caa f5 variances 2014
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ACCA F5 Variance notes......good notes for ACCA F5 studyTRANSCRIPT
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Section D: Standard Costing And Variance Analysis
Designed to give you knowledge and application of:
D1. Budgeting and standard costing D2. Basic variances and operating statements D3. Material mix and yield variances D4. Sales mix and quantity variances D5. Planning and operational variances D6. Behavioural aspects of standard costing
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D1: Standard Costing and Variance Analysis
Learning outcomes
Explain the use of standard costs. [2]
Outline the methods used to derive standard costs and discuss the different types of cost possible. [2]
Explain the importance of flexing budgets in performance management. [2]
Prepare budgets and standards that allow for waste and idle time. [2]
Explain and apply the principle of controllability in the performance management system. [2]
Prepare a flexed budget and comment on its usefulness. [2]
Meaning of standard cost (CIMA, London)
A predetermined cost which is calculated from management standards of efficient operations and the relevant necessary expenditure
They are the predetermined costs on the technical estimate of material labour and overheads for a selected period of time, and for a prescribed set of working conditions
Direct labour Direct materials Factory overheads
Components of
standard cost
Manufacturing / operation costs
Selling expenses
Administrative expenses
Explain the use of standard costs
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Methods used to derive standard costs and types of standards
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Usefu
lness o
f S
tandard
cost
Planning
Control & Performance
Measurement
Decision-making
Valuation
Improvement & change
Building blocks for budgeting
Act as benchmark for comparison with actual performance to evaluate level of achievement forms basis for ascertaining the cost ,future availability & price of the product provides alternative methods of valuing stock & cost of production
impact the level of motivation of employees
Usefulness of Standard cost
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Types of standards
Ideal standard: demands perfect implementation not easily attainable reasons: there are always chances
of unexpected and unwanted events taking place such as accidents, breakdowns etc.
Currently attainable standard: emphasis on normality allows deviations extra ordinary efforts not
required to implement the set standard
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Price: Standard may be set after considering the price levels in the market and firms bargaining position vis-à-vis vendors
Quantity: once the quality is decided the production and engineering department sets the standard for quantity of materials to be purchased.
Quality: a comprehensive decision has to be made for buying high or low quality direct materials
Standard cost of direct materials
Waste:
Where the standard costing system is used, the standard is set for wastage, against which the actual waste is compared.
Normally the waste is due to evaporation, shrinkage, etc.
The actual waste exceeds the standard waste in situations where the material is handled and used inefficiently.
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Standard wage rate is determined by the personnel department considering the skill level needed from workers and the type of work. The standard wage rate includes the following: compensation paid health and life insurance pension plan contribution paid vacations unemployment taxes employers share of employees social
security plan
The quantity standard for direct labour is determined jointly by various departments considering: complexity of the process skill level of workers nature of work working conditions
Standard cost of direct labour
Idle time: categorised as indirect labour represents wastage caused by unproductive time idle time variance adds to adverse the labour efficiency variance allowance for idle time is not made as it could be avoided
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Over head cost is charged to production on the basis of machine-hour, labour-hour, direct-wages etc.
Setting standard for overheads
Standards for fixed cost are set taking total fixed costs with regard to the budgeted capacity utilisation.
Variable overhead standards are set by taking the same as a % of material cost or based on labour or machine hours.
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Favourable if Actual sales revenue > Standard sales revenue
Variances
Cost related variances Revenue related
variances (sales variance)
Favourable if Actual cost < Standard
cost
Basic variances
Causes of variances
Inaccurate recording of actual costs and revenues
Random events Operating efficiency Setting inappropriate standard
Variances can be split into two types:
Price difference: compare the actual price with the standard price for actual quantity
Volume difference: compare the actual quantity with the standard quantity for standard price
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Total sales value variance = Actual sales – Budgeted (Standard) sales
Sales price variance = Actual quantity (Actual selling price – Standard
selling price)
Sales volume variance = Standard price (Actual quantity – Standard quantity)
Sales price and volume, Sales margin variances
Under Absorption Costing:
Total sales profit variance = (Act profit margin – Std profit margin) X Actual
sale Qty
= {(Act sales price – std cost per unit) – (Std sale price
– std cost per unit) X Actual sales Qty
Under Marginal Costing:
Sales Margin Variance = (Act Contribution margin – std contribution margin) X
Act sales Qty
= {(Act price – std variable cost) – (std price – std variable
cost)} X Act sales Qty
Result under both will be the same
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Direct material cost variance = Standard material cost for actual
production – Actual
materials cost*
Actual material cost = actual usage of material out of current year’s
purchase + extent of opening stock consumed at std price (if there’s
opening stock of material)
Direct material price variance = Actual quantity X (Standard price –
Actual price)
Direct material usage variance = Standard price X (Standard quantity for
actual production
– Actual quantity)
Materials total, price and usage variances
Causes of Price variance:
purchase price variations in
market
Purchase of non-std lots
Quantity discounts
Variation in transport etc.
