Exercise - Variance Analysis

Exercise

Irfan Gadget Sdn Bhd manufactures products for children and babies. Below is the budgeted cost information of one of its products which is baby car seat for the month of July 2018 based on the budgeted production and sales of 4,000 units.

                            

    RM

Direct material:                                    

                          Welding rods (12,000 kg)                 240,000

                          Fabrics (8,000 meters)                       80,000

                          Direct labour (8,000 hours)               160,000

                          Variable overhead                               80,000

                          Fixed overhead                                   40,000

 

The variable overhead cost is absorbed based on direct labour hours while the fixed overhead cost is absorbed based on number of units produced. The standard selling price of the baby car seat is RM200 per unit.

The actual data for the month is as follows:

Units produced and sold                          5,000

Selling price per unit                               RM180

Direct material:

Welding rods purchased and used   12,500 kg@ RM18 per kg

Fabrics purchased and used           8,750 meters @ RM8 per meter

Direct labour                                         10,000 hours @ RM15 per hour

Variable overhead cost                           RM100,000

Fixed overhead cost                               RM40,000

Required:

a.    Prepare a standard cost for one unit of baby car seat.                               

b.    Analyse the following:

i)          Direct material price variance for welding rods

ii)         Direct material usage variance for fabrics

iii)        Direct labour rate variance

iv)       Direct labour efficiency variance

v)        Variable overhead expenditure variance

vi)       Variable overhead efficiency variance

vii)      Fixed overhead expenditure variance

viii)     Fixed overhead volume variance

ix)       Sales margin price variance

x)        Sales margin volume variance

         

c.  Construct a statement reconciling budgeted profit and actual profit for the month of July 2018 assuming Irfan Gadget Sdn Bhd has the following additional variances:

            i.        Direct material usage variance of RM50,000 (F) for welding rods.

           ii.        Direct material price variance of RM17,500 (F) for fabrics.

Variance Analysis Exercises

Hi there,

Using the same old example from the previous posting of Standard Costing, I expanded the exercises and it looks like below

Example:

Setandet Kos Sdn Bhd manufactures mobile phone by the name of oPhone. Below is the budgeted cost information of oPhone for the month of October 2018 based on the budgeted production and sales of 5,000 units.

                            

    RM

Direct material:                                    

                             Plastic casings (10,000 kg)                       600,000

                             Wires (10,000 meters)                             120,000

                             Direct labour (8,000 hours)                      240,000

                             Variable overhead                                    100,000

                             Fixed overhead                                          60,000

The variable overhead cost is absorbed based on direct labour hours while the fixed overhead cost is absorbed based on number of units produced. The standard selling price of oPhone is RM1,200 per unit.

Calculate the standard cost for oPhone.

The actual data for the month is as follows:

Units produced and sold                          6,000

Selling price per unit                               RM1,000

Direct material:

Plastic casings purchased and used   12,500 kg@ RM58 per kg

Wires purchased and used                10,750 meters @ RM10 per meter

Direct labour                                         10,000 hours @ RM22 per hour

Variable overhead cost                           RM120,000

          Fixed overhead cost                               RM60,000

Analyse the following:

i)          Direct material price variance for plastic casings

ii)         Direct material usage variance for wires

iii)        Direct labour rate variance

iv)       Direct labour efficiency variance

v)        Variable overhead expenditure variance

vi)       Variable overhead efficiency variance

vii)      Fixed overhead expenditure variance

viii)     Fixed overhead volume variance

ix)       Sales margin price variance

x)        Sales margin volume variance

        

Variance Analysis

---

Definition

Variance Analysis, in managerial accounting, refers to the investigation of deviations in financial performance from the standards defined in organizational budgets.

Explanation

Variance analysis typically involves the isolation of different causes for the variation in income and expenses over a given period from the budgeted standards.

So for example, if direct wages had been budgeted to cost $100,000 actually cost $200,000 during a period, variance analysis shall aim to identify how much of the increase in direct wages is attributable to:

• Increase in the wage rate (adverse labor rate variance);
• Decline in the productivity of workforce (adverse labor efficiency variance);
• Unanticipated idle time (labor idle time variance);
• More wages incurred due to higher production than the budget (favorable sales volume variance).

Types of Variances

Main types of variances are as follows:

• Sales Price Variance
• Sales Volume Variance
• Sales Mix Variance
• Sales Quantity Variance
• Direct Material Price Variance
• Direct Material Usage Variance
• Direct Material Mix Variance
• Direct Material Yield Variance
• Direct Labor Rate Variance
• Direct Labor Efficiency Variance
• Direct Labor Idle Time Variance
• Variable Overhead Spending Variance
• Variable Overhead Efficiency Variance
• Fixed Overhead Total Variance
• Fixed Overhead Spending Variance
• Fixed Overhead Volume Capacity & Efficiency Variance

taken from: https://accounting-simplified.com/management/variance-analysis/index.html

Definition

Sales Price Variance is the measure of change in sales revenue as a result of variance between actual and standard selling price.

Formula

Sales Price Variance:

=	(Actual Price - Standard Price)	x	Actual Unit
=	Actual Price x Actual Units Sold	-	Standard Price x Actual Units Sold
=	Actual Sales Revenue	-	Standard Revenue of Actual Units Sold

Explanation

Sales Price Variance can be calculated in a number of ways as illustrated in the formulas given above. The calculation of the variance is in fact very simple if you just remember the objective of finding the variance, i.e. how much change in sales revenue is attributable to the change in selling price from the standard?

