ACCA F5 Performance Management - 2010 - Study text - Emile Woolf Publishing
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Chapter 10: Basic variance analysis
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Standard marginal costing
Standard marginal costing and standard absorption costing compared
Fixed production overhead variances in standard marginal costing
Sales volume variance in standard marginal costing
Standard marginal costing operating statement
8 Standard marginal costing
8.1 Standard marginal costing and standard absorption costing compared
When a company uses standard marginal costing rather than standard absorption
costing:
finished goods inventory is valued at the standard variable production cost, not
the standard full production cost
variances are calculated and presented in the same way as for standard
absorption costing, but with two important differences:
- fixed production overhead variances
- sales volume variances.
8.2 Fixed production overhead variances in standard marginal costing
In standard marginal costing, there is a fixed production overhead expenditure
variance, but no fixed production overhead volume variance.
The fixed production overhead expenditure variance is calculated in the way
already described and is the same amount in a standard marginal costing system as
in a standard absorption costing system.
8.3 Sales volume variance in standard marginal costing
In standard marginal costing, the sales volume variance is calculated using standard
contribution, as follows:
Sales volume variance: usual method of calculation
units
Actual sales volume (units) X
Budgeted sales volume (units) Y
Sales volume variance in units X - Y (F) or (A)
Standard contribution per unit $C
Sales volume variance (contribution variance)
(X – Y) × $C
(F) or (A)
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Sales volume variance: alternative method of calculation
$
Actual sales at standard selling price X
Budgeted sales Y
Sales volume variance in $ revenue (X – Y) (F) or (A)
Standard contribution /sales ratio C%
Sales volume variance (contribution variance) $(X – Y) x C% (F) or (A)
Both methods of calculating the sales volume variance produce the same answer.
8.4 Standard marginal costing operating statement
An operating statement is presented in a different way. Budgeted contribution can
be reconciled with actual contribution, by means of the sales price variance, sales
volume variance and variable cost variances. Fixed cost expenditure variances
should be presented in a separate part of the operating statement.
Operating statement: standard marginal costing
$
Budgeted profit BP
Add budgeted fixed costs BF
Budgeted contribution (BP + BF) BC
Sales price variance X (F) or (A)
Sales volume variance X (F) or (A)
Sales less standard variable cost of sales X
Variable cost variances (F) (A)
$ $
Direct materials price X
Direct materials usage X
Direct labour rate X
Direct labour efficiency X
Variable production overhead rate X
Variable production o’head efficiency X
Total variable cost variances Totals X (F) or (A)
Actual contribution AC
Budgeted fixed overhead expenditure BF
Fixed overhead expenditure variance X (F) or (A)
Actual fixed production overheads AF
Actual profit (AC – AF) AP
Chapter 10: Basic variance analysis
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Variances with waste and idle time
Variances when waste is provided for in the standard cost
Variances when idle time is provided for in the standard cost
9 Variances with waste and idle time
9.1 Variances when waste is provided for in the standard cost
When the standard cost provides for wastage or loss in production, it is usual to
calculate the material usage variance by comparing the actual usage of materials
with the expected usage of materials allowing for normal wastage. The calculation
of the material usage variance should be straightforward, as the following example
shows.
Example
A company makes a standard product. Each finished product contains 450 grams of
raw material, but there is an expected loss in production equal to 5% or the
materials input. Raw materials have a standard cost of $4 per kilogram.
During a period, 6,000 units of the product were manufactured and 3,240 kilograms
of raw materials were input to production.
What was the direct materials usage variance for the period?
Answer
The standard cost of materials, allowing for normal wastage of 5% of input, is:
(450 grams × 100/95) at $4 per kilo
= 500 grams × $0.004 per gram = $2.
This can be re-stated as 0.5 kilos at $4 per kilo = $2.
kilos
6,000 units of product should use (× 0.5 kilos)
3,000
They did use 3,240
Material usage variance in kilos 240 (A)
Standard price per kilo $4
Material usage variance in $ $960 (A)
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9.2 Variances when idle time is provided for in the standard cost
When the standard cost provides for idle time in production, the calculation of
efficiency variances is more complicated. This is because within the total direct
labour efficiency variance, there is:
a separate idle time variance, which may be favourable or adverse: an idle time
variance is favourable if actual idle time is less than expected
an efficiency variance for hours worked excluding idle time.
Total direct labour efficiency variance = Idle time variance + Efficiency variance in
other time
A second complication is that standard idle time (expected idle time) can be
measured in two different ways:
in terms of the output actually produced, or
in terms of the hours actually worked.
Each of these two ways produces a different value for the idle time variance.
An example will be used to illustrate the two different methods of calculating the
variances.
Example
A company makes a standard product. Each finished product should take 18
minutes of active labour time, but idle time is budgeted and included in the
standard cost. Expected idle time is 10% of hours worked. The standard labour rate
of pay is $15 per hour worked.
During a period, 3,600 units of the product were manufactured. 1,000 labour hours
worked and of these, 70 were recorded as idle time.
What were the following variances in the period?
Total direct labour efficiency variance
Idle time variance
Efficiency variance excluding idle time.
Answer
The standard cost for direct labour is:
(18 minutes × 10/9) at $15 per hour
= 20 minutes at $15 per hour = $5.
Chapter 10: Basic variance analysis
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It can be useful to separate the idle time part from ‘active working hours’, as
follows:
$
Active working hours: 18 minutes at $15 per hour 4.5
Idle time: 2 minutes at $15per hour 0.5
Total standard cost for direct labour 5.0
Total efficiency variance
The total efficiency variance, including the idle time variance, can be calculated as
follows:
hours
3,600 units of output should take (× 20 minutes)
1,200
They did take 1,000
Total efficiency variance in hours 200 (F)
Standard direct labour rate per hour $15
Total direct labour efficiency variance in $ $3,000 (F)
This total variance can be analysed into an idle time variance and an ‘efficiency
variance excluding idle time’, but there are two different methods of calculating the
variance, each producing different values.
