@PO Taken ATP Advance Variance Analysis - Pgs.18

ADVANCED VARIANCE ANALYSIS
OVERVIEW
Objectives
To calculate materials mix and yield variances and sales mix and quantity
variances.
To understand the causes and interdependence of variances.
MATERIALS - MIX SALES - MIX AND

AND YIELD QUANTITY
VARIANCES VARIANCES
CAUSES OF General causes

VARIANCES Specific causes
Interdependence
Problems of traditional variances

Calculations
PLANNING AND Market value and share
OPERATIONAL Advantages and disadvantages
 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 0801

1 MATERIALS MIX AND YIELD VARIANCES
When several materials are in a production process and a degree of substitution is

possible, then additional material variances can be calculated.
Total materials
cost variance
Price variance Usage variance
Mix Yield
variance variance
The mix variance shows the effect of changing the proportions of the mix of inputs into
the process.
The yield variance shows the difference between the actual and the expected output or
yield of the process.
The price variance, mix variance and yield variance can be most easily determined
using a standard table for the calculation.
Material AQAMAP AQAMSP AQSMSP SQSMSP

Units £ Units £ Units £ Units £
A G H J K
B L M N P
—— —— —— —— —— —— —— ——
W X Y Z
Price variance Mix variance Yield variance
Usage variance
Notation
AQ Total actual quantity SQ Standard quantity (for actual output)

AM Actual mix SM Standard mix
AP Actual price SP Standard price
AQAMAP Actual cost of material input

AQAMSP Standard cost of actual material input
AQSMSP Standard cost of total material input split in the standard mix
SQSMSP Standard cost of expected input for actual output

In the standard table the figure W represents the sum of G and L. X, Y and Z are found
in a similar fashion.
The difference between W and X is the total price variance. As we are dealing with
cost if W > X, then it is an adverse variance and vice versa. The other variances are
found in a similar fashion.
If an individual variance is requested, it can be found. For example, the individual

price variance for material A is the difference between H and G in the above table.
Example 1
The standard material cost of a unit of a product is:

£
Material X 2 kg @ £3 6
Material Y 1 kg @ £2 2
_____ –––
3 kg 8
_____ –––
The actual production was 5,000 units and the materials used were:
Material X 9,900 kg costing £27,000

Material Y 5,300 kg costing £11,000
Required:
Calculate the total materials cost variance, materials price variance, materials usage
variance, mix variance and yield variance.
Solution
Total materials cost variance

£
Standard cost of actual production
Actual cost of actual production
_____
–––––
AQAMAP AQAMSP AQSMSP SQSMSP

kg £ kg £ kg £ kg £
X 9,900 27,000 9,900
Y 5,300 11,000 5,300
______ ______ ______ ______ ______ ______ ______ ______
15,200 38,000 15,200 15,200
______ ______ ______ ______ ______ ______ ______ ______

2 SALES MIX AND QUANTITY
When several products are sold the following analysis is possible.
Total sales
variance
Price variance Volume variance
Mix Quantity
variance variance
In this case the price variance is calculated in the usual way.
Price variance = (AP – SP)AQ
The mix and quantity variances are most easily found using a table.
Product AQAMS margin* AQSMS margin BQSMS margin

Units £ Units £ Units £
X
Z
——— ——— ——— ——— ——— ———
x x x
Mix variance Quantity variance
Volume variance
* Margin means profit (absorption costing) or contribution (marginal costing).
BQ = Budget sales quantity.

Example 2
Products
Budget Q P R
Unit sales 200 100 100
Price £20 £25 £30
Margin £3 £4 £6
Actual
Unit sales 180 150 170
Price £22 £22 £26
Margin £4 £3 £5
Required:
Calculate sales price, mix and quantity variances.
Solution
Price variance £
Q
P
R
_______
_______
AQAMS margin AQSMS margin BQSMS margin

Q 180
P 150
R 170
___ _____ ___ _____ ___ _____
500
___ _____ ___ _____ ___ _____
3 CAUSES OF VARIANCES
3.1 General causes
Variances may be caused by

planning errors
measurement errors
random factors
operational factors.
Operational factors may indicate that the process is out of control, and it is these which
are considered below.

