Standard Costing and Basic Variance Analysis (part 3)

Basic Variance Analysis: Please note that this lecture relates to Chapter 13 of the Course Notes and not Chapter 12 as stated in the lecture.

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  1. avatar says

    Hi, first of all I want to thank you for the lectures, they really help. There is one thing I cannot understand. How comes that Volume variance equals capacity+efficiency variance. Why we use budget hours in cap var and act hours in effic. Could you be so kind to derive the formula for me.

    • Profile photo of John Moffat says

      It is not a question of deriving formulae, but of understanding.

      The volume variance exists (when we are using absorption costing) because the actual production is more or less than the budgeted production. We assume that production is limited by the amount of labour available, and so the reason for being able to produce more or less is either because we have more or less labour available than we budgeted (the capacity variance) or because we work faster or slower (the efficiency variance).

      I do explain this in the lecture, and illustrate why it is happening.

  2. Profile photo of zahreddine says

    From my earlier studies and F5 costing chapters, I clearly understood that within an absorption costing approach, fixed cost stay constant as a whole and vary per unit according to the level of output. could anybody please tell me why in this example they stay constant per unit and vary as a whole?, which makes them exactly like variable overheads

    • Profile photo of John Moffat says

      Of course fixed overheads stay fixed in total!!!
      I do not say any different in this lecture.

      However, I am trying to explain in the lecture that when we are using absorption costing for variance analysis it is effectively treating the fixed overheads on a unit basis i.e. as though they are variable.
      Obviously they are not variable and that is why we have a fixed overhead volume variance to ‘correct’ for this.

      (It is actually exactly the same problem as you will have been through in Paper F2 on absorption costing (and in variance analysis – ‘basic’ variance analysis here is revision of F2. Because of what I have written above we had in F2 to be able to adjust for the over/under absorption of fixed overheads.)

    • Profile photo of sarath says

      Rent is a fixed expense. Assume that the company is working on a rented building, and the company has to pay the entire rent for the month even if it doesn’t work for the entire month!
      Hope that helps…..

  3. avatar says

    Can someone please help me with this question below. And if the answer can be supported by an explanation, it would be a great help.

    A company has a fixed overhead volume variance that is $10,000 unfavorable. The most likely cause for this variance is that
    a. the production supervisory salaries were greater than planned.
    b. the production supervisory salaries were less than planned.
    c. more was produced than planned.
    d. less was produced than planned.


    • Profile photo of John Moffat says

      The answer is d

      The reason is that when using absorption costing, when the standard profit is calculated is is effectively assuming that fixed overheads are charged on a unit basis and the amount charged for fixed overheads will be the actual production at fixed cost per unit, which will be less than the budget production at fixed cost per unit.
      It is difficult to explain here without numbers, but the lecture does explain.

      However…..the easy way to remember whether the volume variance is favourable or adverse is to say: if production is more than budget then we have done well – it is good – and the variance is favourable. Vice versa if production is less than budget. That way of thinking always works :-)

      (answers a and b have clearly nothing to do with the volume variance – they will create a fixed overhead expenditure variance)

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