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Dear Sir,
I find the solution for a planning and operational variances question in this year’s F5 Kaplan textbook hard to understand. The solution doesn’t show theory but only figure numbers. I just can’t understand. May I ask help from you? Thanks!Below is a standard cost card extract from POV Ltd:
Selling price per unit $200
less: 4 kgs of materials @$20 per kg ($80)
6 hours labour @$7 per hour ($42)
———-
contribution per unit $78For the period, due to the material’s unavailable situation, the company found an alternative one. 2500 units were budgeted to be produced and sold but the actual production and sales were 2850 units.
Weather conditions unexpectedly improved for the period with the result that a 50 cent per hour bad weather bonus, which had been allowed for in the original standard, did not have to be paid. Because of the difficulties expected with the alternative material, management agreed to pay the workers $8 per hour for the period only. During the period 18800 hours were paid for.
Please calculate the planning and operational variances for labour cost.
The textbook solution is something like:
Labour rate:
(i) Planning variance:
(1) Weather bonus
=(2850 x 6 x $7) – (2850 x 6 x $6.5)
=$119700 – $111150
=$8550 (F)
(2) Alternative material difficulties:
=(2850 x 6 x $6.5) – (2850 x 6 x $8)
=$111150 – $136800
=$25650 (A)(ii) Operational variances:
(1) Rate = 0
(2) Efficiency = (2850 x 6 x $8) – (18800 x $8)
= $136800 – $150400
= $13600 (A)I just don’t understand the solution:
1. Why are they “Weather bonus” and “Alternative material difficulties” for planning variances, but when it comes to operational variances, they are “Rate” and “Efficiency”?
I mean one only calculates Price and Usage variances both for planning and operational material variances. Why the term is different when it comes to labour variances?2. Why the rate operational variance is Zero?
Thanks again!
Certainly for the operational variances, we only have the rate and efficiency variances. They are checking whether or not the managers of the operations did their ‘job’ as planned. For the rate variance, although we originally planned to pay $7 we did actually spend $8 an hour. This extra was not because the operational manager accidentally paid more or anything – it was because we had to change plans and pay less because of the weather but pay more because of the alternative material.
So the whole of the extra $1 per hour was due to changing our plans (and is the planning rate variance), and so there is no operational rate variance.
The reason that they have split the planning variance is that we changed our plans for two different reasons and it is useful for us to split it between the reasons. Since we know that we saved $0.50 per hour due to the weather, and we then paid more because of the alternative material is is useful to split between the two.
“weather’ and ‘alternative materials’ are not standard – it is only for this question – but we should always try to split/analyse the variances as much as possible depending on the information given. We are doing it to help management understand why things have changed from the original standards.
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@johnmoffat said:
Certainly for the operational variances, we only have the rate and efficiency variances. They are checking whether or not the managers of the operations did their ‘job’ as planned. For the rate variance, although we originally planned to pay $7 we did actually spend $8 an hour. This extra was not because the operational manager accidentally paid more or anything – it was because we had to change plans and pay less because of the weather but pay more because of the alternative material.So the whole of the extra $1 per hour was due to changing our plans (and is the planning rate variance), and so there is no operational rate variance.
The reason that they have split the planning variance is that we changed our plans for two different reasons and it is useful for us to split it between the reasons. Since we know that we saved $0.50 per hour due to the weather, and we then paid more because of the alternative material is is useful to split between the two.
“weather’ and ‘alternative materials’ are not standard – it is only for this question – but we should always try to split/analyse the variances as much as possible depending on the information given. We are doing it to help management understand why things have changed from the original standards.
Thank you, sir! But I’m not sure I understand this? Do you mean $8 is the revised labour rate as well as the actual labour rate? If so, then where does the $6.5 fit in this bill? I thought the $6.5 was the revised labour rate, while the $8 was the actual labour rate, given what was shown in the planning variances solution.
See, the “weather bonus” variance was the standard budget less the revised standard budget; and the “alternative material difficulties” variances was the revised standard budget less the flexed budget based on the actual rate. Or was I wrong? If so, could you help me to identify where I was wrong?
Thanks!
They actually paid $8 per hour as against the original $7 per hour.
There were two reasons for this – one was because of the weather (which saved them 0.50 per hour, which would have mean 6.50 per hour) and the other was because of using alternative materials (which then cost them an extra 1.5 an hour – 8 less 6.50). Both of these were due to changes in plans and so both are planning variances.
The total planning variance is $1 per hour (they had to pay 8 instead of the original 7) but because there were two different reasons for this happening, we can split it between the affect of the weather and the affect of the alternative matierails.
I also have a problem with the same example. I am not figuring out the answer notes in the text book. As for labour rate I agree with the answer, but the labour efficiency planning variance cannot be understood here, as there was not revision of production methods.
There were two reconciliation methods proposed one only with traditional variances and the other with both planning and operational. The second version proposed flexing the 2850 units produced x 6 h and mulitplying it by 8 pounds as actual price of labour and comparing it with actual usage of 18800 hours times 8 pounds. . I thought that operational variance is taken with original budgeted price? is it not correct? Why is revised with actual price then?
Thanks.
There is confusion because both BPP and Kaplan have changed the way that they calculate planning and operational variances.
The old and the new methods give different answers, and the examiner has said that she accepts either way.
So keep to the way you have learned. If you have not learned or you are not sure, then study the past exam question ‘Truffle’ and learn from there.
Thanks sir! I think the main confustion came from the fact that there is no precise formular for planning and operational variance for labour in Kaplan textbook, but for material price and usage. It is assumed that labour variance can be calculated based on the same principle. In this answer though there differencies, how they treat labour rate and efficiency variance.
Especially rate. As I understand the operational rate variance is calculated based on actual usage of hours, it means hours as 18800 are taken for comparison of price of labour actual and revised. Whereas in the answer they took the the units number 2850 units and flexed them to 6 hours of labour usage. Should this be so for operational labour variance? or both is accepted?
thanks.
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