3.2 Specific causes
Favourable Adverse
Materials Bulk discounts Market price increase

price Good purchasing (shortage)
Bad purchasing
Delivery costs
Different supplier
Different material
Change in quality
Materials Better quality Defective material

usage More efficient Theft
Excessive
waste/spoilage
Stricter quality control
Different batch sizes

Change in mix
Labour Lower skilled labour Wage rise

rate Overtime working
Bonus payments
Different skill mix
Idle time Strikes

Lack of material
Breakdowns
Injury/Illness
Lack of orders

Favourable Adverse
Labout Motivation Lower pay

efficiency Higher pay Poor equipment
Better equipment Slow working
Learning effect Poor material
Better material Lower grade
Higher grade
Overhead Cost savings/cutbacks Cost increases

expenditure Excessive service usage
Incorrect split of semi-variable

and fixed costs
Overhead See Labour efficiency

efficiency
Overhead Increase in productive Excessive idle time

capacity hours Shortage of plant capacity
Sales price Market shortage To achieve increase in

volume
Change in quality
Response to competitors
Pass on cost changes
Sales Increase in market share Fall in market share

volume Increase in market size Fall in market size
Price decrease Price increase
3.3 Interdependence of variances
Frequently two or more opposing variances will be caused by the same operational
factor.
It is necessary to consider the overall effect when considering any course of action.
3.3.1 Examples
Purchase high quality material
− adverse materials price

− favourable materials usage
Raise the selling price
− favourable sales price

− adverse sales volume

Use highly skilled labour
− adverse labour rate

− favourable labour efficiency
− favourable variable overhead efficiency
− favourable fixed overhead efficiency
3.3.2 A more complex example
Purchase high quality material
− adverse materials price

− favourable materials usage
− favourable labour efficiency
− favourable variable overhead efficiency
− favourable fixed overhead efficiency
− favourable sales price
− adverse sales volume
4 PLANNING AND OPERATIONAL VARIANCES
4.1 Problems of traditional variance analysis
Traditional variance analysis compares:
Actual vs Expected
performance performance
If the actual environment differs from that which was anticipated then actual
performance should be compared with a standard which reflects the changed conditions
(ex post standard).
Even if the environment has not changed, with hindsight (looking back) it might be
realised than an unrealistic standard was used eg ideal standard.
Actual performance should be compared with a realistic standard for control and
appraisal purposes – this variance is known as the Operating Variance. The difference
between the ex ante and ex post targets is known as the Planning Variance.
Planning variance – a classification of variances caused by ex ante budget allowances

being changed to an ex post basis.
Operational variance – a classification of variances in which non-standard

performance is defined as being that which differs from an ex post standard.

4.2 Calculations
Use the following table to separate out PLANNING and OPERATING variances.
PLANNING AND OPERATING VARIANCE TABLE
£
ORIGINAL FLEXED BUDGET
(EX ANTE) X PLANNING
VARIANCE
(UNCONTROLLABLE)
REVISED FLEXED BUDGET
(EX POST) X
OPERATING
VARIANCE
ACTUAL RESULT X (CONTROLLABLE)
Note – the examiner sometimes calls planning variances budget revision variances.
Example 3
Standard material cost/unit : 4 kgs at £2.50 = £10

Budgeted Output : 20,000 units
Actual Output : 22,000 units
Materials actually used : 86,000 kgs at £3
With hindsight a better standard would have been 3.75 kg per unit at £2.80 per kg.
Required
(a) Calculate the traditional variances
(i) Price Variance

(ii) Usage Variance
(iii) Overall Material Variance (price + usage)
(b) Calculate planning and operating variances
(c) To gain a better assessment of performance we now analyse the operating

variance into Price and Usage.

Solution
(a) Traditional price and usage variances
(b) Planning and operating variances
£
Original flexed budget Planning variance
Revised flexed budget
Operating variance
Actual result
(c) Operating price and usage variances
£
Operating price variance
Operating usage variance
–––––
Total operating variance
–––––
This revised analysis still indicates inefficiency on the part of the buying department
and that there could be better use of materials.
Compare this with the traditional analysis which suggested a more serious inefficiency
in buying ie £43,000 adverse price variance, coupled with efficient use of materials.
The PLANNING VARIANCE can also be split into price and usage, but it is
questionable whether it provides useful information or not.

