Variance Analysis - Standard Costing, Cost Management Video Lecture | Cost Management - B Com

the last part of this section is
variance analysis variance analysis
looks at what actual costs or revenues
turned out to be and why and what can be
done if the actual figures have varied a
lot now we've got two types of variants
less favorable and adverse favorable for
costs means the actual costs are lower
than budgeted costs and adverse is the
opposite when actual costs are higher
than budgeted costs for a sales revenue
or a profit budget favorable means
actual revenue or profit is greater than
budgeted revenue or costs and that this
means that actual revenue or profit is
lower than budgeted revenue or profit
now in the exam you could be asked to
work out what the variance is why it
occurred and what to do about it
first of all we'll look at how you work
out the variance it's easier if we use
some figures so if you look at this
table you can work out if the variances
are adverse or favorable okay so as you
can see the first one is sales revenue
the budgeted figure was 500 pounds and
the actual figure was 600 pounds now
this gives a variance of 100 pound
favorable because the company gained
more revenue than they expected to wage
costs next you can see the planned costs
were 100 pounds but the actual wage
costs were only 90 pounds that gives a
variance of ten pound favorable because
their costs were lower than they
expected them to be the final one is
material costs the budgeted figure was
200 pounds whereas the actual figure was
300 pounds so that gives a variance of
100 pounds adverse because they had to
spend more money on materials than they
plant it from this table you could work
out the profit variance remember the
profit is sales revenue minus costs so
let's have a go at working it out using
our table
budgeted revenue was 500 pounds and
total budgeted costs of wages our
material costs added up to 300 pounds so
500 pound revenue - 300 pound costs
gives a budgeted profit of 200 pounds
the actual revenue was 600 pounds an
actual total costs of wages and
materials came to 390 pounds so 600
pounds - 390 pounds gives us 210 pounds
therefore the variance is the actual
profit of 210 pounds - the budgeted
profit of 200 pounds which gives us a
profit variance of ten pound favorable
why don't you have a go pause get a
paper pencil and work out what the
variances are and then work out the
overall profit variance here's the table
you
how did you get on let's go through it
and see how you got on for sales revenue
you should have got a thousand pounds
favorable variance which is the
difference between the actual and the
budgeted figures for rent the variance
is 500 pounds of this because the film
had to spend 500 pounds more than
planned for labor is 500 pounds
favorable because they thought they'd
spend 4000 pounds on labor but only
spent 3500 pounds and for raw materials
the variance is 500 pounds adverse
because they were higher than planned to
work out the profit variance you first
need to total the costs and take him
away from the revenue you need to do
this for the budgeted figures and the
actual figures so budgeted costs of rent
labor and materials were 10,000 pounds
now this taken away from the 12,000
pound revenue gives us a budgeted profit
of 2,000 pounds for the actual figures
total costs came to ten thousand five
hundred pounds this taken away from
13,000 pounds revenue gives us two
thousand five hundred pounds so the
difference between the two profit
figures is 500 pounds and because it's
more than the budgeted figure for a
profit it's favorable you should be okay
with calculating variances now once
you've worked out variances you might
have to consider why they occurred and
what to do about them this really
depends on what the variances are and
whether they're adverse or favorable for
example adverse cost variances can occur
if the price of raw materials goes up or
if workers demands pay rises or even if
rent goes up favorable or adverse
variances for sales revenue can be down
to more or less people buying your
products which in turn may be down to
things like their disposable income or
what competitors are doing what you do
about adverse variances depends on why
there could for example adverse material
costs could be improved by finding
cheaper suppliers
or adverse wage costs could be improved
by reducing the workforce of course
you'd have to discuss the consequences
of such actions for the examiner why not
have a go at this exam question and see
how young will use Chris's surfboard
business so you can get application
marks let's imagine that Chris is now
facing a new competitor and it's
starting to have an effect on his sales
here's the question
spend about six minutes on it analyze
two courses of action that Chris could
take to overcome an adverse sales
revenue variance
right you might have written something
like this an adverse sales variance
means that Chris budgeted for higher
sales revenue than he actually achieved
now this means he's not selling as many
surfboards as he planned to improve the
situation he could promote his business
more perhaps using specialist surf
magazines or advertising in local
newspapers although this means he'd have
to spend money in the short term and
increases costs he may increase interest
in his products enough to increase sales
and therefore sales revenue
alternatively he could lower his prices
that this will increase sales if demand
is price elastic and given that the new
competitor may have high startup costs
they may not be in a position to
retaliate see how the answer explains
what the variance means and comes up
with two solutions that are related
specifically to Chris's situation see
also how the consequences of the two
solutions are discussed an answer like
this would get good content application
and