Week 3

Planning and Operational

variances
Phuong Thao NGUYEN
NEU-SAA
Revising a budget
• Revise a budget or standard cost:

• Changes in circumstances ➔ beyond the control

• Distinguish:

• Variances caused by the revision to the budget

• Variances caused by operational management

Reasons for revising a budget or standard cost

• Changes in the market size for a product

• Changes in the market price for materials
• Changes in product specification
• Unexpected increase in wages
• Unexpected changes in the production process
Calculating a revised budget

• Revising budget ➔ decompose the total

variance into:
• Planning variances
• Operational variances
Calculating a revised budget

Fixed/static
Actual Revised budget
budget

Operational variance Planning variance

Total variance
Calculating a revised budget

• Planning variances:
• Caused by the revision in the budget/ standard cost
• Operational managers should not be made responsible
• Operational variances:
• Caused by differences between actual performance and
the revised budget/ standard ➔ responsibility of
operational manager
Sales variances

Sales volume variances:

• Planning variance:
(revised quantity – budgeted quantity) x Budgeted Contribution/unit

• Operational variance:
(actual quantity – revised quantity) x Budgeted Contribution/unit
Sales variances

Sales price variances:

• Planning variance:
(revised sales price – budgeted sales price) x Actual quantity

• Operational variance:
(actual sales price – revised sales price) x Actual quantity
Materials variances

Material price variances:

• Planning variance:
(revised price – budgeted price) x Actual quantity of materials used

• Operational variance:
(actual price – revised price) x Actual quantity of materials used
Materials variances

Material usage variances:

• Planning variance:
(revised quantity – budgeted quantity) x Budgeted price

• Operational variance:
(actual quantity – revised quantity) x Budgeted price
Labour variances

Labour rate variances:

• Planning variance:
(revised rate – budgeted rate) x Actual hours

• Operational variance:
(actual rate – revised rate) x Actual hours
Labour variances

Labour efficiency variances:

• Planning variance:
(revised hours – budgeted hours) x Budgeted rate

• Operational variance:
(actual hours – revised hours) x Budgeted rate