Causes of Usage variance:
purchase of non-std material
Negligence in use
Lack of training to workers
Pilferage of material
Inefficient production methods
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Direct labour cost variance = Standard direct wages for production - Actual direct wages paid = (Standard labour hours for actual production x Standard wages rate per hour) - (Actual labour hours x Actual wages rate per hour)
Direct labour rate variance = (Standard wages rate per hour - Actual wages rate per hour) x Actual labour hours
Direct labour efficiency = (Standard labour hours for actual production variance – Actual labour hours worked) x Standard wages rate per hour
Idle time variance = Hours lost x Standard wage rate per hour = (Hours paid - Hours worked) x Standard wage rate per hour
Labour Cost, rate & Efficiency variances
Causes of Rate variance:
Change in wage rates
Different rates during seasons
New worker paid at different
rate
Causes of Efficiency variance:
Insufficient training
Lack of supervision
Dissatisfied workers
Bad working conditions
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The standard cost card of Supernova Plc is given below:
Actual performance results for the year 20X6 reveals the following:
Assume that, 300 units have been used during the year out of the opening stock and issued at the standard price of raw material for the current year. The managing director wants to know the reasons for variances in the direct costs of the Company.
Example
Standard cost/Unit
Raw material 65 kg at $4 per kg 260
Direct labour 16 hrs at $7.75/hour 124
384
Actual results for the year 20x6
production 145 units
Direct material purchases 9,000 kg at a cost of $40,500
Opening stock direct material 1850 kg
closing stock direct material 1550 kg
Direct wages $18,800 for 2,350 hours
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Answer Total direct material cost variance = Standard materials cost for actual production - Actual materials cost
Total material cost variance = $37,700 – $41,700 (W1 & W2) = $4,000 (A) Direct material price variance = (Standard materials price - Actual materials price) x Actual quantity
Material price variance = $(4 – 4.5) x 9,000 kg Material price variance = $4,500 (A) Direct material usage variance = (Actual quantity consumed –Standard quantity for actual
production) x Standard price
Direct material usage variance = (9,300 – 9,425) kgs x $4 per kg Direct material usage variance = $500 (F)
Workings W1 Standard material cost for actual production = 65 kg x 145 units x $4 = $37,700
W2 Actual material cost = Here, actual material consumed is more than the material purchased during the year, i.e. 9,300 units (1,850 opening stock + 9,000 units purchased during the year – 1,550 units closing stock) = (9,000 x 4.5) + (300 x 4) = $41,700
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Direct labour cost variance = Standard direct wages for production - Actual direct wages paid Direct labour cost variance = $17,980 - $18,800 = $820 (A) Direct labour rate variance = (Standard wages rate per hour - Actual wages rate per hour) x Actual labour hours Direct labour rate variance = $(7.75 - 8) x 2,350 hrs = $587.50 (A) Direct labour efficiency variance = (Standard labour hours for actual production - Actual labour hours worked) x Standard wages rate per hour Direct labour efficiency variance = (2,320 – 2,350) hrs x $7.75 = $232.50 (A) Workings W1 Standard labour cost for actual production = 16 hours x 145 units x $7.75 = $17,980 W2 Actual wage rate per hour = $18,800/2350 = $ 8 per hour
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Variable overhead total variance = Variable overhead absorbed - Actual variable overhead = (Variable overhead absorption rate per hour x Standard hours for actual production) - Actual variable overhead
Variable overhead expenditure variance = (Standard variable overhead rate (this is rate variance) – Actual variable overhead rate) Also called spending variance x Actual hours worked
= Standard variable overhead for actual hours - Actual variable overhead Variable overhead efficiency variance = (Variable overhead absorbed (due to difference in hours) – Standard Variable overhead) = (Standard hours for actual production - Actual hours) x Standard variable overhead rate per hour
Variable overhead total, expenditure and efficiency variances
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Answer Variable overhead total variance = Variable overhead absorbed - Actual variable overhead
= (Variable overhead absorption rate per hour x Standard hours for actual production) - Actual variable overhead
Variable overhead total variance = ($3 x 100,000) – $364,000 = $300,000 - $364,000 = $ 64,000 (A) For calculation of ‘standard hours for actual production’ refer (W1) Variable overhead expenditure variance = (Standard variable overhead rate (this is rate variance) – Actual variable overhead rate) Also called spending variance x Actual hours worked = Standard variable overhead for actual hours - Actual variable overhead Variable overhead expenditure variance = 112,000 x (3 - 3.25) = $28,000 (A) For calculation of ‘standard and actual overhead rate’ refer (W2) and (W3)
