Interpreting variances and taking action

Accounting Ahead | Original study resource | accountingahead.com.au

Interpreting variances and taking action

MODULE 3 | PART C.3 | STUDENT COMPANION

All the variances in one place

Variance (Blue Wren, September) Amount Who explains it

Sales volume $18,000 U Profit centre manager with sales manager

Selling price $9,000 F Sales manager

Material price $940 F Purchasing manager

Material efficiency $1,200 U Production manager

Labour rate $1,710 U Production manager

Labour efficiency $3,150 F Production manager

Variable overhead spending $1,400 U Shared

Variable overhead efficiency $900 F Shared

Fixed overhead spending $1,000 U Profit / investment centre manager

Production volume (capacity signal) $4,000 U Profit / investment centre manager

Reconciling budgeted and actual profit

From budgeted to actual profit $

Static budget profit (300,000 - 120,000 - 40,000) 140,000

Sales volume (18,000)

Selling price 9,000

Materials (940 F - 1,200 U) (260)

Labour (1,710 U - 3,150 F) 1,440

Variable overhead (1,400 U - 900 F) (500)

Fixed overhead spending (1,000)

Actual profit (279,000 - 27,260 - 61,560 - 18,500 - 41,000) 130,680

The production volume variance stays outside this bridge: the static budget treats fixed overhead as a lump sum.

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART C.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Variances tell connected stories

Price up, volume down

A $1 rise earned $9,000 but cost $18,000 of contribution

Cheap steel, more steel

Price saving $940; extra usage $1,200

Higher rate, fewer hours

Experienced crew: rate $1,710 U; efficiency $3,150 F

Hours drive overhead

Fewer labour hours made variable overhead efficiency

favourable too

Favourable is not always good; unfavourable is not always bad

Usual suspects behind variances

Variance Possible causes

Favourable price or

spending

Talented staff on lower grades; skilful negotiation; market oversupply; bulk buying;

cheaper supplier or substitute; early-payment discounts

Unfavourable price or

spending

More experienced (higher-paid) staff; overtime premiums; pay rises after training or

promotion; shortages pushing prices up

Favourable efficiency Skilled workers; efficient scheduling; new scheduling software; better-quality materials

Unfavourable efficiency Less skilled or substitute workers; poor scheduling; poorly maintained machines;

breakdowns; poorer materials

Any variance An incorrect budget - acceptable once, suspicious if repeated every year

Capacity questions (production volume variance): Why did we not produce at budget? Has demand

fallen? Has quality slipped? Are prices too high, or are competitors cheaper or more aggressive? Have new

rivals arrived? If demand rises beyond the relevant range for good, plan more capacity; if output keeps

falling short, consider downsizing or fixing the strategy.

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART C.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Actions Blue Wren might take

Finding Action

Cheap steel increased scrap Agree steel quality specifications jointly between purchasing and production

Price rise cut volume Test customers' price sensitivity before the next change

Experienced crew paid off Keep them; train others to their level

Overhead spending up Review the electricity contract and insurance

Causes cross departments Monthly variance forum with sales, purchasing and production

Practice questions

MODULE 3 | PART C.3 | TRY THESE BEFORE THE WORKED ANSWERS

Ridgeway Boards (imagined) - September. Static budget: make and sell 4,000 skateboards at $90. Standards

per board: timber 2 kg at $5 per kg; labour 0.5 hours at $32 per hour; variable overhead $24 per machine hour,

0.25 machine hours per board; fixed overhead budget $40,000 a month, allocated on budgeted machine hours.

Actual: 3,800 boards made and sold at $92; timber used 7,800 kg costing $4.80 per kg; labour 1,950 hours at $31

per hour; 920 machine hours; variable overhead $23,000; fixed overhead $41,500.

Question 1 - Reconcile budgeted and actual profit

Prepare Ridgeway's static budget profit and actual profit for September, then reconcile them using the sales,

material, labour, variable overhead and fixed overhead spending variances.

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART C.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Question 2 - Linked variances

Identify two pairs of Ridgeway's variances that may be linked and explain the likely connection.

Question 3 - Responsibility and bonuses

Which managers should explain each variance? Has anyone clearly earned a bonus?

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 3 | PART C.3 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Reconcile budgeted and actual profit

Item $

Static budget: sales 4,000 x $90 360,000

Less variable costs 4,000 x $32 (128,000)

Less fixed overhead (40,000)

Static budget profit 192,000

Sales volume (200 x $58) (11,600)

Selling price ($2 x 3,800) 7,600

Materials ($1,560 F - $1,000 U) 560

Labour ($1,950 F - $1,600 U) 350

Variable overhead ($920 U - $720 F) (200)

Fixed overhead spending (1,500)

Actual profit: 349,600 - 37,440 - 60,450 - 23,000 - 41,500 187,210

Total variance $4,790 U = $192,000 - $187,210. The production volume variance ($2,000 U) is a capacity signal

outside the bridge.

Question 2 - Linked variances

Selling price F and sales volume U: the $2 price rise probably cost 200 boards of sales. Timber price F and

timber efficiency U: cheaper timber may be poorer, causing more waste. Labour rate F and labour efficiency

U: lower-paid, less experienced staff probably took longer. Variable overhead efficiency F: fewer machine

hours than allowed.

Question 3 - Responsibility and bonuses

Sales manager: price and (with the profit centre manager) volume. Purchasing: timber price. Production: timber

usage and both labour variances. Shared: variable overhead. Profit/investment centre manager: fixed overhead

spending and production volume. No one has clearly earned a bonus on these figures alone: most favourable

variances are offset by linked unfavourable ones. Hear each manager's explanation first.

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART C.3 | WORKED ANSWERS

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