in the chapter of Cost behaviour earlier, total fixed cost didn’t change according to production levels while fixed cost per unit would decrease when we produce more units. however in your lecture you said the more units we made, the more fixed O/H we spent (in example 2: from $130.500 to $ 134.074). is there any misunderstand here?

and you also explained that ” produced more was good is equal Favarouable”. it means that the more unit we made, the more sale we got and therefore the more profit we generate. Am i correct? if it is right. we will spend more inventory cost. this lead to overspent, so it became adverse, not Favarouble. Am i right?

Fixed overheads should indeed stay fixed in total. However if we are using absorption costing (as we are in this example – marginal costing variance analysis is dealt with later) then this effectively treats the fixed overheads as though they are variable. (I explain this in the first of the lectures on variance analysis). That is why we need to ‘correct’ it by having the fixed overhead volume variance.

The reason producing more results in a favourable volume variance is that absorption costing will have charged fixed overheads per unit for every unit produced. If you produce more then more fixed overheads will have been charged. However since total fixed overheads should not change with production, producing more will mean we have charged more than we should have done against the profit. To ‘correct’ it we effectively reduce the amount that has been charged, and reducing the expense increased the profit – hence favourable. (It has nothing to do with how many of the production are actually sold)

It is hard to type in words, but I do explain in the lecture. (Make sure you listen to all of the variance lectures because it is in the first one that I explain why I am flexing the fixed overheads.)

Standard margin is standard contribution. It is not relevant for this example because it is absorption costing and we use standard profit when calculating the sales volume variance. It is when using marginal costing that we use the standard contribution to calculate the sales volume variance.

In kaplan where they have written the formulae of Sales volume Variance, they used standard margin in the following way:

( Actual quantity sold – Budget quantity sold) × Standard margin

And down below they mentioned that the standard margin equals the standard contribution per unit ( marginal costing), or the standard profit per unit ( absorption costing).

So what I actually wanted to know was that is standard margin a general term used for both of them or its only used for contribution. Because the idea I get from above is that it’s a general term. This is the basic reason I asked you about standard margin.

Dear Sir, I’m just having some trouble wrapping my head around doing the the Fixed Overheads in this way. Surely the logic of the Flexed Budget is that we’re using the figures we would have come up with at the start of the year, had we known our actual production and sales figures from the beginning. But had we known from the beginning that we would produce 8900 units, we would expect to need more labour hours, and so we would never have used €15 as the absorption rate. So I guess my question would be, why do this extra variance analysis instead of just calculating a new absorption rate? Many thanks for these wonderful lectures. -Naoise

Variance analysis is normally done monthly. Obviously it would be a miracle if everything went according to budget each month – some months we will use more labour and some months we will use less labour. However, it would be silly to keep changing the absorption rate every month (which would then change the standard costs and therefore the inventory value every month).

We assume (certainly for Paper F5) that the estimates used for calculating the absorption rate are OK for the year as a whole. It just means that some months we will have a variance one way, and some months the other way.

Dear Sir, In this chapter, when you are making the operating statements, you divide the fixed overheads variances into expenditure variance, capacity variance and efficiency variance. Now when I review this lecture again, I could get the capacity variance $1800(F). Can you help me? Thank you very much for your help in advance !!!

For the capacity variance you take the difference between the actual hours worked and the originally budgeted hours. You multiply the difference by the standard fixed overheads per hour.

If actual hours are more than budgeted hours then the variance is favourable; if less then it is adverse.

Yep me too I got the capacity variance as 1800 (A) How did 1800 (f) come It should be 1800 (A) Because Act hrs worked 44100 Original budget hrs 43500 So in this there is 600 hrs of adverse .. So… 600 × 3 = 1800(A).. PLEASE help me out sir im confused

In relation to the controversy on the variation of the fixed overheads as against the fixed budgeted which we know it ought not to change as a fixed overheads, the can I say it is a semi-fixed overheads and not fixed overheads? since the unit cost is fixed ($3000/200units=$15) but the total cost changed?

Thus in the short run it was fixed cost in nature (budgeted) but in the long run fixed costs normally becomes semi-fixed

Can you please explain this question?? A company has recorded the following variances for a period: $ Sales volume variance – 10,000 – adverse Sales price variance – 5,000 – favourable Total cost variance – 12,000 – adverse Standard profit on actual sales for the period was $120,000.

Budget profit , if sales volume would be favorable, then the standard(flexed budget) profit increases. ( it would be badgered profit= £110,000. Plus sales volume £10,000 favourable, then = £120,000( standard profit= flexed b). But, here you wrote Sales volume was £10,000 adverse. It means sold actually less units than badgered. Therefore, your original badger was £130,000 + Sales volume of £10,000 Adverse= £ 120,000 standard profit(flexed). So, orig. Bags. £130,000… I suggest, have a relook on F2, variance analysis. Look at operating statement. My lovely teacher, John Mofatt, have explained in a very easy way as he always does it. Hope it is correct.

sarjugiri123 says

thank you Sir for the lecture but i couldn’t find lecture question.

John Moffat says

It is example 1 in the chapter of our free lecture notes on variance analysis!

hedgend says

You are marvelous as always. Thank you for making the rules so much clear.

John Moffat says

And thank you for your comment 🙂

khanhhoangvu says

Dear Teacher,

in the chapter of Cost behaviour earlier, total fixed cost didn’t change according to production levels while fixed cost per unit would decrease when we produce more units. however in your lecture you said the more units we made, the more fixed O/H we spent (in example 2: from $130.500 to $ 134.074). is there any misunderstand here?

and you also explained that ” produced more was good is equal Favarouable”. it means that the more unit we made, the more sale we got and therefore the more profit we generate. Am i correct? if it is right. we will spend more inventory cost. this lead to overspent, so it became adverse, not Favarouble. Am i right?

Could you please clarify these more clear?

Thank you Sir

Could you

John Moffat says

Fixed overheads should indeed stay fixed in total. However if we are using absorption costing (as we are in this example – marginal costing variance analysis is dealt with later) then this effectively treats the fixed overheads as though they are variable. (I explain this in the first of the lectures on variance analysis). That is why we need to ‘correct’ it by having the fixed overhead volume variance.

The reason producing more results in a favourable volume variance is that absorption costing will have charged fixed overheads per unit for every unit produced. If you produce more then more fixed overheads will have been charged. However since total fixed overheads should not change with production, producing more will mean we have charged more than we should have done against the profit. To ‘correct’ it we effectively reduce the amount that has been charged, and reducing the expense increased the profit – hence favourable. (It has nothing to do with how many of the production are actually sold)

khanhhoangvu says

Thank you for your explaination. however I didn’t get it clear. If you have another explaination is easier to understand please let me know.

maybe I need to listen your lecture again to get it more

Thank you very much Sir

John Moffat says

It is hard to type in words, but I do explain in the lecture. (Make sure you listen to all of the variance lectures because it is in the first one that I explain why I am flexing the fixed overheads.)

Sammar says

Can you please tell me what is standard margin? And what is the value of standard margin in this example!

John Moffat says

Standard margin is standard contribution. It is not relevant for this example because it is absorption costing and we use standard profit when calculating the sales volume variance. It is when using marginal costing that we use the standard contribution to calculate the sales volume variance.

Sammar says

In kaplan where they have written the formulae of Sales volume Variance, they used standard margin in the following way:

( Actual quantity sold – Budget quantity sold) × Standard margin

And down below they mentioned that the standard margin equals the standard contribution per unit ( marginal costing), or the standard profit per unit ( absorption costing).

So what I actually wanted to know was that is standard margin a general term used for both of them or its only used for contribution. Because the idea I get from above is that it’s a general term. This is the basic reason I asked you about standard margin.

John Moffat says

Standard margin will usually mean standard contribution in this context. For absorption costing it will usually be called standard profit.

naoise says

Dear Sir,

I’m just having some trouble wrapping my head around doing the the Fixed Overheads in this way. Surely the logic of the Flexed Budget is that we’re using the figures we would have come up with at the start of the year, had we known our actual production and sales figures from the beginning. But had we known from the beginning that we would produce 8900 units, we would expect to need more labour hours, and so we would never have used €15 as the absorption rate. So I guess my question would be, why do this extra variance analysis instead of just calculating a new absorption rate? Many thanks for these wonderful lectures.

