hello, i have another silly question, when preparing the sale variances, in the price, there is our share of fixed cost per unit, how does this affect the overall variance?

I don’t understand what you are asking. The sales price variance is simply looking at the effect of charging more or less than the standard selling price.

Understood that the variances all fit together at the operating statement level but if there are exam questions that just ask about the variances specific on Sales (and not requiring an Operating Statement) then,

For Sales volume variance – is it always the variance on Profit between budget and actual ? Technically can we not analyse the variance between the extra or less Revenue due to the volume change?

For Sales revenue – Can we not analyse variance on Profit level for this one like sales volume?

The sales volume variance is always the different between the actual sales volume and the budgeted sales volume, costs at either the standard profit or the standard contribution depending on which method of costing is being used. We never analyse it because there is no point. The purpose of variance analysis is to discover why the actual profit is different from the budgeted profit. If the actual profit is different from the actual sales at standard profit then the reason has to be due to changes in the selling price and/or changes in the costs, and we calculate variances for each of these.

I have another question please. I see that the cost of the actual ‘extra’ inventory of 500 units (those production units > sales units) are estimated based on standard costing of $68 per unit, and so both flexed budget cost and actual cost of these extra inventories are accounted to be at $34,000. So does this mean that we assume all production cost efficiencies or inefficiencies against flexed budget are all considered in the cost of goods sold?

I just want to ensure my understanding of this assumption is correct. For instance, in a rather unlikely situation, it could be that all of the actual 8,400 units produced for sales incurred costs exactly the same amounts as flexed budget costs, but somehow those extra 500 units in inventory incurred much more costs, which resulted in total production costs of 8,900 units higher than the total flexed budget production costs.

We value the inventories at standard cost and so all differences in costs are dealt with in the variances for the period and not carried forward in the valuation of the inventory.

shakir7385says

Dear John, While calculating expenditure variance of F.O.H, why the standard cost is not calculated the way we calculated the standard cost of mat., lab., and v.o.h? Why we simply mentioned $130,500 in place of standard cost to calculate variance.

Sir, many thanks for your details explanation of the variance analysis lecture. But I also have the same question on F.O.H.

Can we put in this way in calculating F.O.H? Expenditure variance Actual cost $134,074 At standard cost base on actual hours worked (44100 units * $3/hr) $132,300 Variance $1,774 (A) Efficiency variance Actual hours worked 44,100 Actual production base on actual no. of units produced (8,900 * 5hrs) 44,500 Variance at standard cost 400hrs * $3/hr = $1,200 (F)

Total variance $574 (A)

When will use absorption cost concept for F.O.H. and stay fixed whatever with the no. of units has changed? Refer to the standard cost card, absorption cost concept should be adopted instead of fixed, am I correct?

No, the expediture variance is always the difference between the actual total fixed overheads and the originally budgeted total fixed overheads (whether using absorption or marginal costing). If it is absorption costing then we also have the capacity and efficiency variances and they are calculated as I show in my lecture.

Having said that, I would not worry too much about the fixed overhead variances. They are very unlikely to be asked in Paper PM (because they were examined in Paper MA). It is the advanced variances in the next chapter that are most important for Paper PM.

Hi John and thanks for a great lecture (as always!). 馃檪

I was just curious regarding fixed overheads… You state very clearly that while they should not change, and so should stay fixed, they do change in this example because we are using absorption costing. My question is hypothetical as to how this relates/applies to a real-life situation in for example a business and you’d be asked to calculate the total variances on a flexed budget, and/or analyse them. Would you still flex the FOH?

For variance analysis, if we are using absorption costing then using the standard profit per unit when calculating the sales volume variance it automatically flexes the fixed overheads. That is why the fixed overhead variance needs analysing into the expenditure variance (which is meaningful) and the volume variance (which is just to explain the reason for the difference).

In real life it depends on whether the company chooses to use absorption costing or marginal costing – it their choice.

Don’t worry too much – fixed overhead variances are rare in Paper PM because they were examined in Paper MA.

It is the advanced variances in the next chapter that are much more important for Paper PM.

lwhnatalie says

Sir, your explanation on chapters is bravo especially your quick response on our questions regarding each chapter can help us a lot for self-study.

John Moffat says

Thank you for your comment 馃檪

aniabagheri says

hello, i have another silly question, when preparing the sale variances, in the price, there is our share of fixed cost per unit, how does this affect the overall variance?

John Moffat says

I don’t understand what you are asking. The sales price variance is simply looking at the effect of charging more or less than the standard selling price.

ty0311 says

Hi Sir,

Understood that the variances all fit together at the operating statement level but if there are exam questions that just ask about the variances specific on Sales (and not requiring an Operating Statement) then,

For Sales volume variance – is it always the variance on Profit between budget and actual ? Technically can we not analyse the variance between the extra or less Revenue due to the volume change?