112,000 Actual labour hours 50,000 Actual units produced 364,000 Actual variable production overheads
2 Labour hours per unit 60,000 Budgeted units for the period
360,000 Budgeted variable production overheads $ Particulars
Example
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Variable Overhead Efficiency Variance = Variable Overhead Absorbed – Standard Variable Overheads = Standard Variable Overhead per Hours x (Standard Hours for Actual Productin – Actual Hours) = 3 x (100,000 – 112,000) = 36,000 (A) W1 Standard hours for actual production = Standard hours per unit x Actual production = 2 x 50000 = 100,000 hours
W2 Standard variable overheads Variable overhead absorption rate = ---------------------------------------------- Standard hours worked 360,000 = ------------------------ 60,000 x 2 = $3 per hour W3 Actual variable overheads Actual absorption rate = ---------------------------------------------------- Actual hours worked
364,000 = ------------------------------ 112,000 = $3.25 per hour
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Under absorption costing all production costs (fixed or variable) are absorbed as production costs. Hence Fixed Overheads variances would arise. Hence, under absorption costing both the following will have to be analysed: Fixed overhead expenditure variance and Fixed overheads volume variance Under marginal costing, only variable manufacturing overheads are considered as production costs. Hence there’s no impact of change in level of production on these overheads. Hence under marginal costing, only one variance will have to be analysed: Fixed overheads expenditure variance
Fixed overhead total, expenditure and Volume variances
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Fixed overhead total variance = (Standard hours for actual production x Fixed overhead absorption rate)
- Actual expenditure on fixed overheads Budgeted fixed overhead Where, Fixed overhead absorption rate = Budgeted activity (e.g. Standard hours) Fixed overhead expenditure variance = Budgeted fixed overhead
- Actual expenditure on fixed overhead Fixed Overhead Volume Variances (FOVV) = Budgeted fixed overheads
- (Fixed overhead absorption rate per hour x Standard hours for actual production)
= (Budgeted hours - Standard hours required for actual production)x Fixed overhead absorption rate / Hr
Fixed overhead efficiency variance = (Standard hours for actual production
- Actual hours worked) x Fixed overhead absorption rate
Fixed overhead capacity variance = Budgeted fixed overheads- (Actual hours x Fixed
overhead absorption rate) = (Budgeted hours – Actual hours)
x Fixed overhead absorption rate
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Question. A company uses absorption costing for both internal and external reporting purposes as it has a considerable level of fixed production costs. The following information has been recorded for the past year: Required: (a) Calculate the fixed production overhead expenditure and volume variances and briefly explain what each variance shows.
(5 marks) (b) Calculate the fixed production overhead efficiency and capacity variances and briefly explain what each variance shows.
(5 marks) (10 marks)
(Paper 1.2 June 2003)
525,000 hours Labour hours 70,000 units Units produced
Actual levels of activity: $2,890,350 Actual fixed production overheads
500,000 hours Labour hours 62,500 units Units
Budgeted (Normal) activity levels:
$2,500,000 Budgeted fixed production overheads
Example
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Answer (a) Fixed Production Overhead Expenditure Variance Fixed overhead variance = (Actual expenditure on fixed overhead - Budgeted fixed overhead) = $ (2,890,350 – 2,500,000) = $390,350 (A) This variance indicates that the company has spent more than originally budgeted. Fixed Production Overhead Volume variance Fixed Overhead Volume Variance = Fixed overhead absorption rate per hour x (Budgeted hours – Standard hours required for actual production) = (560,000 – 500,000) hours x $5 per hour = $300,000 (F) Working W1 Standard hours required for actual activity For that first we shall calculate Budgeted hours per unit = 500,000 hours/62,500 units = 8 hours per unit. Standard hours required for actual activity = Actual units x Budgeted hours per unit = 70,000 units x 8 hours per unit = 560,000 hours W2 Budgeted Fixed Overhead Fixed Overhead Absorption Rate (FOAR) = --------------------------------------------------------- Budgeted Activity (Standard Hours) FOAR = $2,500,000/500,000 hours = $5
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Fixed Overhead Efficiency Variance = Fixed overheads absorption rate x (Actual hours worked or paid - Standard hours required for actual
production) = $5 x (525,000 – 560,000)
hours = $175,000 (F)
The variance shows that the labour was more efficient than originally envisaged as it took less time than expected to achieve the production of 70,000 units.
