ACCAF5VARIANCES

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Variances Conventional Formulas
1. sales variances
sales price variance= AQ * (AP-- SP)
sales volume variances = (AQ-- SQ) * SM 【contribution or profit 】
2. material variances
price variance= AQ*(AP--SP) usage variance= (AQ--SQ)* SP
3. labour variances
labour rate variance= AH * (AR--SR) labour efficiency variance = (AH--SH)*SR
4. idle time variance
rate variance= AH * (AR--SR) AH: total hours paid
productive efficiency variance= (actual productive hours — standard
productive hours) * standard grossed up rate
excess idle time variance= (actual idle time - standard idle time) * SGR *standard for actual production
* standard idle time= acutal total hours paid*standard idle rate
* if the idle time rate is unknown, then there 's no need to gross up the rate
5. variable overhead variances
expenditure variance= AH* (AR--SR)
efficiency variance= (AH--SH)*SR *SH: standard hours for actual production
6. fixed overhead variances marginal costing
fixed expenditure variance = actual expenditure absorption costing
fixed expenditure variance = actual expenditure fixed volume variance= budgeted expenditure fixed capacity variance= budgeted expenditure hour = (original hours — actual hours) * OAR per hours
fixed efficiency variance= (actual hours - standard hours) * OAR per hour
7. mix and yield variances
mix variance = (AQAM--AQSM)*SP(or RSP) - input
yield variance = (AQSM--SQSM)*SP(or RSP) - input : output
Conventional statement
Marginal :
budgeted contribution sales volume variance
sales price variance
revised contribution
—budgeted expenditure —budgeted expenditure ——actual units*OAR per unit —acutual hours * OAR per
cost variances
actual contribution
fixed overhead expenditure variance
gross profit
Obsorption:
budgeted profit
sales volume variance
sales price variance
revised profit
cost variances
actual profit
Explanations of the variances
Wrong budgeting; poor planning;abnormal/ seasonal effects;
Operational reasons:
1. Sales:
Price: discounts; price competition (to generate large market share); type of products (new or old;)
volume: market conditions (economy, customers ' buying habits;), bulk purchase; higher production output;
2. Materials
Price: market changes(demands, shortage, competition for suppliers); bulk discounts ; change of supplier; change of buyers(ability to bargin); change of proportion of mix materials
Usage:quality of materials;stricter quality control;workers ' skill; change of production procedures; chagne of product specification; theft;
Mix: the change of proportions of each material (use more cheaper materials;); Yield: quality of the average materials;
3. Labour
Rate: unplanned change of wage award system; grade of workers; unplanned bonus or worktime
Efficiency:workers 'skill; quality of material; the bonus schemes; learning effect; staff training; more efficient methods, or change of product specification;
4. Variable overheads
Expenditure: the costs or prices of the indirect stuff (material, labour) change;
poor control
Efficiency : same to labour efficiency; learning effect;
5. Fixed overheads
Expenditure: change of costs for overhead items; seasonal effect; poor control Volume:change in production output (demand, alteration of stockholding policy,
update of machine); other reasons (strikes; grade of workers; motivation;) Capacity: same to volume;
Efficiency : same to efficiency for labour; learning effect;
6. idle time
more efficient working ( material;workers ), if the wage is paid on fixed time (then some hours are paid but unproductive); poor production planning;
stockouts; lack of demand for seasonal effects;machines breakdown;
7. Overall (inter-relationships)
Selling price sales volume production output material usage; labour efficiency; variable overhead efficiency; fixed volume;
Material price material usage labour efficiency;variable overhead efficiency; fixed volume ;
Labour rate labour efficiency; variable overhead efficiency; fixed volume;
Material mix Material price; material yield; labour efficiency; variable overhead effciency; fixed volume;
Fixed overhead expenditure sales volume (advertising to boost sales); labour efficiency, material usage (better maintainence for machines and plants); fixed volume (large warehouse to stock more inventories); idle time (machine breakdowns) Variable overhead expenditure material usage; labour efficiency; variable overhead efficiency (stricter supervise; stricter quality control);
Sometimes, material price variance is adverse,and mix variance is also adverse. This may because, more materials of poor quality are used, even though the price of this kind of material is higher. But the actual price is lower than expected. So, buyers purchased more.
Four types of standard
1. basic standard
remain unchanged in long-term; out of date; cannot be used to highlight current efficiency;undemanding; show trends; least used
2. ideal standard
based on perfect operating conditions ( no wastage;no breakdowns) —no inefficiencies;
used to pinpoint areas where can get large cost savings;
unachievable;unacceptable;may have adverse motiviational effects;
3. current standard
based on current operating conditions;
useful when some abnormal conditions occur;
no targets;no attempt to improve; demotivation;neutal effect; not good for a new business which desires to grow
4. attainable standard
based upon efficient operating conditions (allowances for normal material losses, realistic allowances for fatigue, machine breakdowns); conform to the best that can be practically achieved, even with some inefficiencies
most frequently used;
incorporate reasonable targets to improve the current operations; more demanding
achievable,motivated and accepted
Investigation of variances
1. the size of the variance: levels of significance
2. favourable or adverse: reasons for favourable variances should be sought also,
since they may indicate the presence of budget slack (easy to achieve)or suggest any improvement to motivate staff and be more demanding;
3. costs VS benefits : if costs/ benefits are more than 1, the investigation at this stage
may prove uneconomic
4. ability to correct
5. historical pattern : if it is unusual, then may be worthy; statistical tests of
significance may be used to highlight such variances
6. budget reliability : if the budget is uncertain, then the variances need to be
examined。

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