Week 8 - Variance Analysis

Question 1

What are variances?

Answer 1

differences between what we budget as results and what actual results are

Question 2

mix variance meaning and calculation

Answer 2

• mix: measures what happens if we change the proportion of each ingredient in the mix
• given the actual number of inputs used, would we be better off if we changed the input ratio?

Calculation:

• actual total quantity used x actual proportion
• LESS
• actual total quantity used x planned proportion
• x budgeted price
• = mix variance

Question 3

yield variance and calculation

Answer 3

• yield: measures the effect on cost of any difference between the actual usage and that justified by the output
• how changing proportions affect productivity and produces yield variance

calculation:

• actual total quantity used x budgeted proportion x budgeted price
• LESS
• budgeted total quantity to be used x budgeted proportion x budgeted price

Question 4

total efficiency variance

Answer 4

• sum of mix and yield variances
• variances arising from different weighted average prices and different yields

calculation:

• actual total Q of all inputs used x actual input mix x budgeted prices
• LESS
• budgeted total Q of all inputs used x budgeted input mix x budgeted prices

Question 5

operational variances

Answer 5

these are variances which arise through factors in the control of management. they are found by comparing actual performance with revised more realistic standards

Question 6

planning variances

Answer 6

variances caused by external factors and reflect the difference between the original and the revised standards

Question 7

standard costing

Answer 7

a control technique which compares standard costs and revenues with actual results to obtain variances which are used to stimulate improved performance

Question 8

standard cost

Answer 8

a standard cost is a carefully predetermined unit cost which is prepared for each cost unit. it contains details of the standard amount and price of each resource that will be used. The data can be stored on standard cost cards

Question 9

some alternative bases on which standards are set - standard costing:

Answer 9

• based on prior period level of performance within the organisation
• based on the level of performance achieved by comparable organisations
• based on a level of performance required to meet organisational objectives

Question 10

standard costing: variance analysis

Answer 10

involves breaking down the total difference between a standard cost and actual cost incurred to explain how much of it is caused by the usage of resources being different from the standard and how much of it is caused by the price of resources being different from the standard

Question 11

what causes variances?

Answer 11

getting the original standard or budget wrong - planning errors

one or a combination of two or more operating factors - operational variances

possible interdependencies between variances - favourable variance resulting into an adverse variance

Question 12

usefulness of standard costing and variance analysis

Answer 12

1. control mechanism
   
   1. cost control
   2. revenue; pricing
   3. improvements
2. performance appraisal mechanism
   
   1. motivate managers to achieve targets
   2. link standards to pay

Question 13

Modern management techniques and standard cost analysis:

Answer 13

1. JIT
2. AMT
3. TQM
4. ABC