Fixed Production Overhead Capacity Variance Fixed Overhead Capacity Variance = (Budgeted hours – Actual hours) x Fixed overhead absorption rate = (500,000 – 525,000) x $5 = $125,000 (F) This variance shows that labour worked for more hours than was originally
budgeted thereby exceeding the budgeted capacity.
Fixed Production Overhead Efficiency Variance
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Volume variance $300,000 (F)
Expenditure variance $390,350 (A)
Total fixed overhead variance $90,350 (A)
$2,890,350 minus
500,000 x $5 minus 560,000 x $5
Efficiency variance
$175,000 (F)
Capacity variance
$125,000 (F)
Volume variance $300,000(F)
$2,800,000(F) minus 525,000 x 5 minus 500,000 x 5
(560,000 x$5)
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Produce full operating statements in both a marginal cost and a full absorption costing environment, reconciling actual profit to budgeted profit
Absorption Costing Marginal Costing
Operating income
depends on
Sales and production
i.e. any change in these
will cause operating
income to vary
Sales volume i.e.
change in production
volume will not affect
operating income
Changes Fixed cost per unit varies
with change in volume
Total Fixed cost &
contribution per unit
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Example
Reban Plc is a newly established manufacturing company. The following information relating to the year ended 20X7 is provided: It being the first year of operation, there is no inventory at the beginning of the year. Actual input prices per unit and actual quantities per unit of the product were equal to the standard. Being a cost accountant you are asked to compute Reban’s 20X6 incomes from operation using marginal costing as well as absorption costing.
2,020,000 Fixed costs
(Of this 50% is manufacturing and 50% is selling and distribution
expenses)
8,400,000 Variable costs
(Of this 60% is manufacturing and 40% is selling and distribution
expenses)
Costs
200 Selling price per unit
$
50,000 units Units sold during the year
70,000 units Actual production
80,000 units Budgeted production
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Answer 2
The income statement for 20X7 under marginal costing would be as follows:
Note If sales volume increases by 1,000 units, then variable costing operating income will increase by the amount of the increase in contribution margin 3,040,000 / 50000 x 1000 = 60800
1,020,000 Operating income
2,020,000 1,010,000 ($2,020,000 x 0.50)
Fixed selling and distribution expenses
1,010,000 Less: Fixed manufacturing cost
3,040,000 Contribution margin ($8,400,000 x 0.40)
6,960,000 3,360,000 Variable selling and distribution expenses
3,600,000 Manufacturing expenses (W1)
Less: Variable costs
10,000,000 Sales (50,000 units x $200) $ $
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The operating income statement for 20X7 under absorption costing would be as follows: The valuation (cost) of ending inventory under absorption costing is: (70,000 – 50,000) x $86.43 (W3) = $1,728,600 The valuation (cost) of ending inventory under marginal costing is: (70,000 – 50,000) x $72 = $1,440,000 Workings W1
Variable manufacturing costs per unit = ($8,400,000 x 0.60)/70,000 units = $72 per unit
For 50,000 units manufacturing cost is 50,000 x $72 = $3,600,000
1,272,500 Operating income
4,370,000 1,010,000 Fixed ($2,020,000 x 0.50)
3,360,000 Variable ($8,400,000 x 0.40)
Less: Selling expenses
5,642,500 Gross margin
4,357,500 Cost of goods sold
126,250 Add: Fixed overhead volume variance (A) (W2)
(50,000 units x $12.625) (W2)
4,231,250 631,250 Fixed costs
(50,000 x $72) (W1)
3,600,000 Variable cost
Less: Manufacturing costs
10,000,000 Sales ($50,000 x $200)
$ $
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W2
Fixed overhead volume variance is the difference between the amounts of the budgeted fixed overhead and the fixed overhead applied - First, calculate the budgeted fixed overhead rate Budgeted fixed overhead Budgeted fixed overhead rate = ------------------------------------ Level of volume = ($2,020,000 x 0.50)/80,000 units = $12.625 per unit. Second, calculate the production volume variance:
Fixed overhead budget Fixed overhead applied ($2,020,000 x 0.50) (70,000 x $12.625) = $1,010,000 = $883,75 Production volume variance $126,250 (A)
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W3 Valuation of ending inventory All variable cost of manufacturing + fixed cost of manufacturing / Actual
production (8,400,000 x 0.6) + (2,020,000 x 0.5) / 70,000 = 86.43 The production volume variance here is the same amount as the total under applied fixed overhead (i.e. fixed overhead variance) because the question indicates that actual costs incurred are equal to standard or budgeted amounts i.e. there is no fixed overhead spending variance. Note that a production volume variance occurs only under absorption costing because all fixed overhead costs incurred are written off as period costs under marginal costing.
