input price variance and efficiency variance

variable costs consists of = cost per unit of input x input quantity used per unit of output x number of output

Input price variance= (actual price per input-predicted price per input) x actual input quantity used per unit of output x actual volume of output

efficiency variance= actual price per input

Examples of interlinkages between material variances

What do you need to remember about material variances

For price variance: this is based on quantity of material purchased not used

for efficiency variance: this is based on quantity used not purchased

Interpretation of materials variance

What does AP, AQ,SP,SQ mean

AP= actual price=actual price of one unit of input

AQ= actual total quantity of input used to make actual output

SP= standard/predicted price of one unit of input

SQ= standard amount on input used per unit of output x actual output

examples of interlinkage between labour variance

Variable overhead actual and static cost variance components and what variable MOH consists of

• variable overhead volume (diffierence in volume of variable input used)

• Flexible VOH variance

  • VOH efficiency variance occurs when inputs per unit of output changes from what was planned

  • VOH spending variance when cost per input unit differs from what was planned

• Variable MOH= allocation rate(price) x quantity of allocation based used per unit of output(efficiency) x output volume(volume)

Interpretation of VMOH variances

• only works if the allocation base is the most appropriate one.

fixed overhead cost variance

Fixed overheads are a lump sum —they don't change with volume (within the relevant

range).

• When the volume of activity rises and falls (within the relevant range), fixed overheads

do not vary.

• So, for control, only the spending variance matters.

BUT …

• Fixed overheads are applied using a pre-set standard rate. (eg. $10 of fixed MOHper shirt)

• The actual rate is only known after the period ends.

• If applied differs from budgeted fixed overhead, this creates a fixed overhead production

volume variance.

• Fixed overhead may be over-appliedor under-applied once aggregated

How to actually do fixed MOH questions like this and whats the interpretation

FOHSV=fixed MOH spending variance doesn’t depend on volume produced so will just be actual FMOH- Budgetted FMOH=100,000-90,000=10,000

FOHPVV=fixed moh volume variance = 90,000-(90,000/30,000) x 28000=6000 unfavourable bc. production capacity wasn’t utilised.

How to use variances

• variances can be used to prompt follow up investigations.

• large variance=/= poor performance

• causes of variances are often interrelated eg. a favourable price variance may relfect lower quality inputs which leads to an unfavourable flexed cost variance

• use causal links, never just use variances in isolation

Variance analysis cycle

How to decide which variances to investigate

• can either investigate all: continuous improvement

• or can investigate things that have a significant departure from what we though: management by exception

What can variances be used for

• to evaluate performance/reward to see whether standards are reasonable

  • was budegt reasonable

• to be used for organisational learning

  • understand root cause of variance to see what action to take and if variances are interlinked.

  • eg. unfavourable materials efficiency variance could lead to better workforce training, redesigning processes

who is made resposible for labour variances

the production manager.