MODULE TITLE: BUSINESS MANAGEMENT TECHNIQUES
TOPIC TITLE: COSTING TECHNIQUES
LESSON 7: VARIANCE ANALYSIS
INTRODUCTION - In this lesson we explain the objective of variance analysis and provide a practical example of how the difference between budgeted and actual profit can be broken down into its constituent elements by analysing the sales margin and production cost variances.
YOUR AIMS - At the end of this lesson you should be able to:
- state the objectives of variance analysis
- define the main variances
- understand the linkage between individual variances and the difference between budgeted and actual profit
- explain the potential causes of favourable and adverse variances
- reconcile budgeted and actual profit using variance analysis
- appreciate the significance of variances.
QUESTIONS -
1. What are the sub-variances of the fixed overhead variance?
2. Define the labour rate variance.
3. What are the likely causes of a labour rate variance?
4. A company producing sprockets has set its budget to produce 8000 units in each period. The unit standards are:
Sales price : £12.00
Direct labour : 12 mins at £10.00/hour
Direct material : 250g at £6.00/kg
Variable overhead : £20.00/hour
Fixed overhead : 75% direct labour cost
The actual production in the period was 8200 units with costs as follows:
Sales revenue : £99 200
Direct labour : 1515 hours costing £15 301.50
Direct material : 2200 kg costing £12 980
Variable overheads : £35 250
Fixed overheads : £11 800
Prepare an operating statement reconciling the budgeted and actual profit for the period.