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The effect of idle time and waste on variances including where idle time has
been budgeted for
Idle time: If idle time is included in standard cost:
Idle time variance =(Standard idle time – Actual idle time) x
Standard labour rate
If idle time is not included in standard cost: Idle time variance = Actual Idle hours x Standard labour rate
Waste: The material waste variance will get reflected in the yield variance
whether the actual waste is more or less than the standard.
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Variance analysis for
variable set-up overhead
cost
Total variance for variable set-up overhead costs
Variable setup overhead spending
variance
Variable overhead (of an activity)
efficiency variance
Actual costs incurred – flexible
budget costs
Actual variable cost/unit of
allocation base – budgeted variable unit of allocation
base
(Actual quantity allocation base – budgeted QTY of allocation base) x
budgeted VOH/allocation base
ABC based variances
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Methods of investigating
Setting pre-determined
criteria
Statistical decision models
Determining statistical probability to chart out in-control and out of control
distribution
Variance analysis for
variable set-up overhead
cost
Fixed overhead (w.r.t an activity) variance or fixed overhead (w.r.t
an activity) spending variance
Production volume variance for FOH costs (w.r.t an activity)
Actual costs incurred – flexible budget costs
Budgeted FOH costs – FOH allocated with budgeted input
allocated for actual output units produced
Refer Self Examination Question
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Section D: Standard Costing And Variance Analysis
Designed to give you knowledge and application of:
D1. Budgeting and standard costing D2. Basic variances and operating statements D3. Material mix and yield variances D4. Sales mix and quantity variances D5. Planning and operational variances D6. Behavioural aspects of standard costing
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D3:Material mix and yield variances
Learning outcomes
Calculate, identify the cause of, and explain mix and yield variances. [2]
Explain the wider issues involved in the changing mix e.g. cost, quality and performance measurement issues. [2]
Identify and explain the interrelationship between price, mix and yield.[2]
Suggest and justify alternative methods of controlling production processes. [2]
Calculate, identify the cause of, and explain mix and yield variances
Material mix variance (MMV) = (Standard mix of raw materials on actual input - Actual mix of raw materials on actual input) x Standard cost per unit of raw materials.
= (Standard mix - Actual mix) x Standard cost per unit Material yield variance (MYV) = (Standard yield for actual mix– Actual
yield or actual mix) x Standard weighted average cost per unit of all material in the mix Material mix variance & Material yield variance are part of
Material volume & quantity variance
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Material mix
variance
Subset of material usage variance
Shows the effect on material cost due to a change in the mix
(standard mix – actual mix) x standard cost per unit of output
Material yield
variance
Subset of material usage variance
Shows the effect on material cost due to change in yield
(standard output – actual output) x standard cost per unit of output
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Standard Material mix is the cheapest possible combination of materials (as
input) as per technical specifications per unit of output.
Such optimal mix may change due to material substitution or price changes.
The issues involved in changing mix are:
a) Relative prices, availabilities & technical features of input materials at the time
of selecting mix
b) Existence of alternative material
c) Planned yield to be considered on actual mix
Wider aspects of changing mix
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Destruction Ltd manufactures ‘Centex’ explosive from Centive and Amex. The
standard cost is:
In a period, 80 batches of Centex were produced from 500 kg of Centive and 730 kg of Amex. Actual prices were $2.45 per kg and $2.75 per kg respectively.
Calculate Material usage variance, Material mix variance and Material yield Variance and material price variance.
Material usage variance = (Standard quantity for actual production – Actual quantity) x Standard price For Centive = (400 - 500) x 2 = $200 (A) For Amex = (800 – 730) x 3 = $210 (F)
kg $/kg $
Centive 5 2 10
Amex 10 3 30
Total for 1 batch 15 40
Example
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Material mix variance = (Actual quantity in standard mix – Actual quantity in actual mix) x Standard cost of material Material Yield Variance = (Standard yield from actual mix – Actual yield from actual mix) x Standard price = (1,230 – 1,200) x $2.67 per kg {80*15} & {40 /15} = $80 (A) W1 Standard quantity = Number of batches x Number of units per batch For Centive = 80 batches x 5 kg per batch = 400 kg For Amex = 80 batches x 10 kg per batch = 800 kg W2 In order to ascertain actual quantity in standard mix apply standard ratio on actual quantity Accordingly, actual quantity in standard mix For Centive = 5 / 15 x 1230 = 410 For Amex = 10 / 15 x 1230 = 820
Input Actual quantity Actual quantity Difference Standard Variance
in standard mix in actual mix price
Centive 410 500 (90) 2 (180) (A)
Amex 820 730 90 3 270 (F)
Total 1,230 1,230 90 (F)
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Relationship between
price, mix, yield
favourable price variance may cause adverse yield variance and vise-versa if material price is low due to inferior
quality
favourable mix may lead to poor output (i.e. yield)
change in relative price might influence change in mix and yield
Identify and explain the interrelationship between price, mix and yield
Refer to Self Examination Question
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Mix variance:
A favourable variance would suggest that a higher proportion of a cheaper material was used. This could be due to:
1. a decision to cut costs
2. greater availability of cheaper materials
3. Unavailability of other more expensive materials
4. Costs of other materials having risen so it was decided to use less of them
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Yield variance:
An adverse variance would suggest that less output has been achieved for a given input. i.e. that the total input in volume is more than expected for the output achieved. This could be due to:
1. labour inefficiencies
2. higher waste
3. inferior materials
4. using a cheaper mix with a lower yield
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JPP manufactures and exports a wide range of writing paper and envelopes such as leather journals, guest books, albums, diaries etc. The products are made from the highest quality handicraft paper.
