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Dear Sir,
If in a question both, the rate and labor hour’s standards have been revised, when we calculate an Operational Labor Efficiency variance:
Firstly, We deduct the actual hrs. from the revised labor hrs. that should’ve been,
then, do we multiply it by the original standard rate or the revised standard rate.The BPP text book’s examples all multiply by the revised standard rate, however, I just did the December 2012 exam Question 2 and in that the examiner multiplied it by the original standard rate.
Please help, this thing is ruinnng my concept of operational variances.
P.S: In the BPP book, even the operational material usage variance is multiplied by the revised standard rate…
The examiners answer does it a different way to everyone else (BPP, Kaplan, OpenTuition etc.). Her way is not sensible!
However, she did make it clear that doing it the sensible way would still get full marks (even though it gives different final answers).
If you go to the main F5 page, you can find my answer to the question which does it the ‘sensible’ way (as used by BPP etc.). This should hopefully relax you 🙂
Dear Sir,
Thank you, I have watched the video for the relevant question.
However, now the problem is:
Theoretically and effectively, Operational and Planning variances are the breakdown of a total variance, but in your video the total Rate variance is $7200(F) but the operational Rate variance is nil and the planning Rate variance is $7400 (F). It doesn’t add up.
Same goes for the efficiency variances…
And then at the end of the day the sum of the 2 operational variances (efficiency and rate) and the 2 planning variances should be equal to the sum of the 2 original variances (the total efficiency and planning variance) that we calculated in part a, this is not the case in your video; however, it is like that in all the examples in the text books and the marking scheme for this very answer…
HELP!!!
No.
As I say in the lecture there are two ways of calculating the variances. I do it the same way as the Student Accountant article from some years ago, and the same way that all the books from BPP and Kaplan do (I do not know which text book you are using) – it is the most sensible way. (And the way that it was done by the examiner the previous time planning and operational variances were asked (Securenet – December 2009)
Using this approach, the two rate variances do NOT add up to the total rate variance, and the two efficiency variances do NOT add up to the total efficiency variance.
That might seem strange at first, but if you think about the operating statement the planning variances will change the originally budgeted profit to arrive at a revised budget profit. That profit would then be adjusted for the sales volume variance, and then the operational variances will be calculated. (You would not be asked to produce a full operating statement and so there is no reason to spend too much time worrying about this.)
All of the examples in BPP and Kaplan do it the same way as me. The examiners answer to Truffle does it a different way (which is not as sensible) and (as I say in my answer) it gives different numbers. However, the examiner made it very clear in her comments that our way would get full marks.
It is up to you. You can do it either way – whichever you find easier.
Got it.
The bit you added about the operating statement that cleared it up…
Thank you very much, you are definitely the best sir for these exams!!! (oh, if only I could go back to the good old A-level days)
Sir,
I figured it out, when I said in my second last post before you corrected me,
“And then at the end of the day the sum of the 2 operational variances (efficiency and rate) and the 2 planning variances should be equal to the sum of the 2 original variances (the total efficiency and planning variance) that we calculated in part a, this is not the case in your video; however, it is like that in all the examples in the text books and the marking scheme for this very answer…,”
it was right, it does add up… Even in your video. There is just a slight error in the video:
For the planning rate variance(@24:50 of the video), you calculated 140220 and 147600 but the variance you calculated was 7400 instead of 7380 (simple error due to misreading the figures on the screen, which even I did)…
If the variance becomes 7380 as it is, the 4 variances (the operational/planning rate and efficiency) add up to the sum of the 2 original variances (the total efficiency and planning variance) as they should.
And all is well in F5 variance world, Happy ending; YAYY!!!
Any final tips before the exam???
Thanks for that – sorry about the error.
And also I realise I misunderstood your original question as well!!
Anyway, glad it is sorted 🙂
At this stage, the best tip that I can give you is to get plenty of sleep. Too many people make silly mistakes and lose marks they should not be losing simply because they stay up all night revising and are then too tired to think straight!
And thats why I said ” you are definitely the best sir for these exams!!! ”
What you just said was definitely the most valuable advice anyone could have given me right now..
Thank you very much…
Now, I just pray that I pass…
Hullo john,
Thanks for this issues it has confused me too a little bit.
How can i get to see you video?Thank you?
Here is the link (it is from the main F5 page):
https://opentuition.com/acca/f5/f5-december-2012-question-2-planning-and-operational-variances/
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