variance & variance analysis management accounting.ppt

About variance analysis

2. Further Variance
Analysis
16

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Management Accounting (Third Edition)
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Learning Outcomes
Explain and calculate material mix and yield variances
Explain the difference between the individual price and
weighted average price methods in calculating the material
mix variance
Explain and calculate sales mix and quantity variances
Understand the principles of planning and operational
variances
Explain and calculate the planning and operational variances
Prepare the operating statement incorporating the planning
and operational variances
Explain the benefits and limitations of planning and
operational variances

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Management Accounting (Third Edition)
© Oxford Fajar Sdn. Bhd. (008974-T), 2018 16–4
Further Variance Analysis
Material usage variance
•Material mix variance
•Material yield variance
Labour efficiency variance
•Labour mix variance (team composition variance)
•Labour yield variance (team productivity
variance)
Sales volume variance
•Sales mix variance
•Sales quantity variance
Planning and operational variances

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Management Accounting (Third Edition)
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Material Mix Variance
When more than one type of material is used
Compares the actual mix and the standard mix
of actual quantity used, valued at the standard
price per unit
Two methods:
–Individual price method
–Weighted average price method

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Management Accounting (Third Edition)
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Material Yield Variance
Compares the actual yield and the standard
yield from the actual input, valued at the
standard cost per unit
Two methods:
–Output measure
–Input measure

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Management Accounting (Third Edition)
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Limitations of Material Mix
and Yield Variances
When input materials are different in nature
Changing the mix proportion may affect the
quality of the final output
Assumption made:
•the correlation between the physical inputs and
outputs is constant, irrespective of the
proportion of the mix

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Labour Mix Variance
When more than one type of labour is used
Team composition variance
Compares the actual mix and standard mix of
the actual labour hours used, valued at the
standard rate of labour

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Management Accounting (Third Edition)
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Labour Yield Variance
Also known as team productivity variance
Compares the actual yield with the standard
yield, valued at the standard cost of the yield
Evaluates the efficiency of the labour as a
whole

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Management Accounting (Third Edition)
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Sales Mix and
Quantity Variances
Sales margin mix variance
–Compares the actual quantity sold at actual mix and
the actual quantity sold at the standard mix, valued
at the standard margin per unit
 Sales margin quantity variance
–Compares the actual quantity sold at the standard
mix and the budgeted quantity expected to be sold at
the standard mix, valued at the standard margin per
unit
Contribution margin—variable costing system
Profit margin—absorption costing system

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Management Accounting (Third Edition)
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Planning and Operational
Variances
Planning variance is due to the original
standard set not being an attainable standard
for the current environment
Operational variance arises due to the
difference between the actual results and the
revised standards
Provides more useful management information
for control purposes

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Management Accounting (Third Edition)
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Calculation of Planning and
Operational Variances
Planning cost variance
–Compares the original standards with the revised
standards
Operational cost variance
–Compares the actual results with the revised
standards

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Planning Cost Variances
Original standard cost are higher than the
revised standard costs—Favourable variance
Original standard cost are lower than the
revised standard costs—Adverse variance

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Operational Cost Variances
Actual costs are lower than the revised
standard costs—Favourable variance
Actual costs are higher than the revised
standard costs—Adverse variance

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Sub Variances
Total cost variance
–Planning cost variance + Operational cost variance
Planning cost variance is not controllable
Provides useful management information on
improving their forecasting
Operating cost variance is controllable

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Management Accounting (Third Edition)
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Sub Variances
Total material cost variance
–Material planning cost variance + material
operational cost variance
Material planning cost variance
–Material planning price variance + material
planning usage variance
Material operational cost variance
–Material operational price variance + material
operational usage variance

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Management Accounting (Third Edition)
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Sales Planning and
Operational Variances
Sales planning variance is known as market
volume variance.
Sales operational variance is known as market
share variance.

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Management Accounting (Third Edition)
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Benefits of Planning and
Operational Variances Analysis
In a volatile environment, standard costing and
variance analysis will become more realistic.
The controllable and uncontrollable variances
are emphasized.
The importance of the planning function is
highlighted.
The standard setting process may improve.
It is more acceptable by the managers.

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Management Accounting (Third Edition)
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Limitations of Planning and
Operational Variances
It is difficult to ascertain a realistic standard.
The process is time consuming.
There can be a tendency to justify that all
variances are due to planning uncontrollable
errors.