It was decided in a board meeting, that the company’s operations will be reviewed on a quarterly basis.
Therefore, Jacky, the management accountant, has suggested to use the standard costing system for performance analysis of each product. The budgeted output and sales for the period January to March 20X9 is 5,000 units.
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The following standard data is provided for the three month period.
Direct material per unit: Paper 1.5 kg @ $30 per kg $45
Ink and other material 0.25 kg @ $20 per kg $5
Direct labour per unit 3 hrs at $8 per hour $24
Selling price per unit $100
Fixed overheads $50,000
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Actual results for the period are as follows: $
Selling price 4,850 units 533,500
Direct material: Paper 8,245 kg 243,228
Ink and other material 1,123 kg 21,337
Direct labour 17,072 hours 128,040
Fixed overheads 57,500
Note: the actual hours paid were 17,072, but the employees worked for only 16,330 hours.
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Required- calculate the following variances. 1. Materials price variance 2. materials usage variance 3. Material mix variance 4. Material yield variance 5. Direct labour efficiency variance 5. Direct labour rate variance 7. Fixed overhead variances 8. Sales price variance 9. Sales volume variance
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D4: Sales mix and Quantity variances
Learning Outcomes
Calculate, identify the cause of, and explain sales mix and quantity variances. [2]
Identify and explain the relationship of the sales volume variances with the sales mix and quantity variances. 2]
Calculate, identify the cause of, and explain sales mix and Quantity variances
Sales mix variance (SMV) = Budgeted contribution margin per unit x (Actual sales at actual mix- Actual sales at budgeted mix)
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Sales mix refers to the proportion of different products in the total sales. The actual product-wise proportion in the total sales quantity may be different than the budgeted mix and this may affect the profitability positively or negatively.
According to the sales budget, the sales of products A and B were 800 and 1,200
units at a contribution margin of $5 and $8 respectively. However, the actual sales
of products A and B were 500 and 1,500 units.
The total budgeted sales would differ from the actual sales even though the total
number of units sold is the same. This is because of change in the sales mix.
Budgeted sales mix: 800: 1,200 = 2:3
Actual sales mix: 500: 1,500 = 1:3
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Sales mix variance (SMV) = Budgeted contribution margin per unit x (Actual sales at actual mix- actual sales at budgeted mix) Product A: $5 x (500 – 800) = $1,500 A Product B: $8 x (1,500 – 1,200) = $2,400 F Sales mix variance = $1,500 A + $2,400 F = $900 F Due to favourable sales mix variance, actual profit will be $900 more than the budgeted profit, which is beneficial for the company.
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Sales Quantity variance (SQV) = ( Budgeted contribution margin per unit x (Actual sales at budgeted mix- Standard sales at budgeted mix)
Sales quantity variance indicates the effect on profit of selling a different total quantity from the budgeted total quantity
Sales Quantity variance
According to the sales budget of 15,000 units, budgeted sales mix is 2:3 for two products, X and Y. The actual sales of products X and Y are 4,000 and 12,000 units at $10 and $8 respectively. The variable costs are 60% of sales.
Actual sales at budgeted mix: Product X: 16,000 x 2/5 = 6,400 units Product Y: 16,000 x 3/5 = 9,600 units
Standard sales at budgeted mix: Product X: 15,000 x 2/5 = 6,000 units Product Y: 15,000 x 3/5 = 9,000 units
Here, total budgeted units are different from actual sales units. Sales quantity variance will arise in such a case.