For Sales revenue – Can we not analyse variance on Profit level for this one like sales volume?

Thanks and Regards,

Tim

John Moffat says

The sales volume variance is always the different between the actual sales volume and the budgeted sales volume, costs at either the standard profit or the standard contribution depending on which method of costing is being used.

We never analyse it because there is no point. The purpose of variance analysis is to discover why the actual profit is different from the budgeted profit. If the actual profit is different from the actual sales at standard profit then the reason has to be due to changes in the selling price and/or changes in the costs, and we calculate variances for each of these.

ty0311 says

Thank you Sir, I have a better understanding now.

I have another question please. I see that the cost of the actual ‘extra’ inventory of 500 units (those production units > sales units) are estimated based on standard costing of $68 per unit, and so both flexed budget cost and actual cost of these extra inventories are accounted to be at $34,000. So does this mean that we assume all production cost efficiencies or inefficiencies against flexed budget are all considered in the cost of goods sold?

I just want to ensure my understanding of this assumption is correct. For instance, in a rather unlikely situation, it could be that all of the actual 8,400 units produced for sales incurred costs exactly the same amounts as flexed budget costs, but somehow those extra 500 units in inventory incurred much more costs, which resulted in total production costs of 8,900 units higher than the total flexed budget production costs.

Many thanks in advance!

John Moffat says

We value the inventories at standard cost and so all differences in costs are dealt with in the variances for the period and not carried forward in the valuation of the inventory.

shakir7385 says

Dear John,

While calculating expenditure variance of F.O.H, why the standard cost is not calculated the way we calculated the standard cost of mat., lab., and v.o.h? Why we simply mentioned $130,500 in place of standard cost to calculate variance.

John Moffat says

Because by definition total fixed costs should stay fixed, whatever the level of production.

lwhnatalie says

Sir, many thanks for your details explanation of the variance analysis lecture.

But I also have the same question on F.O.H.

Can we put in this way in calculating F.O.H?

Expenditure variance

Actual cost $134,074

At standard cost base on actual hours worked (44100 units * $3/hr) $132,300

Variance $1,774 (A)

Efficiency variance

Actual hours worked 44,100

Actual production base on actual no. of units produced (8,900 * 5hrs) 44,500

Variance at standard cost 400hrs * $3/hr = $1,200 (F)

Total variance $574 (A)

When will use absorption cost concept for F.O.H. and stay fixed whatever with the no. of units has changed? Refer to the standard cost card, absorption cost concept should be adopted instead of fixed, am I correct?

John Moffat says

No, the expediture variance is always the difference between the actual total fixed overheads and the originally budgeted total fixed overheads (whether using absorption or marginal costing). If it is absorption costing then we also have the capacity and efficiency variances and they are calculated as I show in my lecture.

Having said that, I would not worry too much about the fixed overhead variances. They are very unlikely to be asked in Paper PM (because they were examined in Paper MA). It is the advanced variances in the next chapter that are most important for Paper PM.

KimR says

Hi John and thanks for a great lecture (as always!). 馃檪

I was just curious regarding fixed overheads… You state very clearly that while they should not change, and so should stay fixed, they do change in this example because we are using absorption costing. My question is hypothetical as to how this relates/applies to a real-life situation in for example a business and you’d be asked to calculate the total variances on a flexed budget, and/or analyse them. Would you still flex the FOH?

Thanks 馃檪

John Moffat says

For variance analysis, if we are using absorption costing then using the standard profit per unit when calculating the sales volume variance it automatically flexes the fixed overheads. That is why the fixed overhead variance needs analysing into the expenditure variance (which is meaningful) and the volume variance (which is just to explain the reason for the difference).

In real life it depends on whether the company chooses to use absorption costing or marginal costing – it their choice.

Don’t worry too much – fixed overhead variances are rare in Paper PM because they were examined in Paper MA.

It is the advanced variances in the next chapter that are much more important for Paper PM.

KimR says

That’s great, many thanks ?

KimR says

Meant to say many thanks! ?

saharaking says

i have not seen your response sir

andrewire says

John. Really enjoying your lectures. This is a fantastic resource and helping me immensely. Thank you so much to you and your team!

John Moffat says

Thank you for your comment 馃檪

tillyp says

Hi, do we calculate fixed costs variances in the same way using marginal costing? or is this for absorption costing?

tillyp says

oh never mind, just saw the separate lecture 馃檪

John Moffat says

That was what I was about to reply to you – I am pleased that you found it 馃檪

alie2018 says

Thank you Sir

afzalr21 says

Hi, if you dont mind me asking, did you pass f5? Im planning to sit in June, God willing.