Question

You work for a manufacturing company and have just completed the budget process for the upcoming business year. At the end of the first quarter you take the actuals and compare them to the budget. You notice there are differences which need explanation and create the static and flexible budget variances. You present this to management and they request you to explain the variances in more detail.

You go and create the Flexible Budget Performance Report and present this. You also need to explain the reasons for the variances and who is responsible. Explain the calculations used to create this report.

Explain why the variances using standard costs better reflect the actual variance and how to determine who is responsible for each variance

Answer 1

Standard costing:-

An analytical tool to understand different types of disordered as per budgeted forecast.

A major component to analyze the total variances:-

1. Material cost variances

2. labor cost variances

3. Overhead variances

Further variance analysis provides each cause in each of the cost variances due to different reasons

Material cost Variance= Material Price Variance + Material Usage Variance

Labour cost variance = Labour rate Variance + Labour Efficiency Variance + Labour idle time Variance

Fixed Overhead Variance = Fixed Overhead Expenditure variance + Fixed Overhead Volume Variance

Variable Overhead Variance = Variable Overhead Expenditure variance + Fixed overhead efficiency Variance

Sales Variance (Turnover /Value)  = Sales Price Variance + Sales Volume Variance

Sales Variance (Margin) = Sales price margin Variane + Sales margin volume Variance

By analysing each different cause of variance, respected head to personnel can be account for mismanagement or false management.