# Variance Analysis (part a) Example 1

1. says

in this example why we change fix over head cost according to activity level… ?? because in my thought fixed cost do not change with the activity level…

• says

Fixed costs do not change with the activity.
However, as I explain in the lecture, using absorption costing and taking a standard profit per unit does effectively treat fixed costs as though they are variable. Since they are not variable, it does mean that there will be an over or under absorption of fixed overheads (as you will remember from the lecture on absorption costing earlier). With relevance to variance analysis, it also explains why the fixed overhead variances (when using absorption costing) also include a volume variance (as you will see in the next lecture on variance analysis).

If you are simply asked to flex a budget then you do keep fixed overheads constant, what I do here is simply to make sense of the fixed overhead variances that we calculate later.

2. says

hello Sir, can you please confirm me?
When we calculate variance, for sales variance we take Actual less Flexed?
and for the materials, labour, overheads, etc.. we take flexed less actual???

• says

It doesn’t matter which way round you subtract – don’t simply learn things as rules!!

What matters is whether the difference will result in more profit (in which case favourable) or less profit (in which case adverse).

The examiner does ask questions deliberately to check that you understand what is happening, and that you have not just learned rules.

• says

We use our own Course Notes which you can download free of charge.

The link is just above the lecture, on the right.

3. says

Hi sir
I still don’t understand why the evaluate the actual stock at \$68 if the actual cost was more than \$70

• says

We are not preparing financial accounts – then we may well value inventory differently.
With management accounting when we are usually preparing statements every month, we keep the inventory value constant at what we expect for the year. Some months the actual costs may be higher than they should be and some months lower, but it would be silly if we were changing inventory values every month.

• says

I understand Sir but I want to know it won’t affect the annual result. is the fianacial account consider this resultat at the end of the year? sorry if I don’t understand. Im new.

4. says

Hi John, pls am using this platform to advice open tuition to help develop objective questions on Paper F8 against december sitting. Regards.

• says

It would have been better to post this in the F8 forum.

Obviously, since all papers from F4 to F9 (except F6) will have MCQ’s in December, we will as always be updating after the June exams by including MCQ’s.

Most people are studying at the moment for June exams, MCQs are not relevant for them.

If you are studying for December, then obviously the existing note and lectures are relevant because the syllabuses are not changing.

• says

In the financial accounts we would use the actual cost to value the inventory. But this is not relevant for Paper F2

5. says

Dear Sir,
Thanks for your great lecture first!
While I am still not so clear why you mention : sales/8000 * standard profit/7 . What’s the purpose of this point?

• says

Because that is the budgeted profit, and the whole point of variance analysis is to explain why the actual profit is different from the budgeted profit.

• says

Yeah I know the whole point of variance analysis, and budget profit per unit is 7\$, budget sales is 8000 units, so budget profit is 56000, no problem. But my problem is sales/ 8000 *standard profit/7 , what’s standard profit here ? Isn’t it the budget profit?

• says

Dear Sir,
Simply say how you get the budget profit 56000 from sales/8000*standard profit/7 ? Suppose we can get 56000 from that, then the standard profit is nearly 5227. Where am I wrong? I am very confuse about this now. Thank you very much for your answer!:)

• says

Standard costs and standard profit are the budgeted costs and the budgeted profit.
So….if we budget on selling 8000 units and we budget on making a profit of \$7 a unit, then the budget profit is 56000.

I do not know where you get 5227 from!

• says

Ok sir, I find my problem. Thanks a lot!:))

• says

Please sir how do i watch the f2 leacture its been difficult for me

• says

You do not say what the difficulty is. Have you looked at the technical support page? The link to it is below the lecture.

6. says

What is the difference when flexing a budget with marginal and absorption costing?

• says

With marginal costing, the total fixed overheads do not change. With absorption costing you flex the fixed overheads. (Normally we do not change the total fixed overheads)

7. says

Hi John. Brilliant lecture as always. Just wanted to clarify a point (from reading some of the other comments below). The fixed costs are only flexed when using absorption costing, and are not flexed when using marginal costing (since the fixed cost comes right near the end). Would we be safe to assume that we should use absorption costing if neither it or marginal costing is specified? Also, if we are given a \$/unit rate for Fixed O/H, and we are required to use marginal costing, can we find the total fixed o/h based on budgeted production and use that in the flexed budget? Would that be correct? Thank you so much!

• says

If you are just asked to flex a budget then you should use marginal costing always (and fixed overheads do not change).

The reason that I have flexed the fixed overheads here is because we are doing variance analysis and it is to try and explain why the fixed overhead variances are rather odd when it is absorption costing.

You will not be required to do the flexing, and you can simply learn the rules for the fixed overhead variances, but it is important to have some understanding of why the rules are what they are.

With regard to the second part of your question, what you say is correct – you do calculate the the total fixed overheads using the budgeted production.

8. says

Could you just verify if my interpretation was correct in this question
The question states:

The standard direct material cost per unit for a product is calculated as follows:
10.5 litres at \$2.50

Last month the actual price paid for 12000 litres of material used was 4% above standard and the direct material usage variance was\$1815 favourable. No stocks of material are held.

What was the adverse direct material price variance for the last month?

In the answer from the question bank test it shows
12 000 litres * \$2.50 = \$30 000
Std cost (12 000 * \$2.50 * 1.04)= 31 200
Direct Mat. price variance 1200 A

My question is, the 1.04 in the workings for the standard cost is it representing the 4% as 104/100 being equal to 1.04.