variance analysis 1 lecture 8. 2 objectives: describe the basic concepts underlying variance...
TRANSCRIPT
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OBJECTIVES:
• Describe the basic concepts underlying variance analysis
• Explain the difference between a favourable and an adverse/unfavourable variance
• Compute materials usage and price variances
• Calculate labour efficiency and price/wage rate variances
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• Steps in developing a flexible budget– Identify the actual quantity of output– Calculate the flexible budget for revenues
based on budgeted selling price and actual quantity of output
– Calculate the flexible budget for costs based on budgeted variable cost per output unit, actual quantity of output, and budgeted fixed costs
Flexible Budget
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Flexible BudgetAn Example
Budgeted: Selling price = £100 per unit
Raw materials = £40 per unit
Labour = £20 per unit
Actual Results Original Budget Flexible Budget
Output (units) 900 1,000 900£ £ £
Sales 92,000 100,000 90,000Raw Materials (36,900) (40,000) (36,000)Labour (17,500) (20,000) (18,000)Fixed O/H (20,700) (20,000) (20,000)Profit 16,900 20,000 16,000
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Variances
• Variance ~ difference between the budgeted and actual amounts.
• Variance analysis ~ a means of assessing these differences
• Variance is use to:– Assist managers in planning and control– Evaluate performance– Suggest changes in strategies
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• Standard costing uses the costs that should have been incurred
• Standard costing uses standards of performance and of prices derived from studying operations and of estimating future prices, for materials, labour, and overheads
• Each unit produced can have both actual and standard costs for direct materials, direct labour, and manufacturing overheads
VariancesStandard Costing
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• Standard input– A carefully determined quantity of input, e.g.,
square metres of laminated material
• Standard price– A carefully determined price that a company
expects to pay for a unit of input, e.g., £1 per square metres of laminated material
• Standard cost– A carefully determined cost of a unit of output
VariancesStandard Costing
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• Variances fall into 2 categories– Favourable variances occur when actual
amount is less than the standard amount– Unfavourable variances arise when actual
amount is greater than the standard amount
Variance Analysis
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Direct Material Variances
• Material variance = difference between the actual expenditure and budgeted expenditure on direct materials
• Material Budget Variance – Price variance– Usage/Efficiency variance
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Materials Price Variance
Material J
Standard price per metre £4
Standard usage per unit of product 5 metres
Actual price per metre £3
Actual usage per unit of product 5 metre
Actual cost per unit (5m * £4) £20
Standard cost per unit (5m * £3) £15
Variance (favourable) £5
It is a favourable materials price variance because we actually paid less than the standard that we should have been paid. The actual usage is exactly the same as the standard. The only difference is the PRICE for raw materials.
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Materials Price Variance
Material K
Standard price per metre £9
Standard usage per unit of product 8 metres
Actual price per metre £11
Actual usage per unit of product 8 metre
Actual cost per unit
Standard cost per unit
Variance
The actual price paid is now greater than the standard price should have been paid. It is an adverse/unfavourable materials price variance. The quantity of materials actually used is the same as the standard. The only difference is the PRICE.
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Materials Usage Variance
Material L
Standard price per tonne £5
Standard usage per unit of product 100 tonnes
Actual price per tonne £5
Actual usage per unit of product 95 tonnes
Actual cost per unit (95 * £5) £475
Standard cost per unit (100 * £5) £500
Variance (favourable) £25
The actual quantity used in producing 1 unit of product is less than the standard quantity should have been used. It is a favourable materials usage variance. No difference in price. The only difference is the QUANTITY.
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Materials Usage Variance
Material M
Standard price per tonne £8
Standard usage per unit of product 60 tonnes
Actual price per tonne £8
Actual usage per unit of product 65 tonnes
Actual cost per unit
Standard cost per unit
Variance
The actual quantity used is greater than the quantity should have been used. It is an adverse / unfavourable materials usage variance. No difference in price. The only difference is the QUANTITY.
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Materials Price & Usage Variances ~ Formulae
Materials price variance
(Standard price – Actual price) * Actual quantity purchased
(SP – AP) * AQ
Materials usage variance
(Standard quantity – Actual quantity) * Standard price
(SQ – AQ) * SP
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Materials Price & Usage Variances ~ Formulae
Material N
Standard price per metre £6
Standard usage per unit of product 25m
Actual price per metre £7
Actual usage per unit of product 24m
Actual cost per unit (24m * £7) £168
Standard cost per unit (25m * £6) £150
Variance (adverse / unfavourable) £18
Materials price variance:
(£6 - £7) * 24m (£24)
Materials usage variance:
(25m – 24m) * £6 £6
Net variance (£18)
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• Price Variance– Price changed due to inflation– Government has imposed taxes on the
materials– Purchase higher quality material
• Usage Variance– Wastage occurs due to old machines– Lack of training among employees
Material VariancesWhat caused the variance?
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Direct Labour Variances
• Labour variance = difference between the actual labour cost and the standard labour cost for actual production
• Direct labour budget variance– Direct labour wage rate variance– Direct labour efficiency variance
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Wage Rate Variance
Product A
Standard hours to produce 100
Actual hours to produce 100
Standard wage rate per hour £0.9
Actual wage rate per hour £1.0
Actual cost per unit
Standard cost per unit
Variance
The actual wage rate is higher than the standard wage rate that should have been paid. It is an adverse wage rate variance. No difference in quantity of labour hours. The only difference is the WAGE RATE.
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Labour Efficiency Variance
Product B
Standard hours to produce 400
Actual hours to produce 370
Standard wage rate per hour £1.0
Actual wage rate per hour £1.0
Actual cost per unit (370 * £1) £370
Standard cost per unit (400* £1) £400
Variance (favourable) £30
The actual labour hours used are less than the standard labour hours that should have been used. It is a favourable labour efficiency variance. No difference in wage rate. The only difference is the LABOUR HOURS.
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Labour Wage Rate and Efficiency Variances ~ Formulae
Wage rate variance
(Standard wage rate per hour – Actual wage rate) * Actual hours worked/used
(SR – AR) * AH
Labour efficiency variance
(Standard labour hours for actual production – Actual labour hours worked) * Standard wage rate per hour
(SH – AH) * SR
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Labour Wage Rate and Efficiency Variances ~ Formulae
Product C
Standard hours to produce 500
Actual hours to produce 460
Standard wage rate per hour £0.9
Actual wage rate per hour £1.1
Actual cost per unit (460 * £1.1) £506
Standard cost per unit (500* £0.9) £450
Variance (adverse / unfavourable) £56
Wage rate variance:
(£0.9 - £1.1) * 460 (£92)
Labour efficiency variance:
(500 – 460) * £0.9 £36
Net variance (adverse / unfavourable) (£56)