Ch16 Further variance analysis
Sales Variances
Two sales variances
There are two basic ways in which sales performance can affect profit: selling at
giving rise to a price variance？ and selling a different price from the standard price ？
a different quantity from that budgeted ？giving rise to a volume variance？.
Sales price variance
To calculate this variance, ask yourself: “how many units were sold; what was received for these sales; what should have been received?” The difference will represent the sales price variance.
Sales price variance = Actual sales revenue - ？Actual units sold×Standard
selling price？
Or, in abbreviated form = AQ×？AP - SP？
You will notice that these abbreviated formulae make more use of unit costs and revenues than their “more wordy forms”. This can be more convenient or may cause problems ？of rounding？. If any actual costs or selling prices per unit turn out not to be round numbers, keep hold of the unrounded unit figures in your calculator to avoid making rounding errors.
Sales volume variance
The questions to ask now are: “How many units were sold; how many units should have been sold?” The difference provides an indication of the sales volume variance. Since our aim is usually to produce a reconciliation that either starts from budgeted profit or from budget contribution, the volume variance is subsequently expressed in terms of standard profit per unit ？for standard total absorption
costing？ or in terms of standard contribution per unit ？for standard marginal
costing？.
Sales volume variance =？Actual sales volume - Budgeted sales units？
×Standard margin per unit,
or=？AQ - BQ？×SM
Causes of variance are probably the results of:
a.unplanned price increase;
b.unplanned price reduction.
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Causes of variance are probably the results of:
a.unexpected fall in demand due to recession
b.addition demand attracted by reduced price
c.failure to satisfy demand due to production difficulties.
N.B.
On Sales margin volume variance
The use of absorption or marginal costing affects the calculation of the sales volume variance.
？1？ Under absorption costing any difference in units is valued at the standard profit per unit;
？2？ Under marginal costing such a difference in units is valued at the standard contribution per unit;
In neither case is the standard selling price used. This is because when volumes change so do production costs and the purpose of calculating the variance is to find the effect of profit.
The operating statement
The purpose of calculating variances is to identify the different effects of each item of cost/income on profit compared to the expected profit. These variances are summarized in a reconciliation statement, known as an operating statement.
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A.In an absorption system:
l The statement commences with the budgeted profit which is based upon budgeted cost and activity levels;
l This is then adjusted by the sales volume variance to reflect any difference in actual and budgeted activity. The result, which is referred to as the “Standard profit on actual sales” represents the profit which would be achieved if:
a.the selling price was as budgeted;
b.all variable costs were as per the standard unit cost
c.all fixed costs were as budgeted
The selling price and cost variances are then included under the headings of adverse and favorable as appropriate. The total of these should reconcile the actual
profit to the standard profit on actual sales.
B.A marginal costing operating statement evaluates:
The volume variance using contribution per unit;
There is no fixed overhead volume variance.
Summarized absorption costing statement
，
Budgeted profit X
Sales volume variance X
Standard profit on actual sales X
Sales price variance X
Profit before cost variances X
Cost variances X
Actual profit ，X
Total absorption costing operating statement
，
Budgeted profit X
Sales volume variance X
Standard profit on actual sales X
Sales price variance X
Profit before cost variances X
Cost variances Fav Adv
， ，
Materials -price；usage × ×
Labour -rate,eff‟y ；idle time × ×
Variable overhead -rate ；effciency × ×
Fixed overhead -exp‟re eff‟y；cap‟y × ×
，× ，× ×
，×
Marginal costing
，
Budgeted profit X
Sales volume variance X
Standard profit on actual sales X
Sales price variance X
Cotribution before cost variances X
Variable cost variances Fav Adv
， ，
Materials,Labour；Variable overheads × ×
× ，× × ，
Actual contribution ×
Fixed overhead
Budget ×
Expenditure variance ×
Actual ×
Actual profit ，×
N.B.
Standard Marginal Costing
The second operating statement, based on standard marginal costing principles, shows some of the minor differences that a firm needs to make to its standard costing system if using marginal rather than absorption costing.
1.The basic principles of calculating variances are the same as for standard absorption costing;
2.The operating statement will be slightly different;
3.It is easier to show budgeted contribution as the starting point for reconciling budgeted and actual figures.
4.The sales volume variance will be in terms of standard contribution per unit.
5.Variable cost variances will be exactly the same as for standard absorption costing.
6.The only fixed overhead variance is the expenditure variance.
补充知识:
Selling overheads
The cost variances that need to be calculated in most exam questions will be production cost variances. One question under the previous syllabus, Paper 8, has also
tested selling overhead cost variances. These provide information about whether a firm has spent too much on sales commission or advertising, etc. Their calculation differs from production cost variances in one obvious respect.
Total selling overhead cost variance = Standard cost of actual SALES - Actual selling overhead cost
It is unlikely that you will be able to analyze further a variable selling overhead cost variance. However a fixed selling overhead cost variance can be split into expenditure and volume.
Fixed selling overhead cost variances:
Expenditure = Budgeted total fixed selling overhead cost - Actual total fixed selling overhead cost
Volume = ？Actual units sold - Budgeted sales？ X Standard fixed selling
overhead cost per unit
Example:
ZA Ltd manufactures a product called Kappa. The following standard costs apply for the production of 100 Kappas.
Material 600kgs@$0.60 per kg $360
Labor 25hours@$1.40 per hour $35
Fixed $6000
Overheads 20,000units $30
$425
Budgeted monthly production/sales budget is 20,000 Kappas. Selling price is $7.50 per unit. In month 3 actual results were:
Product produced and sold 21,000 units
Sales value $156,000
Material purchased and used 127,500kgs $76,000
Labor 5,200 hours $7,350
Fixed overheads $6,500
Require to prepare an operating statement for Month 3 detailing all the variance.
Solution:
？a？Using absorption costing
Budgeted profit ？w1？ $65,000
Add: Sales volume variance ？w2？ $3,250
Standard profit on actual sales $68,250
Variance Adv ？$？ Fav？$？
Sales price ？w3？ 1,500
Material price ？w4？ 500
Material usage ？w5？ 900
Wages rate ？w6？ 70
Labor efficiency ？w7？ 70
Fixed overhead expenditure？w8？ 500
Fixed overhead capacity ？w9？ 240
Fixed overhead efficiency ？w10？ 60
2,970 870 2,100
Actual profit 66,150
Actual profit is calculated as follows:
Sales $156,000
Less: Material $76,000
Labor $7,350
Fixed overhead $6,500
$89,850
$66,150
w1: 20,000！？$7.50-$425/100？= $65,000
w2: 1,000！？$7.50-$425/100？= $3,250
w3: 21,000！$7.50=$157,500-$156,000=$1,500 ？A？
w4: $76,000-？127,500！$0.6？= $500 ？F？
w5: 600kg/100！21,000= 126,000kg- 127,500kg=1,500kg！$0.6=$900 ？A？
w6: $1.40！5,200 hours=$7,280- $ 7,350= $70 ？A？
w7: 25hours/100！21,000=5,250 hours - 5,200 hours= 50hours！$1.40= $70
？F？
w8: $30/100！20,000=$6,000-$ 6,500=$ 500 ？A？
25/100=200hours！$1.20=$ 240 ？F？ w9: 5,200-20,000！
w10: 21,000！25/100=5250hours-5200hours=50hours！$1.2=$60 ？F？
？b？ Using marginal costing
Budgeted profit $65,000
Add: Sales volume variance ？w1？ $3,550
Standard profit on actual sales $68,550
Variance Adv？$？ Fav？$？
Sales price 1,500
Material price 500
Material usage 900
Wages rate 70
Labor efficiency 70
Fixed overhead expenditure？w2？500
2,970 570 2,400
Actual profit 66,150
？w1？:
Sales $7.5
Less: Material $3.6
Labor $0.35 $3.95
Standard contribution per unit $3.55
？w2？ there is no fixed overhead volume variance to calculate under marginal
costing because there is no absorption of fixed overheads.
Advantages and Disadvantages of the Analysis
Advantages:
Variances are more relevant, especially in a turbulent environment.
The operational variances give a “fair” reflection of the actual results achieved in
the actual conditions that existed.
Managers are, theoretically, more likely to accept and be motivated by the variances reported which provide a better measure of their performance.
It emphasizes the importance of planning and the relationship between planning and control and is a better guide for cost contro1.
The analysis helps in the standard setting learning process, which will hopefully result in more useful standards in the future.
Disadvantages:
The use of planning and operat ional variances is not widespread. Therefore, there may be perceived disadvantages:
The establishment of ex-post budgets is very difficult. Managers whose performance is reported to be poor using such a budget are unlikely to accept them as performance measures because of the subjectivity in setting such budgets.
There is a considerable amount of administrative work involved first to analyze the traditional variances and then to decide on which are controllable and which are uncontrollable.
The analysis tends to exaggerate the interrelationship of variances, providing managers with a „pre-packed‟ list of excuses for below standard performance. Poor performance is often excused as being the fault of a badly set budget.
VI.Criterion of carrying out the investigation of variance
It is rarely practical, or even worthwhile, to investigate every variance produced in an analysis. The factors to consider when deciding whether or not to investigate a variance include the following:
？1？Size of variance-it might be assumed that greater cost savings will result from investigating larger variances which also have a major effect on a manager‟s performance report.
- Fixed size of variance
- Fixed percentage rule
- Statistical decision rule
？2？Favorable or adverse-the general impression would be that only adverse variances should be investigated, although by investigating favorable variances an organization can:
-remove the effect of budget padding when assessing performance
-produce more realistic budgets in the future
-establish ways in which performance might be improved still further in the future.
？3？ Costs and benefits of correction- if the likely cause of a variance is known but it is felt that it will cost too much to eliminate that cause, the variance may not be investigated. It may be that standards have to be revised.