-Naoise

John Moffat says

Variance analysis is normally done monthly. Obviously it would be a miracle if everything went according to budget each month – some months we will use more labour and some months we will use less labour.

However, it would be silly to keep changing the absorption rate every month (which would then change the standard costs and therefore the inventory value every month).

We assume (certainly for Paper F5) that the estimates used for calculating the absorption rate are OK for the year as a whole. It just means that some months we will have a variance one way, and some months the other way.

Hope that makes sense 🙂

Grace says

Dear Sir,

In this chapter, when you are making the operating statements, you divide the fixed overheads variances into expenditure variance, capacity variance and efficiency variance. Now when I review this lecture again, I could get the capacity variance $1800(F). Can you help me?

Thank you very much for your help in advance !!!

Grace says

Sorry I mean I couldn’t get the capacity variance 1800$ (F)

John Moffat says

For the capacity variance you take the difference between the actual hours worked and the originally budgeted hours. You multiply the difference by the standard fixed overheads per hour.

If actual hours are more than budgeted hours then the variance is favourable; if less then it is adverse.

Grace says

Yeah, I got it when I re-watched your video, thank you vey much!!! 🙂

John Moffat says

You are welcome 🙂

wangob says

Yep me too

I got the capacity variance as 1800 (A)

How did 1800 (f) come

It should be 1800 (A)

Because

Act hrs worked 44100

Original budget hrs 43500

So in this there is 600 hrs of adverse ..

So… 600 × 3 = 1800(A).. PLEASE help me out sir im confused

John Moffat says

The capacity variance is favourable.

They actually worked more hours, therefore the actual fixed overheads per hour are lower the budget and therefore it is favourable.

Do read my previous reply above, and do watch the lecture again because I do explain in the lecture.

tijani says

In relation to the controversy on the variation of the fixed overheads as against the fixed budgeted which we know it ought not to change as a fixed overheads, the can I say it is a semi-fixed overheads and not fixed overheads? since the unit cost is fixed ($3000/200units=$15) but the total cost changed?

Thus in the short run it was fixed cost in nature (budgeted) but in the long run fixed costs normally becomes semi-fixed

Accountaholic says

Hi,

Can you please explain this question??

A company has recorded the following variances for a period:

$ Sales volume variance – 10,000 – adverse

Sales price variance – 5,000 – favourable

Total cost variance – 12,000 – adverse

Standard profit on actual sales for the period was $120,000.

What was the fixed budget profit for the period?

$130,000

$137,000

$103,000

$110,000

Thanks 🙂

tijani says

The answer is 110,000

doria says

Budget profit , if sales volume would be favorable, then the standard(flexed budget) profit increases. ( it would be badgered profit= £110,000. Plus sales volume £10,000 favourable, then = £120,000( standard profit= flexed b). But, here you wrote Sales volume was £10,000 adverse. It means sold actually less units than badgered. Therefore, your original badger was £130,000 + Sales volume of £10,000 Adverse= £ 120,000 standard profit(flexed). So, orig. Bags. £130,000… I suggest, have a relook on F2, variance analysis. Look at operating statement. My lovely teacher, John Mofatt, have explained in a very easy way as he always does it. Hope it is correct.

doria says

Something else, sales price and costs variances, these data will be used after the flexed profit in order to arrive to actual profit. That’s all.

Lil says

Standard profit on actual sales $120,000

add: sales volume variance $ 10,000

Fixed budget profit $130,000

merotchi says

Thank you!! You’re an amazing lecturer! 🙂

deka says

It is really helpfull lectures

sandy94 says

sir laughs funny lol.great lecture! helped alottt!! 🙂

ganne says

good work, but can anyone tell me which text is being used

sandy94 says

@ganne, open tuition course notes for f2.

doria says

I agree. I stu and feel very confident with Opentuition lectures and its Notes. Lot of practices

gakololang says

great job,but where are the lectures for the new materials for f2 edition of syllabus,eg.index numbers etc.

John Moffat says

@gakololang, We will add lectures when we have the time – in the meantime study from the notes and your own books.

fahad91 says

great job