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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.

## AT7 Adding 8alue To ;our <uture

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)

## AT7 Adding 8alue To ;our <uture

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)