Advance Variance analysis.pptx performance

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1. Advance Variance Analysis Patrick Sawe MAF - 2023/24

2. Advance Variance Variance analysis is the process by which the total difference between standard and actual results is analysed. Advanced variance simply increase the degree to which the variance may be further analysed for deeper understanding and fair evaluation of performance. It covers the following dimensions; Material mix and yield variances. Sales mix and quantity variances Planning and operational variances. Sales market share and market size variances. 1. Material mix and yield variances When there is more than one input material, the material usage variance can be split into material mix and yield variances. Materials mix refers to the quantity of each material that is used to make a product – i.e. inputs. Material yield on the other hand refers to how much of a product is produced – i.e. our output. In many production processes, it may be possible to combine different levels (use a different mix) of the input materials to make the same product. This, in turn, may result in differing yields, depending on the mix of materials that has been used. Material mix and yield variances are calculated if: A product contains more than one type of material. These materials are interchangeable. There was a change in the proportions of the input materials .

3. Material mix variance The mix variance is looking at the change in the cost of materials when the input materials are used in different proportions to the set standard. For instance, if more of an expensive material has been used and less of a cheap material, then the cost will be higher – and the variance adverse. Steps in calculating mix variance Establish the standard mix (proportion of mixing in a product unit) Write down the actual input of each material in a column (this is the actual total quantity split in the actual mix = AQAM ) Determine the actual input in standard mix ( step 1 x total of step 2). Work out mix variance in units (step 3 – step 2). The total should be zero . Calculate mix variance in financial terms (step 4 x standard price per unit of input).

4. Example 1 Kibajaji operates a standard costing system. The standard direct materials to produce 1,000 units of output is as follows: Material grade Input quantity (kgs) Standard price per kg kg (TZS) A 600 1,100 B 240 2,400 C 360 1,500 During April the actual output of the product was 21,000 units. The actual materials issued to production were: Material grade Quantity (kgs) A 14,000 B 5,500 C 5,500 Required: Calculate the material mix variance for each material, and in total. Comment on the figures calculated.

5. Material Yield variance Measures the efficiency of turning the inputs into outputs. If the yield variance is adverse, it suggests that actual output is lower than the expected output. This could be due to labour inefficiencies, higher waste, inferior materials, or using a cheaper mix with a lower yield. There are two methods of calculating yield variance Method 1: The total method Actual output (given) xxx Expected outputs from actual input (xxx) Yield variance (units) xxx Multiplied by standard material cost per unit of output xxx Yield variance (financial terms) xxx

6. Method 2: The individual method Steps in calculating yield variance Calculate Standard usage for each material Copy actual input in standard mix from the mix variance (step 3 in mix variance) Work out yield variance in units (step 2 – step 3). Calculate yield variance in financial terms (step 3 x standard price per unit of input). Example 2 Using the same details as in example 1. Calculate the material yield variance for each material, and c omment on the figures calculated .

7. Example 3 Bodaboda company manufactures a chemical using two components, A and B. The standard information for one unit of the chemical are as follows: TZS Material A 10 kg at TZS 4,000 per kg 40,000 Material B 20 kg at TZS 6,000 per kg 120,000 160,000 In a particular period, 160 units of the chemical were produced, using 1,000 kgs of material A and 1,460 kgs of material B. Required: Calculate the material usage, mix and yield variances for each material.

8. TYU 1 The standard material cost per unit of a product is as follows: TZS Material X 2 kg @ TZS 3,000 per kg 6,000 Material Y 1 kg @ TZS 2,000 per kg 2,000 8,000 Actual production during the period was 5,000 units and the materials used were: Material X 9,900 kg costing TZS 27,000,000 Material Y 5,300 kg costing TZS 11,000,000 Required : Calculate Total materials cost variance Materials price variance Materials usage variance Mix variance and yield variance

9. 2. Sales mix and quantity variances Sales volume variance can be divided into two variances: sales mix and quantity variance Sales mix variance measures the impact on profit of a change in the sales mix of products sold Sales quantity variance measures the impact on profit of a different total quantity of products actually sold to budgeted Steps in calculating sales mix variance ( the same approach as we did in materials) The difference between the actual total quantity sold in the standard mix and the actual quantities sold, valued at the standard profit per unit: Establish the standard sales mix Find out actual sales based on actual mix (AQAM) Determine the actual sales in standard mix ( step 1 x total of step 2). Work out sales mix variance in units (step 3 – step 2). The total should be zero . Calculate sales mix variance in financial terms (step 4 x standard margin per unit).

