1. Variance analysis 1 、 Basic variances 2 、 The reasons for variances 3 、 Operating statements 4 、 Investing variances 5 、 Materials mix and yield variances 6 、 Sales mix and quantity variances

2. 1 、 Basic variances What is variance ？ What is variance analysis ？ Basic variances The reason for variances

3. Using variance analysis to control cost Compute Variance Is the variance material significant ？ YES Determine causes of variance Identify and analyze performance measures to determine corrective action Take corrective action No corrective action needed NO

4. Summary Cost variances 1 、 Materials variance ： price / usage 1.1 Causes -price ： price paid ≠ standard -usage ： more or less than should have been 2 、 Labour variance ： rate / idle time / efficiency 2.1 Causes -Rate ： Wage rate increase or use of worker at a rate of pay lower than standard -Idle time ： Machine breakdown, illness or injury to worker -Efficiency ：〔 quantity variance 〕

5. 3 、 Variable overhead variance ： expenditure / efficiency 3.1 Causes -expenditure ： Saving in costs incurred. Increase in cost of services -Efficiency 〔 quantity variance 〕 4 、 Fixed overhead variance ： expenditure / capacity / efficiency /volume 4.1 Causes Production or level of activity greater or less than budgeted. Sales variance : Price / volume Causes -price : Selling at a higher or lower price than the standard -Volume : Selling more or less than the budgeted quantity on profit.

6. There are mainly three overhead variance models: One-way variance It is also called as net overhead variance, which can be derived by comparing the actual amount of overhead and the overhead applied. Two-way variance This model separate the net overhead variance into both part, one is called budget variance(controllable), the other one is volume variance(uncontrollable), the budget amount is derived based upon standard hours allowed for production achieved. Three-way variance The budget variance mentioned above would be separated further into spending variance and efficiency variance by using budget amount based on actual hours worked. The overhead is applied to production based on the predetermined rate per cost driver times the standard cost driver allowed for the actual level of activity (hours worked, units produced) Overhead variances represent the analysis of balance in the overhead account after overhead has been applied. Over applied (more credit) is favorable, under applied (more debit) is un favorable.

7. Operating statements Operating statement is a regular report for management which compares actual costs and revenues with budgeted figures and shows variances. There are two main differences between the variances calculated in an absorption costing system and the variances calculated in a marginal costing system.

8. Operating statements in a absorption costing system Step 1. Calculate selling price variances and sales volume variance Step 2. Calculate actual sales minus the standard cost of sales = budgeted profit – the two sales variances Step 3. The cost variances are reported and an actual profit calculated

9. Question A company manufactures one product, and the entire product is sold as soon as it is produced. There are no opening or closing inventories and work in progress is negligible. The company operates a standard costing system and analysis of variances is made every month. The standard cost card for the product, a widget, is as follows. STANDARD COST CARD – WIDGET $ Direct materials 0.5 kilos at $4 per kilo 2.00 Direct wages 2 hours at $2.00 per hour 4.00 Variable overheads 2 hours at $0.30 per hour 0.60 Fixed overhead 2 hours at $3.70 per hour 7.40 Standard cost 14.00 Standard profit 6.00 Standing selling price 20.00 Budgeted output for January was 5,100 units. Actual results for January were as follows. Production of 4,850 units was sold for $95,600 Materials consumed in production amounted to 2,300 kilos at a total cost of $9,800 Labour hours paid for amounted to 8,500 hours at a cost of $16,800 Actual operating hours amounted to 8,000 hours Variable overheads amounted to $2,600 Fixed overheads amounted to $42,300 Required Calculate all variances and prepare an operating statement for January.

13. Operating statement in a marginal environment In a marginal costing system the only fixed overhead variances is an expenditure variances and the sales volume variance is valued at standard contribution margin, not standard profit margin

15. Investigating variances Factors should be considered in assessing the significance of the variance Materiality Controllability The type of standard being used Variance trend Interdependence between variances Costs of investigation

16. Variance investigation models The rule of thumb model Statistical significance model Statistical control charts

17. Materials mix and yield variances The material usage variance can be sub- divided into a materials mix variance and a materials yield variance when more than one material is used in the product.

18. Mix variance A mix variance occurs when the materials are not mixed or blended in standard proportions and it is a measure of whether the actual mix is cheaper or more expensive than the standard mix. A mix variance has no practical meaning unless management is able to control the mix of materials used in production.

19. Yield variance A yield variance arises because there is a difference between what the input should have been for the output achieved and the actual input.

20. Example P296 5.3 Calculating mix variances Two ways of calculating yield variances Inter-relationship between mix and yield variance.

21. Sales mix and quantity variances The sales mix variance occurs when the proportions of the various products sold are different from those in the budget. The sales quantity variance shows the difference in contribution/profit because of a change in sales volume from the budgeted volume of sales.

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