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Continued…
Sales Quantity variance (SQV) = (Budgeted contribution margin per unit x (Actual sales at budgeted mix- Standard sales at budgeted mix)
Product X: $4 x (6,400 – 6,000) = $1,600 F Product Y: $3.20 x (9,600 – 9,000) = $1,920 F Sales quantity variance = $1,600 F + $1,920 F = $3,520 F A favourable sales quantity variance indicates that due to change in sales quantity, actual profit is $3,520 more than the budgeted profit
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Aspects of sales mix and quantity variances
Aspects of sales mix and quantity variances
Unit method Revenue method
The main purpose behind this
method is to know the
proportion of unit sold in
each product
The main purpose behind this
method is to know the
proportion revenue obtained
from each product
Refer to the example given on page 395
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Identify relationship between sales volume with mix & quantity variances
Relationship between sales
volume with mix & quantity
variance
Sales volume variance is total of sales mix & quantity variance
Sales mix variance will be favourable when actual profit exceeds the
budgeted profit
Sales quantity variance will be favorable only if actual sales exceed
budgeted sales
Continued…
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Sales Volume Variance(SVV) =Budgeted
contribution per unit x (Actual sales at actual mix-
Budgeted sale at budgeted mix)
Sales Mix Variance(SMV) =Budgeted
contribution per unit x (Actual sales at
actual mix-Actual sales at budgeted mix)
=
+ Sales Quantity Variance(SQV)
=Budgeted contribution per unit x (Actual
sales at Budgeted mix-Budgeted sales at
budgeted mix)
Continued…
Refer to the Self-Examination Question
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Calculate a revised budget
Identify and explain those factors that could and could not be
allowed to revise an original budget
Calculate planning and operational variances for sales, including
market size and market share materials and labour
Explain the manipulation issues in revised budgets
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Learning outcomes
D4:Planning and operational variances
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Reasons for revising budget
Emergence of unforeseen and unanticipated
situations
Changes in external factors. e.g. market
trends, nature of economy
Changes in internal factors. e.g.
production and sales forecast
Planning variances
Planning variances intend to quantify and analyse the extent to
which the original standard needs to be adjusted in order to reflect
changes in operating conditions between the current situation and that
envisaged when the standard was originally calculated.
Planning variance = (Original budgeted quantity – Revised budgeted
quantity) x Standard margin
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Operational variances
Operational variances indicate the extent to which attainable targets
(i.e., the adjusted standards) have been achieved.
Operational variance = (Revised budgeted quantity – Actual
performance in quantity) x Standard margin
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Importance of Adjusted Standards
Adjustment is needed by change in business environment
Variances are analysed with respect to revised standards that are attainable.
This is referred to as “Ex-post Variance Analysis” (Ex-post means “after the facts”)
Original budgets / standards are called “Ex-ante” (meaning ‘beforehand’), while
revised budget / standards are called “Ex-post”
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In a four week period Sigma Ltd budgeted to make and sell 9,000
units of its single product with a budget as follows:
Budgeted for one month period $
Production and sales (9,000 units at $20 each) 180,000
Less: Variable costs (9,000 at $8 each) 72,000
Contribution 108,000
Less: Fixed cost 50,000
Profit 58,000
There was an external power line failure and three days production out of
20 days were lost. The actual results were:
$
Production and sales (8,000 units at $20 each) 160,000
Less: Variable costs (8,000 at $8 each) 64,000
Contribution 96,000
Less: Fixed costs 50,000
Profit 46,000
Example
Continued… www.caazim.org 65
In the situation, the planning and operating variances will be as following:
With retrospection a more realistic revised (i.e. ex-post) budget for the period would have
been 9,000 units less standard production for three days i.e., 9,000 – 1,350 = 7,650 units.
Therefore the planning variance would be the original (i.e. ex-ante) budget less the revised
(i.e. ex-post) budget at the standard margin, i.e., (9,000 – 7,650) x $12 = $16,200 (A).
The operational variance, which is deemed to be the controllable portion, is the difference
between the more realistic ex-post budget and actual output at the standard margin i.e.,
(7,650 – 8,000) x $12 = $4,200 (F).
Traditionally,
Sales margin volume variance
= (Original budgeted quantity – Actual sales volume) x Standard
margin
= (9,000 - 8,000) x $12
= $12,000 (A), which is equal to the summation of the planning
and operational variances above
Continued…
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Market size variances
This variance shows the expected additional contribution needed by an
organisation to maintain the same market size when actual sales for the
industry as a whole are more than the budgeted sales of the industry.
This is calculated as:
Market size variance =
x -
Actual
industry sales
volume in
units
Budgeted
industry sales
volume in
units
Budgeted
average
contribution
margin per units
Budgeted market
share percentage x
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Market share variances
This variance shows the contribution lost as a result of not attaining the
expected market share or additional contribution on account achieving
an additional share in the market than budgeted.