Idle time variance and efficiency variance excluding idle time: method 1
This is the method that we recommend, because we consider it to be both easier and
also more meaningful in terms of the variances calculated.
With this method, the idle time variance is calculated by comparing the actual idle
time with the idle time that would be expected in producing the units of output
produced. The idle time variance is therefore related to the output produced.
Idle time variance, method 1 hours
3,600 units of output: standard idle time (× 2 minutes)
120
Actual idle time 70
Idle time variance in hours 50 (F)
(Favourable because actual idle time less than expected)
Standard direct labour rate per hour $15
Idle time variance in $ $750 (F)
The efficiency variance excluding idle time compares the time that it should have
taken to make the output (excluding idle time) with the time that it did take to make
them (excluding idle time).
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Efficiency variance excluding idle time, method 1 hours
3,600 units of output should take (× 18 minutes)
1,080
They did take (1,000 hours worked less 70 hours of idle time) 930
Efficiency variance in hours – exclluding idle time 150 (F)
Standard direct labour rate per hour $15
Efficiency variance in $, excluding idle time $2,250 (F)
Labour efficiency variances: summary, method 1
$
Idle time variance 750 (F)
Efficiency variance excluding idle time 2,250 (F)
Total labour efficiency variance 3,000 (F)
Idle time variance and efficiency variance excluding idle time: method 2
This method is more complex, and we recommend method 1 rather than method 2.
With method 2, the idle time variance is calculated on the basis of actual hours
worked and paid for (rather than on the basis of output produced), as follows.
Idle time variance, method 2 hours
1,000 hours worked: expected idle time (10%) 100
Actual idle time 70
Idle time variance in hours 30 (F)
(Favourable because actual idle time less than expected)
Standard direct labour rate per hour $15
Idle time variance in $ $450 (F)
The efficiency variance excluding idle time is now calculated as the difference
between actual hours worked excluding idle time (= 1,000 hours – 70 hours = 930
hours) and the hours that it should have taken to produce the actual output after
deducting the standard idle time for the hours worked.
Efficiency variance excluding idle time, method 2 hours
3,600 units of output should take (× 20 minutes)
1,200
Less: Standard idle time for the actual hours worked (10% × 1,000)
(100)
1,100
They did take (1,000 hours worked less 70 hours of idle time) 930
Efficiency variance in hours – exclluding idle time 170 (F)
Chapter 10: Basic variance analysis
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Standard direct labour rate per hour $15
Efficiency variance in $, excluding idle time $2,550 (F)
With this method, the actual meaning of the efficiency variance excluding idle time
is difficult to understand. This is the main reason why we recommend method 1,
although method 2 has been used as an acceptable method of calculation in the
answer to a past F5 examination paper question.
Labour efficiency variances: summary, method 2
$
Idle time variance 450 (F)
Efficiency variance excluding idle time 2,550 (F)
Total labour efficiency variance 3,000 (F)
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Other aspects of basic variances
Labour variances and the learning curve
ABC-based variances
10 Other aspects of basic variances
10.1 Labour variances and the learning curve
When a learning curve is used in the budget process, it is not possible to calculate a
standard direct labour cost for output. However it is possible to calculate a labour
efficiency variance by comparing:
the actual time taken to produce output during the period, with
the time that it should have taken, allowing for the learning curve.
Example
A company has budgeted to make a new product. The expected time to make the
first unit was 600 hours. An 80% learning curve is expected to apply. The budgeted
direct labour cost is $20 per hour and the budgeted variable overhead costs are $4
per labour hour.
During the budget period, 5 units of the product were manufactured. The time
required to make them was 1,850 hours.
What were the direct labour efficiency variance and the variable overhead efficiency
variance for this product?
Answer
Using an 80% learning curve, the expected time to produce the first five units can be
calculated as follows.
Average time per unit (cumulative) = ax
b
The factor b = log 0.80/log 2
= - 0.09691/0.30103
= - 0.3219.
The first unit was expected to take 600 hours.
The expected average time for the first 5 units was therefore: 600 × (1/5
0.3219
).
= 600 × 0.59566 = 357.4 hours.
Chapter 10: Basic variance analysis
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The efficiency variances can now be calculated as follows:
hours
5 units of output should take (× 357.4 hours)
1,787
They did take 1,850
Total efficiency variance in hours 63 (A)
Standard direct labour rate per hour $20
Labour efficiency variance in $ $1,260
(A)
Standard variable overhead rate per hour $4
Variable overhead efficiency variance in $ $252
(A)
10.2 ABC-based variances
When an entity used activity-based costing, variances can be reported for each
activity. Many of the costs for an activity will be fixed, and for fixed costs we can
calculate an expenditure variance for each period.
When some activity costs are variable, and these costs vary with the units of cost
driver during the period, the calculation of the expenditure variance for each
activity can also make allowance for the variable costs.
Example
A company uses activity-based costing. One of the activities is order handling, for
which the cost driver is the number of orders handled. The expected costs of order
handling are $90,000 per month plus $150 per order handled.
During one month, 400 orders were handled and the total cost of the activity was
$132,000.
The expenditure variance for order handling can be calculated as follows:
Order handling expenditure variance $
Budgeted fixed costs 90,000
Expected variable costs (400 orders × $150)
60,000
Total expected costs 150,000
Actual costs 132,000
Expenditure variance 18,000 (F)
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10.3 Deciding whether to investigate a variance
When a learning curve is used in the budget process, it is not possible to calculate a
standard direct labour cost for output. However it is possible to calculate a labour
efficiency variance by comparing: