It would be correct. (I go through the basic variances in the lectures on the previous chapter of the lecture notes).

samiullahqaharisays

Hi,

Your lectures are amazing I appreciate all the effort you have put into these lectures. I was attempting a question from the exam kit (kaplan, f2, P93, Q: 310) it asks us to calculate overhead variance:

its given us: 拢 per unit

direct material: 15 Direct Labour ( 3hours ) 12 Variable overhead: 6 Fixed Overhead: 4

Overheads are absorbed on the basis of units produced

Actual units produced: 800 budgeted production: 900 actual expenidture: 8500

To work out expenditure variance i would:

actual exp: 8500 (1)expected: 8000 therefore expenditure variance is 500 adverse

(1) workings v/c(800*6) 4800 f/o( 800*4) 3200

The answer on the back of the book shows:

actual exp: 8500 (2)expected: 8400 expenditure variance is 100 adverse

(2) workings v/c(800*6) 4800 f/o( 900*4) 3600

My question is: a) since fixed overheads are on the basis of how many units ACTUALLY produced why do we calculate expected expenditure using budgeted production i.e. 900*4 and not 800*4?

b) why arent material and labour taken into acount??

Hi Sir, Thanks for your lecture. I have read your reply for my question in the Ask the Tutor Forum; however, I cannot find the answer in the lecture. How can I calculate Material Total Variances in case the purchased amount is different from the used amount? Is it: Material Total Variances = (Actual Price – Standard Price) x Actual Purchase + (Actual Usage – Standard Usage) x Standard Price or: Material Total Variances = Actual Price x Actutal Purchase – Standard Price x Standard Usage or: Material Total Variances = Actual Price x Actutal Usage – Standard Price x Standard Usage Thanks in advance.

None of those (and it is dangerous to simply learn formulae).

For the total material variance you take the actual expenditure less the standard cost of the closing inventory of materials, and compare it with the standard cost for the actual production.

Yes it is true. If you are simply asked to flex a budget then the fixed overheads stay fixed.

However variance analysis (when using absorption costing) effectively flexes the fixed overheads, which explains why (in the following lectures on variance analysis) we have extra variances for fixed overheads. I do the flexed budget here to make sense of the fixed overhead variances that follow.

(It is exactly the same problem that you will have seen in the earlier lectures on absorption costing – that when using absorption costing there is likely to be an over or under absorption of fixed overheads that needs correcting for.)

thank you so much for your lectures, they have absolutely been very helpful… i am just a bit confuse about the variance, you said the sales is adverse, but the actual was $613200 which i actually sell and the budgeted was $630000, if i budget 630000 and i used less 613200, i was thinking it should be favorable not adverse.. please advise her b4 i make the big mistake of my life loosing 2 marks 馃檪 thank you sir

The actual sales revenue is 613,200. Since they are receiving less than they were budgeting on receiving they will make less profit – that is why it is adverse.

(When it comes to the costs, then spending less than they budgeted is saving them money – therefore more profit and therefore favourable.)

thank you sir for the clarification, if that is the case sir what about the variable overhead, the actual is 87348 is less than the budgeted of 89000 and we say its favorable?

which is the same for sales which the actual was less than the budgeted and we say adverse? i am sorry but i just want to get it right sir and i am not confusing myself.. thank you for your time sir

But variable overheads are an expense – if you pay out less you make more profit (favourable), if you pay out more then you make less profit (adverse).

Sales are income – if you receive less then you make less profit (adverse) and if you receive more then you make more profit (favourable).

now i can see the whole logic.. the productions are the costs that i uncured while the sales/ revenue are what i am expecting in terms of profit and the rule of adverse and favorable is vice versa am i right?

Yes (but as you continue with the lecture, it is more important for the exam to be able to analyse it between material expenditure and material usage).