This is calculated as:
Market share variance =
x X
Actual
industry sales
volume in
units
Budgeted
average
contribution
margin per
unit
-
Actual market
share
percentage
Budgeted
market share
percentage
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The budgeted sales for the Monta calio company for year 20X6 were:
And the actual sales were:
Budgeted and actual industry sales were 500,000 and 650,000 units. Calculate : Market size and Market share variances
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Product Units Unit
contribution margin Total
contribution
$ $
X 20,000 15 300,000
Y 18,000 8 144,000
Z 12,000 6 72,000
50,000 516,000
Product Units Unit
contribution margin Total
contribution
$ $
X 16,000 15 240,000
Y 17,500 8 140,000
Z 22,000 6 132,000
55,500 512,000
Continued…
Continued…
Answer
b) Market size variance
Market size =
= 10% x (650,000 – 500,000) x $10.32
= $154,800 (F)
x x -
Actual
industry
sales
volume in
units
Budgeted
industry
sales
volume in
units
Budgeted
average
contribution
margin per
unit
Budgeted
market s hare
p ercentage
Continued…
Continued…
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Workings
W2
Budgeted average contribution margin per unit
516,000/50,000 = $10.32
c) Market share
Market share =
Market share = (8.53846% - 10%) x 650,000 x 10.32
= $ 98040(A)
x X
Actual industry
sales volume in
units
Budgeted contribution per unit
-
Actual market share
percentage
Budgeted market share
percentage
Continued…
Continued…
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Workings
W3
Market percentages
Actual market share percentage = 55,500/650,000 x 100
= 8.53846%
Budgeted market share percentage = 50,000/500,000 x 100
=10%
Continued…
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Recap
Calculate a revised budget
Identify and explain those factors that could and could not be allowed to
revise an original budget
Calculate planning and operational variances for sales, including market
size and market share materials and labour
Explain the manipulation issues in revised budgets
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Questions???
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W1 Calculation of standard contribution per unit
$ $
Standard sales price 100
Direct material:
Paper 45
Ink and other material 5
Direct labour
Total cost per unit (74)
Standard contribution 26
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(i) Sales variances Sales volume contribution variance = (Actual
sales - Budgeted sales) x Standard contribution per unit (W1) = (4,850 units - 5,000 units) x $26
= $3,900 (A)
Sales price variance = (Actual selling price per unit - Standard selling price per unit) x Actual quantity sold = Actual sales - Actual sales at standard price
= $533,500 - (4,850 units x $100) = $48,500 (F)
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(ii) Direct material variances
Direct material price variance = Standard material price for actual quantity – Actual material cost
For paper = ($30 x 8,245 kg) – $243,228 = $4,122 (F)
For ink and other material = ($20 x 1,123 kg) – $21,337 = $1,123 (F)
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Material mix variance = (Standard mix of raw materials on actual input (W2) – Actual mix of raw materials on actual input) x Standard cost per unit of raw materials
For paper = (8,030 kg – 8,245 kg) x $30 = $6,450 (A) For ink and other material = (1,338 kg – 1,123 kg) x $20
= $4,300 (F) Material yield variance = (Standard yield for actual mix
(W2) – Actual yield for actual mix (W3)) x Standard cost per unit of raw material
For paper = (8,030 kg – 7,275 kg) x $30 = $22,650 (A) For ink & other material = (1,338 kg – 1,212.50 kg) x $20
= $2,510 (A)
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Workings W2 Standard mix of raw material on actual input Actual quantity of input (materials) = 8,245 kg + 1,123 kg
= 9,368 kg Paper = 9,368 kg x (1.5/1.75) = 8,030 kg
Ink and other material = 9,368 kg x (0.25/1.75) = 1,338
kg W3 Actual yield for actual mix Standard quantity of materials for actual output = 4,850
units x 1.75 kg = 8,487.50 kg Paper = 8,487.50 kg x (1.5/1.75) = 7,275 kg
Ink and other material = 8,487.50 kg x (0.25/1.75) =
1,212.50 kg
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(iii) Direct labour variances Labour rate variance = (Standard wages rate per hour
– Actual wages rate per hour) x Actual labour hours = ($8 x 17,072 hrs) – $128,040 = $8,536 (F)
Labour efficiency variance = (Standard labour hours for actual production – Actual labour hours worked) x Standard rate per hour = ((3 hrs x 4,850 units) – 16,330 hrs) x $8
= $14,240 (A) Idle time variance = (Hours paid – Hours worked) x
Standard wage rate per hour = (17,072 hrs – 16,330 hrs) x $8 = $5,936 (A)
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