CHAPTER 5

Planning and Operational Variances

Two sets of variances can be calculated. Planning variances analyse the difference between original and revised budgets Operational variances analyse the difference between the revised (realistic) budget and actual performance.

The traditional analysis vs the new analysis

Traditional variances

Original budget

Revised budget

Actual result

Planning variances

Operational variances

New analysis
The planning variances are largely uncontrollable by operating management since they can be considered to arise as a result of bad planning. The operational variances indicate the extent to which attainable budgets (ie. the revised standards) have been achieved and, therefore, can be considered as controllable.

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ACCA PAPER F5- FOCUS NOTES Example

A manufacturing company imports tin to make tin cabinets. For the year to 31 December the budget specifies: Production Materials used Actual performance Production Materials used 10,000 cabinets 28,000 kg at 5 per kg 10,000 cabinets 30,000 kg at 4 per kg

At the end of the year it becomes apparent, with the benefit of hindsight, that a more realistic price for tin, given the adverse movement in exchange rates, would have been 5.50 per kg. It is also discovered that competitors have been using just 2 kg per cabinet. Calculate appropriate operational and planning variances.

Solution
To calculate the operational variances, simply use the price type and quantity type formula (introduced in Chapter 4), but replace any ex-ante standards with ex-post standards. (If you do not like the terms ex-ante or ex-post you can use the terms original and revised or new ). As a reminder: The price type formula: The quantity formula: (SP AP) AQ (SQ AQ) SP

Using the revised standards and the above formulae the operational variances can be calculated as follows.

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Chapter 5 Planning and Operational Variances

Material price (SP AP) AQ (5.50 5.00) x 28,000 Material usage (SQ AQ) SP ([2 kg x 10,000 units] 28,000) x 5.50 (25,000 28,000) x 5.50 = 16,500 A = 14,000 F

Note that SQ = the standard quantity of materials for actual production. That is, the budget needs to be flexed. Exam technique To calculate the planning variances, the following formula should be used. Price type variance: (Original SP Revised SP) x REVISED SQ Quantity type variance: (Original SQ Revised SQ) x ORIGINAL SP The total planning variance can be established as follows. Revised budget: Original budget: Total planning variance SP x SQ x Budgeted production SP x SQ x Budgeted production = = X X ___ X ===

Note that the examiner may refer to a planning variance as a revision variance.

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ACCA PAPER F5- FOCUS NOTES

Using the above formula we can produce the material price and material usage planning variances as follows. Material price planning variance (Original SP Revised SP) x Revised SQ (4.00 5.50) [2.5 Kg x 10,000 units] = 37,500 A Material usage planning variance (Original SQ Revised SQ) x Original SP ([3 x 10,000] [2.5 x 10,000]) x 4.00 = 20,000 F The examiner never uses actual volumes when calculating planning variances. The quantity of 10,000 units used in the above calculations is the budgeted quantity.

Volume variances

The examiner may split a volume variance into elements for capacity, idle time and productivity (efficiency). The following tabular approach is recommended for splitting either a sales or production volume variance. (1) Budgeted hours for budgeted sales/production (2) Actual hours less budgeted idle time (3) Actual hours less actual idle time (4) Budgeted hours for actual output/production

Capacity variance

Idle time variance

Productivity (efficiency) variance

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