？4？Ability to correct a variance-this is related to the previous factor, but now the point at issue is whether a cause of a variance will stay corrected once money has been spent to rectify cause.
？5？Past pattern of variances-if a variances merely the result of random variations
in cost then no amount of remedial action will bring about a cost saving.
？6？Reliability of budgets-whilst establishing the extent to which a variance is due to bad budgeting will have all the benefits set out for planning and operationa1 variances, if a variance is purely the resu1t of a badly set budget there will be no major cost savings following the investigation.
？7？Reliability of measurement and recording systems -poor measurement and recording systems can give rise to a variance, for instance if closing stock is incorrectly recorded then an incorrect figure for materials usage is assumed and a variance might result. The benefits of investigation are similar to those of investigating the consequences of bad budgeting.
Several of these considerations give rise to criteria or techniques for variance investigation. Point ？5？ is taken into account by constructing statistical control charts whilst points？3？and ？4？can be assessed using decision trees. The matter of
mere size gives rise to a number of investigation criteria.
Costs, benefits and ability to correct variances
The cost/benefit decision-making rule is that the variance should be investigated if the cost of doing so is less than the expected value of the net benefit.
Supplement
Variance Analysis
Variance analysis using absorption costing
When considering variance analysis questions, students often try to tackle the problem using lots of formulae. Of course if you know the right formula, the answer is easy, but remembering such things in an exam situation can often be very difficult. If the reasons for variance analysis are understood then the calculation of the figures becomes relatively straightforward.
When we look at variances, we are trying to establish the difference between what has actually happened ？what we did achieve？ and what we thought should
have happened, namely the original budget ？what we should have achieved？.
In the original budget, information regarding the standard cost per unit, the standard selling price and a budgeted level of production and sales would have been established. The standard cost would be based on expected levels of price, usage, hourly rates of pay and efficiency. It is how much we think a unit should cost, a budgeted cost figure per production unit. At the end of the accounting period this information is then compared to the actual results to see where there have been deviations from this original plan – that is to say where there are variances. If you
look at the standard cost per unit of an item, the information can drive you towards the successful completion of any variance analysis question. See Figure 1.
Figure 1: Example Using absorption costing
Information regarding the standard cost, revenue and
profit per unit:
，
Direct materials ？5kg at ，3/kg？
15
Direct labour ？2 hours at ，8/per hour？ 16
Variable production overheads ？2 hours at 2 ，1/hour？
Fixed production overheads ？2 hours at 5 ，2.50/hour？
38
Profit 12
Selling price 50
Budgeted sales and production for the period were
4,000 units.
When considering materials, if we look at the end of the period to see what has actually happened, one question that could be asked is „„The standard material cost
per unit should have been ，15, was this the case?‟‟ However, we should also
consider the individual components of the total material cost per unit: we should have spent ，3/kg on materials and we should have used 5kg per unit, did this happen?
Similarly for labor, an overall variance can be obtained by looking at whether we did pay out ，16 per unit of production, but once again we can look further at the individual components making up that ，16. Labor should have taken 2 hours per
unit and labor should have cost the company ，8 per hour, is this what happened?
The standard cost per unit is driving us to look for certain pieces of information: how much did we actually pay out on materials, did we really use 5kg per unit and so on. Let us now consider some actual data, Figure 2, so that we can carry out some variance analysis.
Figure 2: Actual data for the period under
review
4,150 Production and sales
units units:
purchased
and used ，61,350 21,250kg costing Materials:
a total of
paid for
8,250 hours
costing a total of ，68,500 Labour: 150 labour hours
were lost due to
delivery problems
，8,225 Variable overheads:
，19,000 Fixed overheads:
Sales revenue: ，205,425
Material Variances
To calculate the material variances we have already established that we would want to know if the price per kg was ，3 ？the price variance？ and whether 5kg was used per
unit ？the usage variance？.
All that is required now is the comparison of what we did actually pay or use compared to what we should have paid or used using the standard cost per unit ？Figure 3？.
Figure 3: Material price variance
，
Did pay for 21,250kg
？ACTUAL？ 61,350
Should have paid for 21,250 kg
？21,250kg x ，3/kg？ 63,750
2,400 favourable
Notice that when the price variance is calculated we focus on the amount of material that has actually been purchased. It is easy to establish how much we did pay as this comes straight from the actual information given. When we calculate the amount we should have paid, we need to ensure that we are comparing like with like. That is why we continue to use the amount of material actually purchased rather than using a flexed figure based on actual levels of production. We need to focus on the material price so everything else must remain static.
In Figure 3 we can clearly see that we actually paid out less than expected giving rise to a favourable variance. Our material has cost us less than we thought.
We can approach the calculation of the usage variance in much the same way: what we did do ？the actual amount of material used？, compared to what we should
have done ？using the standard cost per unit？, see Figure 4.
Figure 4: Material usage variance
kg
Did use to make 4,150 units
？ACTUAL？ 21,250
Should use to make 4,150
units ？4,150 x 5kg/unit？ 20,750
500 adverse