What’s it all about?
An analysis of your budget compared to what really happened that allows you to work out why you didn’t actually meet what you said you were going to do. Techniques for determining what the quantity and price changes were that affected you and considering what you might be able to do about it next time.
Includes Flexed Budget.
Variances that occur under Absorption Costing only
Uses slightly different terminology to me, but remember, all variances are either quantity or price whatever they are called.
Efficiency = quantity
Rate = price
Overhead Variances when we are using Absorption Costing
All overhead variances (comparing Budget to Actual) are Price Variances only. The nature of Fixed Costs is that they don’t change with activity after all. The only change is when we are looking at the Fixed Costs Absorbed when we are using Absorption Costing.
Because we have absorbed Factory Overhead in to the units we are making on the basis of per unit or per hour, if we make a different number of units or work a different number of hours we will have Absorption Variances.
Here I give a worked example and a handout from PQ Magazine which gives an explanation of what is going on.
The caution I always give is that, just because a variance here seems Favourable, it doesn’t always mean it is a good thing.
Working more hours will give a Favourable variance because theoretically the more hours we work the more overhead we end up charging to customers. the problem is though, we don’t sell hours of work, we sell units of product.
If we have worked more hours without producing more units then actually we won’t get that overhead back from the customers. And we will have paid more in Labour to make the units.
This is shown in the working, where we work more hours (get a Favourable variance), but haven’t made the extra units we should have done with the extra hours.
Don’t forget, you can use any method of Variance Analysis that gives you the correct answer, you don’t have to follow the method I use and teach.
Here are examples of questions worked using different methods. You should be able to get the same answer by following my method too.
A basic approach, a basic question, but it does include discussion of possible written answers. I often think these are too simplistic, but then, in exams we often ahve to be.
A straightforward explanation of quantity and price variances using the traditional (not my) method.
Here is an example using the more traditional methods, not my ‘patented’ Rooks Method. A long example and particularly useful if you don’t like my approach. You could either follow this through to compare methods, or use the data and my method and see how that they give the same answer.
Possible Written Questions.
(No indication of marks – the more marks a question gets, the more you are expected to write – detail that is, not just words!) If you can’t answer these, you need to do some more reading. I do ‘find’ questions elsewhere, so these aren’t all questions I have used myself.
Define Variance Analysis.
Explain in what circumstances is it necessary to flex a budget when conducting a variance analysis and why.
A company made 70 units more than it had budgeted for. Explain why it cannot use the budget to compare to the actual costs of producing the units and what it should do.
(These are other people’s, so they may use different methods to me. Plus, if there is an error in the answer, it’s not my fault!). Bear in mind that they might also use slightly different terminology.
Try these multiple choice questions. They don’t show the answers, but you may get them if you submit your answers at the end. Note that they use the formula approach to answering variance analysis questions – a different method to mine. You will be able to get the same answers to all of the calculations. The only questions you probably won’t get right, are the ones that specifically ask about the formulas.
Do be aware of the different use in terminology. The ideas are the same, but some people all them different things…
Done in a different way to me, but straightforward Quantity and £ variances for you to do (with answers).