Example

ABC PLC is a fertilizer producer which specializes in the manufacture of NHK-II (a chemical fertilizer) and ORG-I (a types of organic fertilizer).

Following information relates to the sale of fertilizers by ABC PLC during the period:

Material	Quantity	Acutal Price	Standard Price
NHK-II	200 tons	$380/ton	$400/ton
ORG-I	300 tons	$660/ton	$600/ton

Sales Price Variance shall be calculated as follows:

	Actual Price (a)	Standard Price (b)	a - b = c	Unit Sold (d) (tons)	c x d
NHK-II	380	400	20	200	4,000 Adverse
ORG-I	660	600	60	300	18,000 Favorable
Total					14,000 Favorable

Analysis

Favorable sales price variance suggests higher selling price realized during the period than anticipated in the standard. Reasons for favorable sales price variance may include:

• Decrease in the number of competitors in the market
• Improved product differentiation and market segmentation
• Better promotion and aggressive sales campaign

Adverse sales price variance indicates that sales were made at a lower average price than the standard. Causes for adverse sales price variance may include:

• Increase in competition in the market
• Decrease in demand for the products
• Reduction in price enforced by regulatory authorities

Sales Volume Variance

Definition

Sales Volume Variance is the measure of change in profit or contribution as a result of the difference between actual and budgeted sales quantity.

Formula

Sales Volume Variance (where absorption costing is used):

=

(Actual Unit Sold - Budgeted Unit Sales)

x

Standard Profit Per Unit

Sales Volume Variance (where marginal costing is used):

=

(Actual Unit Sold - Budgeted Unit Sales)

x

Standard Contribution Per Unit

Explanation

Sales Volume Variance quantifies the effect of a change in the level of sales on the profit or contribution over the period.

Sales volume variance differs from other volume based variances such as material usage variance and labor efficiency variance in that it calculates not just the variance in sales revenue as a result of the change in activity but it quantifies the overall change in the profit or contribution.

The nature of the sales volume variance helps in forming a more meaningful analysis of other variances in the preparation of the operating statement. For example, the material usage variance needs to take into account only the difference between the actual consumption of material and the standard consumption of material for the actual number of units sold since the sales volume variance already takes into account the variation in material cost caused by the difference between budgeted and actual sales volume.

Sales volume variance should be calculated using the standard profit per unit in case of absorption costing whereas in case of marginal costing system, standard contribution per unit is to be applied.

Example

Wrangler Plc is a manufacturer of jeans trousers and jackets.

Information relating to Wrangler Plc's sales during the last period is as follows:

	Trousers Units	Jackets Units
Budgeted	12,000	5,000
Actual	10,000	8,000

Standard costs and revenues per unit of trouser and jacket are as follows:

	Trousers $	Jackets $
Revenue	20	50
Direct labor	5	10
Direct Material	6	15
Variable Overheads	4	10
Fixed Overheads	2	5

Wrangler Plc uses marginal costing to prepare its operating statement.

Sales Volume Variance shall be calculated as follows:

Step 1: Calculate the standard contribution per unit

As Wrangler Plc uses marginal costing system, we need to calculate the standard contribution per unit. Allocation of the fixed overheads may therefore be ignored.

	Trousers $	Jackets $
Revenue	20	50
Direct labor	(5)	(10)
Direct Material	(6)	(15)
Variable Overheads	(4)	(10)
Standard contribution per unit	5	15

Step 2: Calculate the difference between actual units sold and budgeted sales

	Trousers Units	Jackets Units
Actual	10,000	8,000
Budgeted	(12,000)	(5,000)
Difference	(2,000)	3,000

Step 3: Calculate the variance for each product

	Trousers	Jackets
Standard contribution per unit (Step 1)	$5	$15
Actual Units Sold - Budgeted Sales (Step 2)	x (2000 units)	x 3000 units
Variance	$10,000 Adverse	$45,000 Favorable

Step 4: Add the individual variances

Sales Volume Variance ($10,000 - $45,000)

=

$35,000 Favorable

Note: If Wrangler Plc used absorption costing, sales volume variance would be calculated based on the standard profit per unit (i.e. fixed costs per unit of output will need to be deducted from the standard contribution calculated in Step 1).

Analysis

Favorable sales volume variance suggests a higher standard profit or contribution than the budgeted profit or contribution.
Reasons for favorable sales volume variance include:

• Favorable sales quantity variance (i.e. higher total number of units sold than budgeted)
• Favorable sales mix variance> (i.e. higher proportion of the more profitable products sold than planned in the budget)

Adverse sales volume variance indicated a lower standard profit or contribution than the budgeted profit or contribution.
Causes for an adverse sales volume variance include:

• Adverse sales quantity variance (i.e. lower total number of units sold than budgeted)
• Adverse sales mix variance (i.e. higher proportion of the less profitable products sold than anticipated in the budget)

Favorable sales volume variance can be achieved in case of a favorable sales mix variance even if the total number of units of all products sold during the period are lower than the total budgeted units (and vice versa).


It is therefore important to investigate the sales volume variance by analyzing it further into sales quantity and sales mix variances in case where an organization sells more than one product.