10. Steps in calculating sales quantity variance ( the same approach as we did in materials) Method 1: Individual The difference between actual sales volume in the standard mix and budgeted sales valued at the standard profit per unit. Establish the standard sales mix Find out budgeted sales based on standard mix (BQSM) Determine the actual sales in standard mix ( step 1 x Actual sales). Work out sales quantity variance in units (step 3 – step 2). The total should be zero . Calculate sales quantity variance in financial terms (step 4 x standard margin per unit). Method 2 : Total The difference between actual sales volume and budgeted sales valued at the weighted average profit per unit. Sales quantity variance = (Actual sales quantity –budgeted sales quantity) x standard weighted average margin

11. Example 4 Fundi Juma Co operates a marginal costing system and sells two products Sofas (S) and Tables (T ). The standard contribution per unit for each product and the budgeted levels of production and sales for each product for the last period are as follows: Product S T Standard contribution per unit TZS 50,000 TZS 60,000 Budgeted production and sales (units) 8,000 12,000 The actual contribution per unit for each product and the actual levels of production and sales for each product for the last period are as follows: Product S T Actual contribution per unit TZS 55,000 TZS65,000 Actual production and sales (units) 9,500 11,000 Required : Calculate the following variances for the last period: ( i ) Sales mix contribution variance (ii) Sales quantity contribution variance.

12. TYU 2 Oga plc sells three products – Alpha, Beta and Gama. The following table shows the budget and actual results for these products: Alpha Beta Gama Budget: Sales (units) 200,000 100,000 100,000 Price ( per unit) TZS 20,000 TZS 25,000 TZS 30,000 Cost ( per unit ) TZS 17,000 TZS 21,000 TZS 24,000 Actual: Sales (units) 180,000 150,000 170,000 Price ( per unit) TZS 22,000 TZS 22,000 TZS 26,000 Cost (per unit ) TZS 16,000 TZS 18,000 TZS 25,000 Required Calculate the total sales margin variance, and analyse into the sales price variance; the sales mix variance; and the sales quantity variance

13. 3. Planning and operational variances The standard is set as part of the budgeting process which occurs before the period to which it relates. This means that the difference between standard and actual may arise partly due to an unrealistic budget and not solely due to operational factors. The budget may need to be revised to enable actual performance to be compared with a standard that reflects these changed conditions.

14. Cont. Planning and operational variances may be calculated for: Sales Materials Labour 1. Planning and operational variances for sales The sales volume variance can be sub-divided into a planning and operational variance:

15. Example 5 Hombolo has a sales budget of 400 units for the coming year based on 20% of the total market. On each unit, Hombolo makes a profit of TZS 3,000. Actual sales for the year were 450 but industry reports showed that the total market volume had been 2,200. Required (a ) Find the traditional sales volume variance. (b) Split this into planning and operational variances (market size and market share). TYU 3 Abasi Ltd sets its sales budget based on an average price of TZS 14,000 per unit and sales volume of 250 units. Competition was more intense than expected and the company only achieved sales of 220 and had to sell at a discounted price of TZS 12,500 per unit. The company was unable to reduce costs so profit per unit fell from TZS 4,000 per unit to TZS 2,500 per unit. It was estimated that the total market volume grew by 10% from 1,000 units to 1,100 units. Required: (a) Calculate the sales price and volume variances. (b) Analyse the volume variances into market share and market size. (c) Discuss whether the price variance is a planning or operational variance .

16. 2. Planning and operational variances for materials Planning and operational variances can be calculated for materials in the same way as above. Example 6 The standard cost per unit of raw material was estimated to be TZS 5,200 per unit . However, due to subsequent improvements in technology, the general market price at the time of purchase was TZS 5,000 per unit. The actual price paid was TZS 5,180 per unit. 10,000 units of the raw materials were purchased during the period. Required: Calculate (a) Planning and operational materials price variances. (b) Comment on the results . TYU 4 Honda Ltd uses one raw material for one of their products. The standard cost per unit at the beginning of the year was TZS 28,000 made up as follows : Standard material cost per unit = 7 kg per unit at TZS 4,000 per kg = TZS 28,000. In the middle of the year the supplier had changed the specification of the material slightly due to problems experienced in the country of origin, so that the standard had to be revised as follows: Standard material cost per unit = 8 kg per unit at TZS 3,800 per kg = TZS 30,400 . The actual output for was 1,400 units. 11,000 kg of material was purchased and used at a cost of TZS 41,500,000. Required: Calculate (a) Material price and usage variances using the traditional method (b) All planning and operational material variances.

17. 3. Planning and operational variances for labour Planning and operational variances for labour can be calculated in the same way as for materials. Example 7 The standard hours per unit of production for a product is 5 hours. Actual production for the period was 250 units and actual hours worked were 1,450 hours. The standard rate per hour was TZS 10,000. Because of a shortage of skilled labour it has been necessary to use unskilled labour and it is estimated that this will increase the time taken by 20%. Required: Calculate the planning and operational efficiency variances .