- This topic has 7 replies, 2 voices, and was last updated 3 years ago by
.
- Posts
Sir, I am self studying and I need your help on this.
1) What is the difference between comparing standard vs actual results which is calculated as follows:
Standard = (Actual Production x Std cost per unit)
Actual = (Actual Production x Actual cost per unit)2) What is the difference between comparing budget vs actual result which is calculated as follows:
Budget = (Budget Production x Std cost per unit)
Actual = (Actual Production x Actual cost per unit)When looking at cost variances we always compare the actual cost with the standard cost for the actual production. We do not compare with the originally budgeted totals.
The whole point of variance analysis is to identify where we are overspending in order to be able to attempt to correct any problems for the future. Obviously if we produce more than budgeted then we will spend more – this is not a problem.
I do suggest that you watch my free lectures on variance analysis, the lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
(The question you ask is explained in the lectures on basic variances. Very little is asked on the basic variances because they were all examined in Paper MA. However an understanding of them is important in order to make sense of the variances that are asked in Paper PM which are planning and operational variances and mix and yield variances.)
(1) The whole point of comparing actual cost with standard cost for actual production is that in actual we have either produced more or less than the budgeted production which obviously increases the costs so we need a standard cost based on actual production so that in actual and standard we have the same number of production units to compare with.
(2) Sales volume variance compares the actual cost with the standard cost for budget production (and not actual production) which worries me because I believe that standard cost is always calculated through actual production units multiplied with standard cost per unit.
But in sales volume we calculate standard costs like this:
(Budgeted Production x Std cost per unit)Why??
I have seen your lecture and that is why I come here to ask you because I was confused.
Your first post referred to cost variances, and my reply refers to cost variances.
The sales volume variance is not a cost variance. It is explaining why the profit or contribution would be different from the budgeted profit or contribution due to the change in the number of units sold, if the sales price and all of the costs were as standard.
Adjusting for the sales volume variance tells us what the profit or contribution should have been for the actual level of sales i.e. the standard profit or contribution for the actual sales.Changes in the sales price and in the costs will mean that the actual profit or contribution is different from the standard profit or contribution for the actual sales, and are calculated on the actual level of activity.
Thanks for your help but i’ve a one little question regarding cost variance.
You are right in saying that when looking at cost variances we always compare the actual cost with the standard cost for the actual production. We do not compare with the originally budgeted totals.
BUT this is not the case with Fixed Overhead variances where actual cost are compared with budget cost such as in case of:
1) Fixed OH Expenditure is calculated comparing budgeted hours with standard rate and actual hours with actual rate to see whether the fixed overhead cost more or less in actual than what we were expecting in budgeted.
2) Fixed OH Efficiency is calculated comparing standard hours and actual hours with standard rate to see whether the labour works faster or slower in actual than expected in standard.
3) Fixed OH Capacity is calculated comparing budgeted hours and actual hours with standard rate to see whether the labour work more or less hours than expected in standard.
4) Fixed OH Volume is calculated comparing budgeted hours and standard hours with standard rate to see whether the company absorb more or less Fixed OH than expected.
5) Fixed OH Capacity & Fixed OH Volume variances are favourable if we have more hours in actual since we have worked more labour hours in actual due to which we have higher fixed cost.
6) Is it also true that when we compare budgeted cost with standard cost we actually consider standard cost as actual and if standard is more than budgeted then it is favourable variance?
But what is the difference between both budgeted and standard costs?
Sorry for too long question but it really troubles me thats why I asked you!
If we are using absorption costing then the total fixed overhead variance is comparing the actual cost with the standard cost for the actual production (as with the other cost variances).
We analyse it between the expenditure variance and the volume variance to account for the fact that by definition the total fixed overheads should not change with the level of production. Therefore the expenditure variance is the difference between the actual total and the budget total (again, because the total should stay fixed) and the volume variance doesn’t actually mean much but is explaining why the total overheads absorbed are different from the budgeted total (due to a change in the volume). This is effectively the over or under absorption that you will remember from Paper MA. (The capacity and efficiency variances are just analysis of the volume variance).
It is very unlikely that you would be examined on the fixed overhead variances in Paper PM (especially if it is absorption costing as opposed to marginal costing) because they were examined in Paper MA. However if it still worries you then watch the Paper MA lectures on variances where I explain the logic in more detail.
Thanks for your reply 🙂 please say whether these points & the explanation of all of them are correct or not?
1) Fixed OH Expenditure is calculated comparing budgeted hours with standard rate and actual hours with actual rate to see whether the fixed overhead cost more or less in actual than what we were expecting in budgeted.
2) Fixed OH Efficiency is calculated comparing standard hours and actual hours with standard rate to see whether the labour works faster or slower in actual than expected in standard.
3) Fixed OH Capacity is calculated comparing budgeted hours and actual hours with standard rate to see whether the labour work more or less hours than expected in standard.
4) Fixed OH Volume is calculated comparing budgeted hours and standard hours with standard rate to see whether the company absorbs more or less Fixed OH than expected.
5) Fixed OH Capacity & Fixed OH Volume variances are favourable if we have more hours in actual since we have worked more labour hours in actual due to which we have higher fixed cost.
6) Is it also true that when we compare budgeted cost with standard cost we actually consider standard cost as actual and if standard is more than budgeted then it is favourable variance?
(1) to (5) are correct.
I do not know what you are saying with (6). The budgeted cost per unit is the standard cost per unit. The only time we compare with the total budgeted cost is to calculate the expenditure variance which is the difference between the total actual cost and the total budgeted cost.
- You must be logged in to reply to this topic.