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Dear Cath,
in a question where you are provided with original budget figures, revised budget figures and actual budget figures and you need to calculate planning variance (material price, material usage, labour rate, labour efficiency) which base should I use for caluclations? It’s definitely should be actual figures of which I’m sure but should it be based on actual units or actual Kg/Hours?
Eg. in a material price planning calculations, should I use Actual Kg used or Actual units produces multiplied by Std.Kg per unit?
I was sure that it should be Actual Kg used however some questions from other sources uses Actual units x Std.Kg per unit.
And here is another one from me.
Does the EV technique ignores the risk? It’s obvious that it ignores the risk attitude but what about the risk itself?
I was sure that the answe is No, it takes the risk into account because probabilities are considered. However, I recently faced with a question which says that “The limitation of using EV is risk ignorance because the spread of outcomes from the EV is not considered when EVs are used in isolation”. Absolutely confused.
Regards,
YRDI guess I figured out the approach. In case of material price planning variance the actual material purchased should be used, i.e. (original price – revised price) x actual material purchased.
For material usage planning variance this should be (original usage in kg(lt) – revised usage in kg(lt)) x actual number of units x revised price per kg(lt) (or original price per kg(lt) if there were no changes in ex-ante and ex-post price standatd).Same should apply for labour. Is that correct?
Regards,
YRD@tfbanker said:
I guess I figured out the approach. In case of material price planning variance the actual material purchased should be used, i.e. (original price – revised price) x actual material purchased.
For material usage planning variance this should be (original usage in kg(lt) – revised usage in kg(lt)) x actual number of units x revised price per kg(lt) (or original price per kg(lt) if there were no changes in ex-ante and ex-post price standatd).Same should apply for labour. Is that correct?
Regards,
YRDNope. One of Qs in Kaplan text book says it should be actual units produced so my guessing is wrong.
Hi – yes it can be confusing – there are two different but acceptable ways to calculate these planning variances. The two methods give you different answers!
The last time CIMA wrote an article with their preferred method is in the link below
I calculate material price planning variance.
Actual kg used x (revised – original material cost per kg)Material usage variance is
Actual output units x original standard kgs Compared with Actual units x revised standard usage kgs … all valued at original material cost per kg.…. ……………………….
In terms of the Expected value – definitely a technique to deal with risk.-Any technique that involves probabilities incorporates risk because this is within its definition (the outcomes and likelihoods must be quantifiable – making it distinct from uncertainty)….The issue that the answer is discussing is that you have no idea of the variability of the likely outcomes… its an average only – meaning that one of the outcomes could involve an enormous loss and you may not be aware when choosing a project based on EV that this could be a possible result.
Standard deviation is intended to indicate how much the outcomes might vary from the average EV figure.
I think its a bit of a confusing way to describe the variability of the outcomes as risk ignorant.. because better to say that EV has a problem because it ignores the volatility or potential variability in the actual outcome received compared to average.ps) Please start a new thread when you post two different topics – this makes it more useful to other students who are using the forum (and may miss the EV query due to the title of this post) 🙂
Many Thanks
CathHi – yes it can be confusing – there are two different but acceptable ways to calculate these planning variances. The two methods give you different answers!
The last time CIMA wrote an article with their preferred method is in the link below
I calculate material price planning variance.
Actual kg used x (revised – original material cost per kg)Material usage variance is
Actual output units x original standard kgs Compared with Actual units x revised standard usage kgs … all valued at original material cost per kg.…. ……………………….
In terms of the Expected value – definitely a technique to deal with risk.-Any technique that involves probabilities incorporates risk because this is within its definition (the outcomes and likelihoods must be quantifiable – making it distinct from uncertainty)….The issue that the answer is discussing is that you have no idea of the variability of the likely outcomes… its an average only – meaning that one of the outcomes could involve an enormous loss and you may not be aware when choosing a project based on EV that this could be a possible result.
Standard deviation is intended to indicate how much the outcomes might vary from the average EV figure.
I think its a bit of a confusing way to describe the variability of the outcomes as risk ignorant.. because better to say that EV has a problem because it ignores the volatility or potential variability in the actual outcome received compared to average.ps) Please start a new thread when you post two different topics – this makes it more useful to other students who are using the forum (and may miss the EV query due to the title of this post) 🙂
Many Thanks
CathHi Cath,
thanks for the answer! For material price planning variance I will use:
actual units x standard kg per unit x (original price per kg – revised price per kg)
as described in the article you linked.
Ps. Questions posting advice noted, thanks.
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