Exam 9: Variance Analysis: Revenue and Cost

A contract with a new supplier may cause a favourable or unfavourable materials price variance.

The dollar amount of the production volume variance is the most informative element of this variance.

When the proportion of labour related costs in the variable overhead cost pool is high, machine hours is an appropriate allocation base.

The production volume variance is equivalent to the amount of under or over applied overhead.

For external reporting purposes variances relating to over and under applied overhead should be treated as an expense.

The sales price variance reflects the difference between standard and actual selling prices.

Scenesay Ltd is a capital intensive firm. Indirect costs make up nearly 70% of the product costs. The company has no direct material costs because customers provide the direct materials used for each job. To plan and control such costs, the firm employs flexible budgets and standard costs. Overhead rates, based on direct labour hours, are derived from the master budget. Master Budget Actual Results Units produced 4,000 3,620 Direct Labour Hours 10,000 11,000 Fixed Overhead \ 200,000 \ 205,000 Variable Overhead \ 320,000 \ 355,000 Direct Labour \ 200,000 \ 180,000 The direct labour price variance was:

The use of standards assists managers to identify the source of variances.

Rilloto Ltd uses a standard costing system. Overhead costs are allocated based on direct labour hours. The standard variable overhead and fixed overhead rates are $3 and $10 per direct labour hour, respectively. Data relevant for the current period include: Direct Materials Purchased 75,000@,\ 11 per kg Direct Materials Used 75,000 Standard quartity of direct materials for actual production 80,000 Direct Materials stardard price \ 13 per kg Direct labour costs incured 76,000@\ 14 per hour Standard Direct Lubour hours for actual production 78,000 hours Stardard Direct Labour cost per hour \ 15 per hour Variable overhead costs incured \ 231,210 Fixed overhead costs ircured \ 763,000 The direct materials efficiency variance is:

The flexible budget is equal to budgeted revenue and costs multiplied by actual volume.

The sales volume variance can be broken down into market size variance, market share variance and product volume variance.

The production volume variance is adjusted out at the end of each accounting period.

A favourable variable overhead spending variance could be due to lower use of actual resources than expected or lower cost of actual resources compared to standard costs.

The sales price variance is calculated using (actual price - standard price) multiplied by budgeted volume.

Scenesay Ltd is a capital intensive firm. Indirect costs make up nearly 70% of the product costs. The company has no direct material costs because customers provide the direct materials used for each job. To plan and control such costs, the firm employs flexible budgets and standard costs. Overhead rates, based on direct labour hours, are derived from the master budget. Master Budget Actual Results Units produced 4,000 3,620 Direct Labour Hours 10,000 11,000 Fixed Overhead \ 200,000 \ 205,000 Variable Overhead \ 320,000 \ 355,000 Direct Labour \ 200,000 \ 180,000 The variable overhead spending variance was:

The direct materials efficiency variance is measured at standard price because the price variance has already been isolated.

Adizero Ltd uses a standard cost system. Indirect costs were budgeted at $200,000 plus $15 per direct labour hour. The overhead rate is based on 10,000 hours. Actual results were: Standard direct labour hours 9,000 Actual direct labour hours 10,000 Fixed overhead \ 190,000 Variable overhead \ 185,000 The variable overhead efficiency variance was:

Using the standard cost for raw materials in the ledgers allows managers to identify the price variance during the period in which the variance occurred.

The variable overhead efficiency variance is favourable if the actual volume of the allocation base is less than expected given actual production levels.

The direct materials efficiency variance compares the actual amount of materials used to the standard amount of materials that should have been required for the actual level of output.