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89 Chapter 16 1 more vAriAnCe AnAlysis Introduction In this chapter we will look more at variances and three ways of making them more useful to management. Planning and Operational variances involve further analysis of the variances to assist management in deciding where more investigation should be focussed; whereas Mix and Yield variances looks at a specific situation where conventional variances might be misleading; and finally we will take another look at labour idle time variables. 2 Planning and Operational variances We discussed in the previous chapter that the purpose of variance analysis is to assist management in exercising control by identifying areas where perhaps there are operational problems. We also discussed possible reasons for variances. Although these included factors such as inefficiency of the workforce – a factor that perhaps may be controlled for the future – they also included factors such as an increase in raw material prices and an incorrect standard having been used in the budgets. These last two are examples of factors that certainly can not be controlled and where it would be silly to waste time re-investigating each month. It would make more sense to compare actual results with a standard that reflects any changed conditions and is therefore realistic. 2.1 Planning variance (or revision variance) This is a classification of variances calculated by comparing the original budget (or ex ante budget) to a budget revised for any permanent changes to a more realistic budget (ex post budget). Operational variance This is a classification of variances calculated by comparing actual performance with a revised (or ex post) budget. These variances are worth investigating more as they are variances caused by operating factors that potentially might be controllable. 90 ExamplE 1 Letia plc manufacture and sell a single product, The company uses a standard marginal costing system, and the standard cost per unit is as follows: Materials (1 litre @ $1 per litre) Labour (2 hours @ $2.50 per hour) Variable overheads Standard cost Standard contribution Standard selling price $ 1.00 5.00 1.40 7.40 8.60 16.00 Budgeted production and sales for 2002 were 5,000 units. The budgeted fixed overhead was $20,000. During 2002 the actual production was 5,200 units, and 5,100 units were sold for $81,000. Actual production costs were: Materials (5,150 litres) Labour (10,200 hours) Variable overheads Fixed overheads $5,120 $27,400 $7,000 $19,500 During 2002 the following was ascertained: (a) (b) (c) material usage should have been budgeted at 1.2 litres per unit at a price of $0.95 per litre the labour rate of pay was increased at the start of the year to $2.60 per hour in the industry as a whole, sales of Letia’s product were 10% lower than forecast You are required to produce an operating statement, analysing variances between planning variances and operational variances. More variance analysis 91 Chapter 16 92 3 Mix and Yield variances For example, a desk may use wood for the top and metal for the legs. For each of the materials we can calculate price and usage variances in the normal way, and usually this is sufficient for our purpose. However, suppose we were manufacturing a mixed fruit juice that contained a mixture of strawberry juice and banana juice. To calculate usage variances for each material separately would be of little use – if we used less strawberry juice than budgeted, we would automatically use more banana juice. We would therefore end up with one variance favourable and one adverse, and yet the overall effect on costs could be either favourable or adverse depending on which juice was the most expensive. In this situation, when the materials may be substituted for each other (or are substitutable) then we look at all the materials together and analyse the usage variance into the following variances: 3.1 It is quite common in practice for one product to use several different materials. • • mix variance this shows the effect of changing the proportions of the mix of materials input into the process yield variance this shows the difference between the actual and expected output or yield from the process ExamplE 2 The standard material cost per unit of a product is as follows: Material X Material Y 2 kg @ $3 per kg 1 kg @ $2 per kg $ 6 2 8 The actual production during the period was 5,000 units and the materials used were: Material X Material Y 9,900 kg costing $27,000 5,300 kg costing $11,000 Calculate the total materials cost variance; the materials price variance; the materials usage variance; the mix variance; and the yield variance. More variance analysis 93 Chapter 16 3.2 Other mix variances Although the calculation of mix variances most commonly relates to materials, exactly the same sort of situation could be relevant for labour if there were more than one grade (paid at different rates) that were substitutable. The approach would be exactly the same as for materials. Slightly less obvious (although essentially the same approach) is the situation where sales are ‘substitutable’. For example, suppose a company sold two types of desk which although similar had different profit margins. Clearly the company would hope for higher sales, but they would also be interested in the mix of sales – it would be better if customers bought more of the desks giving higher profit p.u., even if it were to mean selling fewer of the desks that gave lower profit p.uhttp://www.opentuition.com/acca/ Again, in this situation, the approach used for materials may be useful. 94 ExamplE 3 Olga plc sells three products – A, B and C. The following table shows the budget and actual results for these products: Budget: Sales (units) Price (p.u.) Cost (p.u.) Actual: Sales (units) Price (p.u.) Cost (p.u.) 180 $22 $16 150 $22 $18 170 $26 $25 A 200 $20 $17 B 100 $25 $21 C 100 $30 $24 Calculate the total sales margin variance, and analyse into the sales price variance; the sales mix variance; and the sales quantity variance. More variance analysis 95 Chapter 16 4 Advanced Idle Time variances When we looked at labour variances in the previous chapter, we said that any difference between the hours paid and the hours worked was Idle Time. However, since there is likely to be some idle time in almost every business, it would be more sensible to build some idle time into the budget and then an idle time variance would only occur if the actual idle time were more or less than budgeted. We will look at the ‘rules’ with an example. ExamplE 4 A company budgets that each unit will take 7.6 hours to make. It budgets on paying workers at the rate of $5.70 per hour, and that 5% of the hours paid for will be idle. The actual results (for production of 1000 units) are: Hours paid: 8,200 hours at a cost of $50,020 Hours worked: 7,740 hours You are required to: (a) Calculate what will appear on the standard cost card as the labour cost per unit (b) calculate the effective standard cost per hour worked (c) calculate the total labour variance (d) Analyse the total variance into rate of pay, idle time, and efficiency variances. 96