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Dear John,
Thanks for what you do. I worked out the Dec 2013 No. of Bed Co using both methods, however my challenge is that the planing price variance plus the operational price variance do not add up to the traditional price variance before it is broken down between it’s planning and operational components, yet i think it should.
When you use the examiner’s approach it adds up.So is it true that it should add up?
Thanks
There are two ways of dealing with planning and operational variances – one is the way that BPP, Kaplan, and OpenTuition use (which is the more sensible way) and the other is the way that the examiner used in that question. She did say in her answer that either approach would get full marks.
When you use the more sensible way, the variances do not add up.
If you want to see my answer to the question (using the more sensible way 🙂 ) you can find it here: https://opentuition.com/acca/f5/f5-december-2012-question-2-planning-and-operational-variances/
Thanks for the response.
So please help me understand, if I use the examiner’s (Less sensible way ) how can I first compute the total planning and total operation variance before I break them down into their individual price and usage variances.
I am very grateful for your help.
Doing it the examiners way, you cannot compute the total planning and operational variances before breaking them down! That is one of the reasons why her way is rather silly (and why everyone else – including an examiners article from 4 or 5 years ago – does it differently 🙂 )
Thanks,
But I also wonder why the ” more sensible way” according to you does not add up to the basic variance when you add the operating and Planning.
I am a little disturbed because I though the essence is these planning and operational variance is to see what portion of the basic variance is due to planning and then which portion relates to operation inefficiency that is why I think they need to add up.Both methods add up to the same total variance.
With the more sensible way, the two planning variances add up to the total planning variance, and the two operational variances add up to the total operational variance. The reason that is more sensible is it is more important to know what is due to changing plans, and what is due to managers ‘operating’ differently. However, the two price variances do not add up to the total price variance and the two usage variances do not add up to the total usage variance.
With the new examiners way, the two price variances add up to the total price variance and the two usage variances add up to the total usage variance. However the two planning variances do not add up to the total planning variance and the two operational variances do not add up to the total operational variance.
The reason is that both the quantity and the costs change between the original standard costs, the revised standard costs, and the actual total costs.
To make things had up you would have to use the same quantity in every calculation or the same cost in every calculation. It is not possible to do this and that is why neither way does everything add up 🙂We could argue for ever about which is the more useful method – most people think our way is more useful – but as the examiner herself has pointed out, you would get full marks for either approach. The overall total is the same (and must be the same) whichever method you use.
Best is to decide which method you find easiest and then stick to it – don’t let yourself get confused my learning two methods. She can never and will never specify which of the two methods to use.
Thank you John for the detailed explanation. I think I should stick to the “more sensible way” and emphasise the fact that which ever way the Total variance must be the same
This is what I have picked from this discussion.
1. Variance analysis is about explaining the difference between the budgets profit and the actual profit. which difference is referred to as the TOTAL VARIANCE. It is usually split between the different elements i.e. material price, material usage, labour rate, labour efficiency etc. and these should Total up to the difference between the budgets profit and the actual profit.2. In the same way The planning and operational variance analysis is trying to analyse this SAME difference between the budgets profit and the actual profit, into its components of Planning errors and operational inefficiency.
Please confirm whether what i have picked from this discussion is okay then i will close this chapter such that we engage in other areas.
Thank once again.Thank you very much.
Hope one day some one will come up with a method that makes every thing add up such that no one ever raises these queries again.
HI JOHN
I AM A STUDENT AND NEED HELP WITH MIX ANDVYIELD BUT YOU HAVE NOT ANSWERED TO ME.
I WOULD KINDLY SPPRECIATE IF YOU CAN PLEASE DO EXPLAIN THIS QUESTION TO ME PLEASE.
(b) You learn that the wood used to manufacture the trellis sets comprises three types: pine, balsa and redwood. Calculate and comment on the materials mix and yield variances using the information in the table below.
(8 marks)Budget per unit – Nov 2012 Std cost Actual – Nov 2012
Materials Wood – 25kg @ £3.20/kg 80.00 80,000kgs
Comprising:Pine – 15kg @ £3.00/kg
Balsa – 2kg @ £1.50/kg
Redwood – 8 kg @ £4/kgSTANRD COST
PINE- 45.00
BALSA- 3.00
REDWOOD-32.00ACTUAL
Pine – 48,000kgs
Balsa – 6,400kgs
Redwood – 25,600kgsPLEASE PLEASE PLEASE… AND THANK YOU
I only just saw your question which was posted as a comment to one of the lectures. I cannot sit reading comments 24 hours a day, so be patient.
I will answer this question tomorrow – it is very late here.
I am not sure that you have given all of the information (or whether it is just the formatting).
The mix variance is no problem – the actual usage of material is 80,000 kg (48,000 + 6,400+25,600).
For the mix variance you compare the standard cost for the actual mix (i.e. ((48,000 x $3) + (6,400 x $1.50) + (25,600 x $4)) with the standard cost of the standard mix – the 80,000 should have been mixed in the same proportions as the standard cost card. On the cost card, each unit should use 25kg in total, so 15/25 of the total should be Pine, 2/25 of the total should be Balsa, and 10/25 should be Redwood.
If you work out the standard mix and cost it out at standard cost, then you can calculate the mix variance.It is the yield variance where I am not sure whether you have provided all of the information.
In total we actually used 80,000 kg and we need to compare this with how much we should have used for the actual production. From the cost card, it should have been 25kg for each unit, but the question does not state how many units were actually produced.(In future, please start a new thread for a new question – this question has nothing to do with Planning and Operational Variances, which is the heading for this thread)
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