My teacher taught me that It is calculated using this formula: Variance % = [Variance (Adv or Fav) / St. or Budgeted Cost]*100 eg MPV % = [MPV (Adv or Fav) / St Cost of RM per unit]*100

I wanna know, Is the Standard or Budgeted Cost used above is the whole cost that should’ve been incurred for the actual output?? and will the same cost be used when doing Material Quantity Variance %?? Also that, Is variance % a margin ( or %) of the budgeted cost??

for a product r mpv for august was $1000F and muv 300A standard usage per unit is 3kg standard material price is 2 per kg 500 units were produced in the period opening inventory on raw materials was 100 kg and closing inventory 400kg material purchases in the period were. sir please help thnx in advance

See the Ask the Tutor Forum – the question was reposted there as requested (you can use the search box)

essasays

First of all thanks for all lecturess.. its really helpfull. i study from BPP and there is this all sort of formulas like … direct material total variances=standard material cost per unit for actual output-actual total material cost.. this formula is necessary to use?

There are several ways you can calculate the variances (all giving the same answer 馃檪 ), and you can use whichever you find the easiest.

I prefer the way I do it because I always find learning formulae dangerous (partly in case I forget them, but also because I think it important to understand what is happening).

I also realize that with the rule you mentioned, you said that it is the actual purchases at cost minus actual purchases at standard cost nut based on the BPP text i am using it does the reverse of your rule. Which of the rule is correct cause it would affect whether the final amount would be favourable or adverse.

It does not matter which way round you write the rule – the number will be the same!

As regards whether it is adverse or favourable, you really should not learn that as a rule – if you are spending more than you should it is adverse, if you are spending less than you expect then it is favourable.

Certainly learn the rules for the calculations, but you must make sure you understand why variances are favourable or adverse – the exam will not simply test that you have learned rules – it will test your understanding as well.

I watched open tuition for the first time and that lecture on budgeting and variances was amazing. I now know how to calculate variances without memorising the formula. That tutor teaches the concept which is exactly what I needed. Excellent lecturer

It is valued at standard cost in management accounting,

The reason (which is explained also in the lecture) is because variance analysis would usually be done every month and it will be silly to keep changing the inventory values each month – some months costs will be higher and some months the costs will be lower, and so we value inventory at what we expect the average cost for the year to be.

(In practice, there could be good reasons for actually changing the standard cost during the year, but this will not happen in Paper F2 – we always value inventory at standard cost.

ravpatel075 says

Dear Sir,

If we are not given to calculate the idle time on the labour Variances we can take the labour efficiency variance to be as follows

Actual Labour Paid – 45,400Hours

Standard Labour (8900Units X 5hours) – 44,500Hours

Variance 900Hours

Multiply by $5 per hour 4500(A)

Total Labour Variance 4500(A) + 2485(F) = 2015(A)

Will this be correct if we dont calculate overtime?

ravpatel075 says

sorry not overtime but idle time?

John Moffat says

It would be correct. (I go through the basic variances in the lectures on the previous chapter of the lecture notes).

samiullahqahari says

Hi,

Your lectures are amazing I appreciate all the effort you have put into these lectures.

I was attempting a question from the exam kit (kaplan, f2, P93, Q: 310) it asks us to calculate overhead variance:

its given us: 拢 per unit

direct material: 15

Direct Labour ( 3hours ) 12

Variable overhead: 6

Fixed Overhead: 4

Overheads are absorbed on the basis of units produced

Actual units produced: 800

budgeted production: 900

actual expenidture: 8500

To work out expenditure variance i would:

actual exp: 8500

(1)expected: 8000

therefore expenditure variance is 500 adverse

(1) workings

v/c(800*6) 4800

f/o( 800*4) 3200

The answer on the back of the book shows:

actual exp: 8500

(2)expected: 8400

expenditure variance is 100 adverse

(2) workings

v/c(800*6) 4800

f/o( 900*4) 3600

My question is:

a) since fixed overheads are on the basis of how many units ACTUALLY produced why do we calculate expected expenditure using budgeted production i.e. 900*4 and not 800*4?

b) why arent material and labour taken into acount??