Example 4
Materials budget
3.4kg/unit
£2/kg
Actual
2,000 units produced
7,000 kg purchased and used, costing £2.20 per kg.
Required
(a) Calculate the traditional price and usage variance.
Solution
(a) Traditional variances
Traditional price variance =
kg
Traditional usage variance
2,000 units should use
Actual usage
–––––
=
–––––
Example 4 (Contd)
The purchasing manager is furious when he receives a variance report criticising him.
He produces evidence to suggest the average market price during the period was £2.30.
The production manager points out that the usage standard was an ideal standard and
totally unrealistic. He calculates the current standard as 3.6kg/unit.
Required
(b) Calculate
(i) the planning variance

(ii) the operating price variance
(iii) the operating usage variance.

Solution
(b) Planning and operational variances

£
Operational
Actual result variance
£
Operational price variance
Kg
Operational usage variance
2,000 units should use
Actual usage
–––––
kg @
––––
––––
4.3 Market volume and market share variances
The traditional sales volume variance may have two elements:
the size of the market was different from expected – a change in the external
environment
the share of that market was different from budget. .

The sales volume variance can therefore be split:
Sales volume
variance
Sales volume Sales volume

planning variance operational variance
Caused by Caused by
external factors internal factors
Market volume Market share

variance variance
£
Budgeted profit/contribution for
original budgeted sales X
market volume
Budgeted profit/contribution for revised variance
budget sales X
(revised market volume X budget market share)
market share
Budgeted profit/contribution for variance
actual sales X

Example 5
Acme Ltd has a Sales Budget of 1,795 units at a unit contribution of £20.00. This is
based on the company maintaining a 5% market share. Total sales volume for the
industry was estimated to be 35,900 units.
Actual sales volumes were as follows.
ACME LTD 1,850 units

INDUSTRY 37,500 units
Required:
Calculate for ACME Ltd
(a) the traditional sales volume variance

(b) the market volume and market share variance
Solution
(a) Sales volume variance
(b) Planning and operating sales volume variances table
£
Budgeted contribution for Market volume
Original budgeted sales variance
Budgeted contribution for

Revised budgeted sales
Market share
Budgeted contribution for variance
Actual sales

4.4 Advantages and disadvantages
4.4.1 Advantages
Distinguishes between variances caused by bad planning or unavoidable

factors, and those due to operating factors.
Adverse operating variances indicate processes out of control which need

correcting.
Planning variances can be used to update standards to current conditions.
Motivation may improve if managers know they will only be assessed on

variances under their control ie operational variances.
4.4.2 Disadvantages
Extra data requirements eg market volume.
More time consuming.
Managers may claim all adverse variances have external causes and all
favourable variances internal causes ie manipulation of revised standards.
FOCUS
You should now be able to
calculate mix and yield variances for materials
calculate mix and quantity variances for sales
demonstrate an understanding of the inter-relationships between variances
explain the reasons for variances
calculate and explain operational and planning variances
assess appropriate management action arising from the variances identified

EXAMPLE SOLUTIONS
Solution 1 – Materials mix & yield
Total materials cost variance
£
Standard cost of actual production (5,000 units × £8) 40,000
Actual cost of actual production (27,000 + 11,000) 38,000
_____
2,000 F
–––––
AQAMAP AQAMSP AQSMSP SQSMSP

kg £ kg £ kg £ kg £
X 9,900 27,000 9,900 29,700 10,133 30,399 10,000 30,000
Y 5,300 11,000 5,300 10,600 5,067 10,134 5,000 10,000
______ ______ ______ ______ ______ ______ ______ ______
15,200 38,000 15,200 40,300 15,200 40,533 15,000 40,000
______ ______ ______ ______ ______ ______ ______ ______

£2,300 F £233 F £533 A
Solution 2 – Sales mix & quantity
Price variance £
Q £(20 − 22) × 180 360 F
P £(25 − 22) × 150 450 A
R £(30 − 26) × 170 680 A
_______
770 A
_______
AQAMS margin AQSMS margin BQSMS margin

Q 180 540 250 750 200 600
P 150 600 125 500 100 400
R 170 1,020 125 750 100 600
___ _____ ___ _____ ___ _____
500 2,160 500 2,000 400 1,600
___ _____ ___ _____ ___ _____

