Introduction to Variance Analysis
Variance analysis is a crucial management accounting technique which involves the comparison of the standards numbers to the actual performance numbers (Ward, 2012). It is to be noted that there are different category of variance analysis, and same could be computed for both the quantity and price of materials, labour rate, labour efficiency and variable overhead, and there reporting of results is done to the management of an enterprise. Each of the variances has its own importance depending on the objective of the analysis, as undertaken by the management (Corporate Finance Institute, 2022). On the analysis of these variances, companies are able to use the information for the identification of problem areas in performance as well as making strategic changes therein for the improvement of the overall company performance. The following are presented the different variances for entity Video Tech Ltd for different variables.
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a) Direct labour rate variance |
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|
Description |
Actual hours (a) |
Actual costs (b) |
Standard rate |
Actual rate (b/a) |
Variance = (Stadard rate- Actual rate)*Actual hours |
|
Assembly |
3900 |
$ 93,600.00 |
$ 24.00 |
$ 24.00 |
$ - |
|
Printed circuit boards |
2400 |
$ 71,280.00 |
$ 27.00 |
$ 29.70 |
$ -6,480.00 |
|
Reading heads |
3500 |
$1,15,500.00 |
$ 30.00 |
$ 33.00 |
$ -10,500.00 |
|
Total |
$ -16,980.00 |
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b) Direct labour efficiency variance |
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|
Description |
Actual units (a) |
Standard hours (b) |
Total Standard Hours (a*b) |
Standard rate |
Actual hours |
Variance = Stadard rate* (Standrad hours -Actual hours) |
|
Assembly |
2200 |
2 |
4400 |
$ 24.00 |
3900 |
$ 12,000.00 |
|
Printed circuit boards |
2200 |
1 |
2200 |
$ 27.00 |
2400 |
$ -5,400.00 |
|
Reading heads |
2200 |
1.5 |
3300 |
$ 30.00 |
3500 |
$ -6,000.00 |
|
Total |
$ 600.00 |
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|
c) Direct material price variance |
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|
Description |
Standard cost per unit |
Actual quantity (a) |
Actual total cost (b) |
Actual costs per unit(b/a) |
Variance = Actual quantity* (Standrad price -Actual price) |
|
Housing |
$ 20.00 |
2200 |
$ 44,000.00 |
$ 20.00 |
$ - |
|
Printed circuit boards |
$ 15.00 |
4700 |
$ 75,200.00 |
$ 16.00 |
$ -4,700.00 |
|
Reading heads |
$ 10.00 |
9200 |
$ 1,01,200.00 |
$ 11.00 |
$ -9,200.00 |
|
Total |
$ -13,900.00 |
|
d) Direct material quantity variance |
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|
Description |
Standard price |
Actual Quantity |
Quantity per unit (a) |
Actual output (b) |
Standard quantity = (b*a) |
Variance = Standrad price*(Standard quantity-Actual quantity) |
|
Housing |
$ 20.00 |
2200 |
1 |
2200 |
2200 |
$ - |
|
Printed circuit boards |
$ 15.00 |
4700 |
2 |
2200 |
4400 |
$ -4,500.00 |
|
Reading heads |
$ 10.00 |
9200 |
4 |
2200 |
8800 |
$ -4,000.00 |
|
Total |
$ -8,500.00 |
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|
e) Variable overhead spending variance |
|
|
Computation of allowable standard hours |
|
|
Std hours allowed = |
Actual units*Std hours |
|
Std hours allowed = |
2200*4.5 |
|
Std hours allowed = |
9900 |
|
Variable overhead spending variance = |
(Std rate x Std allowed hours) - Actual variable overhead |
|
Variable overhead spending variance = |
(2*9900)-18800 |
|
Variable overhead spending variance = |
$ 1,000.00 |
|
f) Variable overhead efficiency variance |
|
|
Actual hours = |
9800 |
|
Standard allowed hours = |
9900 |
|
Standard rate = |
$ 2.00 |
|
Variable overhead efficiency variance = |
Standard rate x (Standard hours allowed - Actual hours) |
|
Variable overhead efficiency variance = |
$ 200.00 |
|
g) Sales price variance |
|
|
Budgeted selling price = |
$ 300.00 |
|
Actual selling price = |
$ 300.00 |
|
Actual units sold = |
2200 |
|
Sales price variance= |
(Budgeted selling price -Actual selling price)*Actual units sold |
|
Sales price variance= |
0 |
|
h) Sales volume variance |
|
|
Budgeted selling price = |
$ 300.00 |
|
Budgeted sale units = |
2000 |
|
Actual units sold = |
2200 |
|
Sales price variance= |
(Actual units sold- Budgeted sale units)*Budgeted selling price |
|
Sales price variance= |
$ 60,000.00 |
|
Direct Material price variance |
(13,900) |
Unfavourable |
|
Direct Material quantity variance |
(8500) |
Unfavourable |
|
Direct Labour rate variance |
(16980) |
Unfavourable |
|
Direct Labour efficiency variance |
600 |
Favourable |
|
Variable overhead spending variance |
1000 |
Favourable |
|
Variable overhead efficiency variance |
200 |
