TUTORIAL 5: Variance Analysis

Xenon (Past Year Oct 2018)

(a)
(i) Material price variance 18
SP AP Diff AQ Variance
RM RM RM g RM
Mat. B 2.55 [W1] 2.60 (0.05) 22,100 (1,105) A/
Mat. C 1.60 1.55 0.05 23,000 1,150 F /
Mat. D 4.50 4.55 (0.05) 13,650 (682.50) A/
Total 58,750 (637.50) A
[W1] (RM57,460/22,100 g) = RM2.60 per g.
(ii) Material usage variance
SQSM for
Act. Prod. AQAM Diff SP Variance
g g g RM RM
Mat. B [W2] 23,200 22,100 1,100 2.55 2,805 F /
Mat. C 20,300 23,000 (2,700) 1.60 (4,320) A/
Mat. D 14,500 13,650 850 4.50 3,825 F /
Total 58,000 58,750 2,310 F
[W2] 80 g/200 g * 58000 g = 23,200 g
(iii) Material mix variance

S Mix AQSM AQAM Diff SP Variance

% g g g RM RM
Mat. B 40% 23,500 22,100 1,400 2.55 3,570 F /
Mat. C 35% 20,563 23,000 (2,438) 1.60 (3,900) A/
Mat. D 25% 14,688 13,650 1,038 4.50 4,668.75 F /
Total 100% 58,750 58,750 4,338.75 F
Working: Mat. B std mix 80/(80+70+50) = 40%

(iv) Material yield variance

(AY - SY) * SCOY
(58,000-58,750) * 2.705 = (2,028.75) A
/ / /
Workings:
SY 200/(80+70+50)*(22,100+23,000+13,650) 58,750
SCOY (80*2.55+70*1.6+50*4.5)/200 2.705
Alternatively:
SQSM for
Act. Prod. AQSM Diff SP Variance
g g g RM RM
Mat. B 23,200 23,500 (300) 2.55 (765.00) A
Mat. C 20,300 20,563 (263) 1.60 (420.00) A
Mat. D 14,500 14,688 (188) 4.50 (843.75) A
Total 58,000 58,750 (2,028.75) A

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(b) Comment on the performances of respective managers (a)(i) to (iv): 3
(any 3 points x 1 mark = 3 marks)

• Overall purchasing and production managers collaborated well in helping the company to improve
profit by RM1,672.50.
• Purchasing manager did not perform well, causing the company to lose RM637.50 in profit. Except
for material C which saw a saving of RM1,150, the company sufferred losses in both materials B
and D through higher purchase prices.
• The production manager did well in material usage to help company save RM2,310. Material C
incurred a loss of RM4,320 but it was more than offset by savings in the usage of the other materials.
• Changing the mix % of materials input into production, compared with standard mix % has gained
savings of RM4,339. But the change in material mix has caused material C to incur higher cost of
RM3,900 vs standard.
• The change in material mix has led to lower yield than expected across the materials, contributing
the loss of profit amounting to RM2,029.

(c) Comment on the performances of purchasing manager (a)(v) to (vi): 3

(any 3 points x 1 mark = 3 marks)
- Above variances separating controllable (operating) and uncontrollable (planning)
• Above variances separating controllable (operating) and uncontrollable (planning) variances is
necessary to fairly hold the manager responsible for costs that are controllable by him.
• It also updates the standard cost accordingly, making it more relevant for comparison purposes,
allowing more accurate decision to be taken where necessary. This will also motivate the manager
accordingly, prevent dysfunctional effects, and help in achieving goal congruence.
• Price planning variance is not controllable by the purchasing manager. Hence, he should not be held
accountable for it.
• However, price operating variance is controllable by the purchasing manager. In this case, he has
done well to purchase at lower price than market and helped the company gain a saving of RM3,450.

(d) Explain to the management ANY THREE (3) purposes of standard costing. 6
Evaluate the relevance of standard costing in the modern business environment:
(any 3 points on PURPOSES x 1 mark = 3 marks)
- Provide a prediction of future costs - used for planning and decision-making purposes
• Provide a prediction of future costs - used for planning and decision-making purposes
• Provide a challenging target - motivate individuals to achieve
• Assist in setting budgets - evaluate managerial performance
• Act as a control device - highlighting those activities which do not conform to plan
• Simplifying the task of tracing costs to products - profit measurement and inventory valuation
purposes

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(d) Explain to the management ANY THREE (3) purposes of standard costing. 6
Evaluate the relevance of standard costing in the modern business environment:
(any 3
(any 3 points
points on
on RELEVANCE
PURPOSES x 1x mark 1 mark= 3= marks)
3 marks)
- Useful
Provideunder stable business
a prediction costs - used –for
of futureenvironment now operating
planning andconditions prone to
decision-making changes –
purposes
• Useful under stable business environment – now operating conditions prone to changes – difficult
to set standard costs
• Accept if perform to standards – not acceptable in today’s business climate (aim for continuous
improvement to remain competitive) – std costing minimize costs rather than improving quality
• Variances usually prepared on aggregate basis (total material var, or total labour var – specific to
production lines or batches are preferred)
• Product life cycles are shorter – std cost becomes outdated quickly
• Emphasis on labour variance – no longer valid now – increasing automation - more overheads
• Report only at end month – delayed information and action

Monex (Past Year Apr 2019)

