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Basic Variance Analysis part 1 – ACCA Performance Management (PM)

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  1. Hi John,

    I’m quite confused with this: so in flexing the budget, you did use the standard cost per unit for each component of production cost to multiply the actual units produced (8,900 units). I suppose that an alternative way of arriving at the costs for the flexed budget should be to multiply the standard cost per material with the actual material usage (in this case, $4.50 per kg by 35,464 kg) and the same with labour. However, this approach gives a different answer from the approach used in the lecture. Can you please explain the difference.

    • The flexed budget is always using the actual units at the standard cost per unit. The actual total cost will be different because the kgs per unit used will be different and because the cost per kg will be different, but we use these to analyze why the total cost is different when calculating the individual variances.

  3. Dear John,

    Please guide why the standard fixed cost per unit taken the same (per unit) for flexed budget as well? It will increase the overall fixed cost if the units of Sales/production would be on higher side. However in true sense, the Fixed cost is to be fixed in total.

    I understand that you mentioned in the lecture that you will guide us about this later but i guess it was missed in this lecture. Or may be i missed it.

    • Sorry but no. There is no point in typing out a full question and expecting to be provided with a full answer. You must have an answer in the same book in which you found the question, so ask about whatever it is in the answer that you are not clear about (but ask in the Ask the Tutor Forum and not as a comment on a lecture).

    • If we had simply been asked to prepare a budget then indeed we would keep the fixed overheads fixed. However I flexed it in this example in order to explain why it is that with variance analysis using absorption costing, the sales volume variance effectively does flex fixed overheads. Later I explain how and why we therefore analyse the fixed overhead variance into an expenditure and a volume variance.

      (Few questions are asked in Paper PM on this chapter – it was all examined in Paper FA (was F3) – but understanding this chapter is needed when it comes to the advance variances which are always asked in Paper PM.

  8. Hello sir,

    Suppose if the question did not give production units; Say for example ;There is only sales units and the question directly gives the values of fixed budget as

    Sales units :8000
    Material :$156600
    Labour : $217500
    VOH:$87000
    FOH:$130500
    then the flexed Budget Material or labour or VOH or FOH calculates as follows..

    Actual sales units: 8400
    Material: $156600/8000*8400
    Labour: $217500/8000*8400 etc..

    Is it right sir??

    Because currently with production units, we are doing

    Material: $156600/8700*8900 so the difference of 200 units takes in to account. What if no production units and only sales units..

    Please correct if above mentioned is wrong..

    Thank you

    • In future you must ask this sort of question in the Ask the Tutor Forum and not as a comment on a lecture.

      Expense variances are calculation on units produced. If you are not told units produced then assume that are equal to the units sold unless, of course, you are told about levels of inventory.

  9. Hello Mr. John thank you for the informative session

    I just couldn’t get the entire third column as I thought we had already calculated the
    actual usage in the second column.
    I couldn’t also get from where we get 613200 in the third column.

    last point what the difference we ‘ve mad in the fixed cost as we did treat is as normal cost
    just like the other costs we took the cost/unit into the total units produced and that is true because it is all about the No of units isn’t it?

  13. Hello, I am unable to pick the sense of calculating closing inventory @ of total standard cost, can you please explain why we do it? Why we don’t compute closing inventory value by using actual total cost per unit?

    • Variances in practice are usually calculated monthly. Some months costs might be a bit higher than standard, and some months they might be a bit lower than standard. It will be ridiculous to every month keep changing the value of the inventory.

      Therefore in management accounts, it is normal to always value in the inventory at standard cost. (If things change a lot then they might decide to change the standard cost, but this is not relevant for Paper PM).

      Remember we are not preparing financial accounts – we are doing management accounts which are prepared to help management run the business. In financial accounts we do value the inventory at actual cost.

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