Favourable |
|
Contribution margin volume variance |
16200 |
Favourable |
|
Total variance |
-21580 |
Unfavourable |
Budgeted unit contribution margin = Budgeted total contribution margin/ Budgeted units
Budgeted unit contribution margin = $ 162000/ 2000
Budgeted unit contribution margin = $ 81 per unit
Contribution margin volume variance = (Actual units - Budgeted units)* Budgeted unit contribution
Contribution margin volume variance = (2200- 2000) $ 81
Contribution margin volume variance (Favourable) = $ 16200
In the given circumstance, there have been assessed certain behavioural factors which have led to the frictions between production managers, as well as the production managers and maintenance managers; which have been explained as follows. It is imperative to note that the downtime of equipment has led to extra overtime costs. This would lead to frictions among managers of Reading heads and Printed circuit boards, and the maintenance department. Further to be noted is that the performance of the assembly department is dependent on the inputs as given by the other production departments. Thus, the frictions may arise when the manager of assembly department would put pressure on other departmental managers, in order to enhance its production level. In addition, the printed circuit boards department along with the reading heads department can engage in rejection of the parts that would have otherwise been modified and utilized, in usual circumstances. Thus, it can be concluded that there are individual departmental interests leading to frictions among the managers.
On the assessment of Robert Smith's analysis of the unfavourable contribution margin, a range of observations have been drawn. The primary observation is that the said analysis is incomplete because there has been a failure on part of Robert Smith in terms of assessment of the real reasons for the unfavourable variances. It is imperative to note that a variance analysis is regarded as efficient only when it involves both the quantitative as well as the qualitative aspects (Drury, 2018). Thus, it is the duty of Robert Smith to enlighten the management with the actual reasons that has led to the variances in the performance and not let management to make its own conclusions. This is because such a conclusion could be inappropriate as each and every departmental manager would try to hide its own efficiencies of the performance. In addition it has been observed that the primary reason for variance as elaborated by Robert Smith is in form of inefficiency of the direct labour. While there are additionally issues in term of material usage as well as the maintenance issues that led to the equipment downtime for some departments. Thus, the report of Robert Smith not only lacks the completeness in terms of absence of reasons of variances, but also there has been an inefficient information as key reasons for variances are not highlighted and only one issue is focussed.
|
Description |
Static budget |
Flexible budget |
Actual budget |
Variance |
|
Units |
2000 |
2200 |
2200 |
0 |
|
Sell price |
$ 300.00 |
$ 300.00 |
$ 300.00 |
$ - |
|
Revenue |
$ 6,00,000.00 |
$ 6,60,000.00 |
$ 6,60,000.00 |
$ - |
|
Variable costs: |
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|
Direct Material |
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|
Housing units |
$ 40,000.00 |
$ 44,000.00 |
$ 44,000.00 |
$ - |
|
Printed circuit boards |
$ 60,000.00 |
$ 66,000.00 |
$ 75,200.00 |
$ -9,200.00 |
|
Reading heads |
$ 80,000.00 |
$ 88,000.00 |
$ 1,01,200.00 |
$ -13,200.00 |
|
Total Direct Material |
$ 1,80,000.00 |
$ 1,98,000.00 |
$ 2,20,400.00 |
$ -22,400.00 (U) |
|
Direct labour |
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|
Assembly |
$ 96,000.00 |
$ 1,05,600.00 |
$ 93,600.00 |
$ 12,000.00 |
|
Printed circuit boards |
$ 54,000.00 |
$ 59,400.00 |
$ 71,280.00 |
$ -11,880.00 |
|
Reading heads |
$ 90,000.00 |
$ 99,000.00 |
$ 1,15,500.00 |
$ -16,500.00 |
|
Total direct labour |
$ 2,40,000.00 |
$ 2,64,000.00 |
$ 2,80,380.00 |
$ -16,380.00 (U) |
|
Variable overhead |
$ 18,000.00 |
$ 19,800.00 |
$ 18,800.00 |
$ 1,000.00 (F) |
|
Total variable costs |
$ 4,38,000.00 |
$ 4,81,800.00 |
$ 5,19,580.00 |
$ -37,780.00 (U) |
|
Contribution margin |
$ 1,62,000.00 |
$ 1,78,200.00 |
$ 1,40,420.00 |
$ -37,780.00 (U) |
References
Corporate Finance Institute (2022) The role of variance analysis [online] Available from: https://corporatefinanceinstitute.com/resources/knowledge/accounting/variance-analysis/ [Accessed on: 20 January 2022].
Drury, C. (2018) Cost and management accounting. Australia: Cengage Learning.
Ward, K. (2012) Strategic management accounting. UK: Routledge.
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