£160 F £400 F

Solution 3 – Materials
(a) Traditional price and usage variances
Price variance (2.50 – 3.00) 86,000 = £43,000 Adv
Usage variance (22,000 × 4 – 86,000) £2.50 = £5,000 Fav
Total variance = £38,000 Adv
(b) Planning and operating variances
£
22,000 × 4 × £2.50 220,000 £11,000 Adv

22,000 × 3.75 × £2.8 231,000
Operating variance
Actual result £27,000 Adv
86,000 kg × £3 258,000
(c) Operating price and usage variances
£
Operating price variance
(2.80 – 3.00) 86,000 17,200 Adv
Operating usage variance

(22,000 × 3.75 – 86,000) £2.8 9,800 Adv
–––––
Total operating variance 27,000 Adv
–––––
Solution 4 – Materials
(a) Traditional variances
Traditional price variance = (2 – 2.20) × 7,000 = £(1,400) A
kg
Traditional usage variance
2,000 units should use (2,000 × 2.4) 6,800
Actual usage (7,000)
–––––
(200) kg @ £2
= £(400) A
–––––

(b) Planning and operational variances

£
2,000 × 3.4kg × £2 13,600 (2,960)

2,000 × 3.6 kg × £2.30 16,560
Operational
Actual result variance
(7,000 × 2.20) 15,400 1,160 F
Operational price variance = (2.30 – 2.20) × 7,000 = 700F
Kg
Operational usage variance
2,000 units should use (2,000 × 3.6) 7,200
Actual usage (7,000)
–––––
200 kg @ 2.30 £460 F
––––
£1,160 F
––––
Solution 5 – Sales
(a) Sales volume variance
(1,850 – 1,795) £20 = £1,100 Fav
(b) Planning and operating sales volume variances table
£
Budgeted contribution for Market volume
Original budgeted sales 35,900 variance
1,795 × £20 £1,600 Fav
Budgeted contribution for

Revised budgeted sales 37,500
0.05 × 37,500 × £20
Market share
Budgeted contribution for variance
Actual sales 37,000 £500 Adv
1,850 × £20

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ADVANCED VARIANCE ANALYSIS

To understand the causes and interdependence of variances.

MATERIALS - MIX SALES - MIX AND

CAUSES OF General causes

Problems of traditional variances

 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 0801

1 MATERIALS MIX AND YIELD VARIANCES

When several materials are in a production process and a degree of substitution is

Price variance Usage variance

Material AQAMAP AQAMSP AQSMSP SQSMSP

Price variance Mix variance Yield variance

AQ Total actual quantity SQ Standard quantity (for actual output)

AQAMAP Actual cost of material input

 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 0802

If an individual variance is requested, it can be found. For example, the individual

The standard material cost of a unit of a product is:

Material X 9,900 kg costing £27,000

Total materials cost variance

AQAMAP AQAMSP AQSMSP SQSMSP

Price variance Mix variance Yield variance

 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 0803

2 SALES MIX AND QUANTITY

When several products are sold the following analysis is possible.

Price variance Volume variance

In this case the price variance is calculated in the usual way.

Price variance = (AP – SP)AQ

Product AQAMS margin* AQSMS margin BQSMS margin

Mix variance Quantity variance

 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 0804

Calculate sales price, mix and quantity variances.

AQAMS margin AQSMS margin BQSMS margin

Mix variance Quantity variance

3.1 General causes

Variances may be caused by

 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 0805

3.2 Specific causes

Materials Bulk discounts Market price increase

Materials Better quality Defective material

Different batch sizes

Labour Lower skilled labour Wage rise

Different skill mix

Idle time Strikes

 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 0806

Labout Motivation Lower pay

Overhead Cost savings/cutbacks Cost increases

Incorrect split of semi-variable

Overhead See Labour efficiency

Overhead Increase in productive Excessive idle time

Sales price Market shortage To achieve increase in

Sales Increase in market share Fall in market share

3.3 Interdependence of variances

Purchase high quality material

− adverse materials price

Raise the selling price

− favourable sales price

 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 0807

Use highly skilled labour

− adverse labour rate

3.3.2 A more complex example

Purchase high quality material

− adverse materials price

4 PLANNING AND OPERATIONAL VARIANCES