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PLANNING AND OPERATIONAL VARIANCES Problems of traditional variance analysis Traditional variance analysis compares: Actual performance vs Expected

performance If the actual environment differs from that which was anticipated then actual performance should be compared with a standard which reflects the changed conditions (ex post standard). Even if the environment has not changed with hindsight (loo!ing bac!) it might be realised than an unrealistic standard was used eg ideal standard. Actual performance should be compared with a realistic standard for control and appraisal purposes " this variance is !nown as the Operating Variance. The difference between the ex ante and ex post targets is !nown as the Planning Variance. Planning variance a classification of variances caused by ex ante budget allowances being changed to an ex post basis. Operational variance a classification of variances in which non#standard performance is defined as being that which differs from an ex post standard. Calc lations: PLANNING VARIANCE $riginal flexed budget (ex ante) %evised flexed budget (ex post) &lanning variance (uncontrollable) OPERATING VARIANCE %evised flexed budget (ex post) Actual result $perating variance (controllable) (xx) x'(x) xxx (xx) x'(x)

xxx

Example 3 (tandard material cost'unit : ) !gs at *+.,- . */0udgeted $utput : +- --- units Actual $utput : ++ --- units 1aterials actually used : 23 --- !gs at *4 5ith hindsight a better standard would have been 4.6, !g per unit at *+.2- per !g. Re! ired (a) 7alculate the traditional variances (i) &rice 8ariance (ii) 9sage 8ariance (iii) $verall 1aterial 8ariance (price : usage) (b) 7alculate planning and operating variances (c) To gain a better assessment of performance we now analyse the operating variance into Price and Usage.

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"ar#et vol me and mar#et s$are variances The traditional sales volume variance may have two elements: the si=e of the mar!et was different from expected " a change in the external environment> the share of that mar!et was different from budget. . The sales volume variance can therefore be split: (ales volume variance: (a) (ales volume planning variance caused by external factors mar!et volume variance (b) (ales volume operational variance caused by internal factors mar!et share variance Advanta%es and disadvanta%es Advantages ?istinguishes between variances caused by bad planning or unavoidable factors and those due to operating factors. Adverse operating variances indicate processes out of control which need correcting. &lanning variances can be used to update standards to current conditions. 1otivation may improve if managers !now they will only be assessed on variances under their control ie operational variances. Disadvantages Extra data re@uirements eg mar!et volume. 1ore time consuming. 1anagers may claim all adverse variances have external causes and all favourable variances internal causes ie manipulation of revised standards. &e$avio ral as'ects of standard costin% The role of standards and variances in the modern business environment is open to @uestion. Standard costin% and ne( tec$nolo%y (tandard costing has traditionally been associated with labour#intensive operations but it can be applied to capital#intensive production too. It is @uite possible that with advanced manufacturing technology variable overheads are incurred in relation to machine time rather than labour time and standard costs s$o ld reflect t$is where appropriate. 5ith com' ter aided desi%n)com' ter aided man fact re *CADCA"+ systems the planning of manufacturing re@uirements can be computerised so that standard costs can be constructed by computer saving administrative time and expense while providing far more acc rate standards.

Plannin% sa%e variances Actual units x(original standard usage " revised standard usage) x original standard price Plannin% 'rice variances Actual units x revised standard usage x (original standard price " revised standard price)

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O'erational sa%e variances %evised usage of actual output Aess: actual usage $perational usage variance in !gs x revised standard cost per !g B $perational usage variance in C O'erational 'rice variances %evised standard price of actual materials Actual price of actual materials $perational price variance

x !g (x) !g x !g Ca xx .

xx (xx) xx

&lanning usage variances


Actual units x (original standard usage " revised standard usage) x original standard price

&lanning price variances


Actual units x revised standard usage x (original standard price " revised standard price)

$perational usage variances


%evised usage of actual output Aess: actual usage $perational usage variance in !gs x revised standard cost per !g B $perational usage variance in C x !g (x) !g x !g Ca xx
.

$perational price variances


%evised standard price of actual materials Actual price of actual materials $perational price variance xx xx (xx)

AT7 Adding 8alue To ;our <uture

AT7 Adding 8alue To ;our <uture