I look forward to hearing from you

Thanks

Samiullah

John Moffat says

You must ask this in the Ask the Tutor Forum, and not as a comment on a lecture.

tuandoan2001 says

Hi Sir,

Thanks for your lecture. I have read your reply for my question in the Ask the Tutor Forum; however, I cannot find the answer in the lecture.

How can I calculate Material Total Variances in case the purchased amount is different from the used amount? Is it:

Material Total Variances = (Actual Price – Standard Price) x Actual Purchase + (Actual Usage – Standard Usage) x Standard Price

or:

Material Total Variances = Actual Price x Actutal Purchase – Standard Price x Standard Usage

or:

Material Total Variances = Actual Price x Actutal Usage – Standard Price x Standard Usage

Thanks in advance.

John Moffat says

None of those (and it is dangerous to simply learn formulae).

For the total material variance you take the actual expenditure less the standard cost of the closing inventory of materials, and compare it with the standard cost for the actual production.

Aazif says

how can we find actual purchase at actual cost (35464kg) in first example

John Moffat says

It is given in the question!!

(As it says at the start of every lecture, you need to download the free lecture notes)

nrna says

in book said that fixed o/h dosnt change it estimates as standard cost in flexed budget isnt it true?

John Moffat says

Yes it is true. If you are simply asked to flex a budget then the fixed overheads stay fixed.

However variance analysis (when using absorption costing) effectively flexes the fixed overheads, which explains why (in the following lectures on variance analysis) we have extra variances for fixed overheads. I do the flexed budget here to make sense of the fixed overhead variances that follow.

(It is exactly the same problem that you will have seen in the earlier lectures on absorption costing – that when using absorption costing there is likely to be an over or under absorption of fixed overheads that needs correcting for.)

mutiat28 says

Hi sir,

thank you so much for your lectures, they have absolutely been very helpful… i am just a bit confuse about the variance, you said the sales is adverse, but the actual was $613200 which i actually sell and the budgeted was $630000, if i budget 630000 and i used less 613200, i was thinking it should be favorable not adverse.. please advise her b4 i make the big mistake of my life loosing 2 marks 馃檪

thank you sir

John Moffat says

The actual sales revenue is 613,200. Since they are receiving less than they were budgeting on receiving they will make less profit – that is why it is adverse.

(When it comes to the costs, then spending less than they budgeted is saving them money – therefore more profit and therefore favourable.)

mutiat28 says

thank you sir…. u are a natural… Have a great weekend.

mutiat28 says

thank you sir for the clarification, if that is the case sir what about the variable overhead, the actual is 87348 is less than the budgeted of 89000 and we say its favorable?

which is the same for sales which the actual was less than the budgeted and we say adverse? i am sorry but i just want to get it right sir and i am not confusing myself..

thank you for your time sir

John Moffat says

But variable overheads are an expense – if you pay out less you make more profit (favourable), if you pay out more then you make less profit (adverse).

Sales are income – if you receive less then you make less profit (adverse) and if you receive more then you make more profit (favourable).

mutiat28 says

now i can see the whole logic.. the productions are the costs that i uncured while the sales/ revenue are what i am expecting in terms of profit and the rule of adverse and favorable is vice versa am i right?

John Moffat says

correct 馃檪

Sammar says

The $3255 is the Total Material Cost Variance, right??

John Moffat says

Yes (but as you continue with the lecture, it is more important for the exam to be able to analyse it between material expenditure and material usage).

secondstar says

Sir, can you please explain Variance Percentage?

how is it calculated??

John Moffat says

Is the variance expressed as a % of the budget (but is not asked for in Paper F2).

secondstar says

My teacher taught me that It is calculated using this formula:

Variance % = [Variance (Adv or Fav) / St. or Budgeted Cost]*100

eg MPV % = [MPV (Adv or Fav) / St Cost of RM per unit]*100

I wanna know, Is the Standard or Budgeted Cost used above is the whole cost that should’ve been incurred for the actual output?? and will the same cost be used when doing Material Quantity Variance %??

Also that, Is variance % a margin ( or %) of the budgeted cost??

John Moffat says

Again, variance percentage is not in the syllabus for Paper F2! (and it can be calculated in more than one way – there is no standard rule.)

secondstar says

Thank you very much for the guidance Sir. 馃檪

John Moffat says

You are welcome 馃檪

storm says

for a product r mpv for august was $1000F and muv 300A

standard usage per unit is 3kg standard material price is 2 per kg

500 units were produced in the period opening inventory on raw materials was 100 kg and closing inventory 400kg material purchases in the period were.

sir please help thnx in advance

John Moffat says

You must ask these questions in the Ask the Tutor Forum, and not as comments on a lecture.

enroluniabroad says

is the right answer 1650 kgs or not..?

John Moffat says

No it is not the right answer.

See the Ask the Tutor Forum – the question was reposted there as requested (you can use the search box)

essa says

First of all thanks for all lecturess.. its really helpfull.

i study from BPP and there is this all sort of formulas like … direct material total variances=standard material cost per unit for actual output-actual total material cost.. this formula is necessary to use?

John Moffat says

There are several ways you can calculate the variances (all giving the same answer 馃檪 ), and you can use whichever you find the easiest.

I prefer the way I do it because I always find learning formulae dangerous (partly in case I forget them, but also because I think it important to understand what is happening).

Erica says

Sir, is this the formula for labour rate variance?

Labour rate variance(A/F) = (Actual rate – Standard rate) x actual hours paid?

John Moffat says

That is correct 馃檪

godze26 says

I also realize that with the rule you mentioned, you said that it is the actual purchases at cost minus actual purchases at standard cost nut based on the BPP text i am using it does the reverse of your rule. Which of the rule is correct cause it would affect whether the final amount would be favourable or adverse.

John Moffat says

It does not matter which way round you write the rule – the number will be the same!

As regards whether it is adverse or favourable, you really should not learn that as a rule – if you are spending more than you should it is adverse, if you are spending less than you expect then it is favourable.

Certainly learn the rules for the calculations, but you must make sure you understand why variances are favourable or adverse – the exam will not simply test that you have learned rules – it will test your understanding as well.

godze26 says

Hi,

Why is the $612.00 favourable when the amount of 136 kg would have been an adverse amount.

John Moffat says

Why on earth is the 136kg adverse?

For the production of 8,900 units, we would have expected to use 8,900 x 4 = 35,600 kg.

We actually only used 35,464kg which is 136 less than we would have expected – that will save money, give more profit, and is therefore favourable.

godze26 says

Hi

I realised my error. I understand now. Thanks for your reply.

andreabarrows says

I watched open tuition for the first time and that lecture on budgeting and variances was amazing. I now know how to calculate variances without memorising the formula. That tutor teaches the concept which is exactly what I needed. Excellent lecturer

allamardneket4 says

why in flexible budget closing inventory are valued at fixed budget valuation amount??

John Moffat says

It is valued at standard cost in management accounting,

The reason (which is explained also in the lecture) is because variance analysis would usually be done every month and it will be silly to keep changing the inventory values each month – some months costs will be higher and some months the costs will be lower, and so we value inventory at what we expect the average cost for the year to be.

(In practice, there could be good reasons for actually changing the standard cost during the year, but this will not happen in Paper F2 – we always value inventory at standard cost.

ryanpie says

what u see is what you get

this is what he told me!!!!! lol

shit nah????

alex83 says

it’s real nice lectures! Thank you opentuition!

gakololang says

wow,thats terrific,splendid lectures.Admin,how about the other lectures for chapter 20,14,19,25,23,21 and 26.

tresor says

Well explained .Thanks for the great effort. Keep it up

leon64 says

wonderful……thank you sir.