Professional Documents
Culture Documents
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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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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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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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
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