(a) 12
(i) Sales margin price variance
AM SM Diff AS Variance
RM RM RM units RM
MO 32 35 (3) 31,600 (94,800) A/
NE 35 37 (2) 62,600 (125,200) A/
XM 35 38 (3) 13,600 (40,800) A/
Total 107,800 (260,800) A

(ii) Sales margin volume variance

AS BS Diff SM Variance
units units units RM RM
MO 31,600 30,000 1,600 35 56,000 F /
NE 62,600 60,000 2,600 37 96,200 F /
XM 13,600 10,000 3,600 38 136,800 F /
Total 107,800 100,000 289,000 F

(iii) Sales margin mix variance

AS S Mix ASSM Diff SM Variance

units % units units RM RM
MO 31,600 30% 32,340 (740) 35 (25,900) A/
NE 62,600 60% 64,680 (2,080) 37 (76,960) A/
XM 13,600 10% 10,780 2,820 38 107,160 F /
Total 107,800 100% 107,800 4,300 F

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(iv) Sales margin quantity variance
ASSM BS Diff SM Variance
units units units RM RM
MO 32,340 30,000 2,340 35 81,900 F /
NE 64,680 60,000 4,680 37 173,160 F /
XM 10,780 10,000 780 38 29,640 F /
Total 107,800 100,000 284,700 F

(b) Comment on the performance of sales manager based on part (a): 5

(5 points x 1 mark = 5 marks)
- Overall, the lower price strategy helped the company to improve profit by RM28,200
• Overall, the lower price strategy helped the company to improve profit by RM28,200 (289,000-
260,800). The gain from sales volume RM289,000(F) as more than offset the loss from lower price
RM260,800(A).
• On sales margin price variance, the sales manager's decision to reduce selling price in all three
products caused the company to lose profit opportunity amounting to RM260,800(A). However,
this was necessary in order to grow sales volume.
• The increase in sales volume justified the sales manager's pricing decision, which gained
RM289,000(F) in profit for the company. The most significant increase was from product XM,
which sees its gain from volume RM136,800(F) more than covered the loss from its price change
RM40,800(A). However, it is debatable whether the right pricing was decided for products MO and
NE as both showed net loss of profit.
• The sales margin volume variance can be analysed into sales margin mix and sales margin quantity
elements. Changing the sales mix % has only marginally gained profit of RM4,300 only through
product XM, while both products MO and NE did not benefit from the change.
• Sales margin quantity variance indicates that all three products increased profit for the company, as
a direct result from the price reduction.

(c) Calculate the market size and market share variances for the product NE : 8

Market Size Variance for product NE :

[(Actual Market Size - Original Market Size)* Original Market Share]* Std Margin
(2587200 - 2000000)* 3% * 37 = 651,792 F
/ / /

Market Share Variance for product NE :

[(Actual Market Share - Original Market Share)* Actual Market Size]* Std Margin
(2.5%-3%)* 2,587,200 * 37 = (478,632) A
/ / /
Explain the purpose of calculating market size and market share variances :
(Any 2 points x 1 mark = 2 marks)

• Market SIZE variance measures variance that is caused by the market, an external factor which is
NOT controllable by the manager, while Market SHARE variance measures the ability of the
manager, thus is CONTROLLABLE by the manager.
• The segregation ensures accurate measure on manager's performance, separating controllable and
non-controllable elements, and to fairly hold the manager responsible for what he/she can control.
• Accurate performance measure enhances manager’s level of motivation, goal congruence, overall
effectiveness and efficiencies, and avoids dysfunctional behaviour.

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Mum’s Recipe (Pat Year Oct 2019)

(a) Assess the performance of the purchasing, production and sales managers : 12
(12 points x 1 mark = 12 marks)

• Overall, the managers collaborated well to provide a net gain of RM2 million (F) in profit to the
company (1 mark).

• Purchasing manager did not do well in managing the purchase price, causing the company to lose
RM1.2 million (A) (1 mark). However, the loss was mainly due to unforeseen changes in demand
and supply for key materials (1 mark). Material C alone suffered a loss of RM1.5 million (A), which
means he made some gains in other materials (1 mark). The material price variance should be
analysed into price planning and price operational components for clarity of the level of
controllability by the purchasing manager (1 mark).

• Production manager did well in material usage to gain RM2.3 million in profit (F) (1 mark). It is
likely that material mix was changed to address the higher material prices, and saved RM3.3 million
(F) in cost (1 mark). However, the change in mix may have caused the loss RM1 million (A) in
yield (1 mark).

• Sales manager may have reduced selling prices in reaction to competitors' promotional discounts,
and caused a loss of RM4.5 million (A) in profit (1 mark). However, the decision to reduce selling
prices has gained higher sales volume and profit of RM5.4 million (F) (1 mark). The sales margin
volume variance can be analysed into mix and quantity elements, to better understand the effects of
the pricing decision (1 mark). Overall, the sales manager seemed to have done a good job to deliver
net RM0.9 million profit gain (1mark).

(b) Price planning variance for material C 13

(i) (SP - RP) * AQ
(3 - 5) * 1,000,000 = (2,000,000) A
^ ^ ^
(ii) Price operating variance for material C
(RP - AP) * AQ
(5 - 4.5) * 1,000,000 = 500,000 F [Note: AP=RM4.5m/1m g]

Assess performance of the purchasing manager:

• Above variances separating controllable (operating) and uncontrollable (planning) variances is
necessary to fairly hold the manager responsible for costs that are controllable by him.
• It also updates the standard cost accordingly, making it more relevant for comparison purposes,
allowing more accurate decision to be taken where necessary. This will also motivate the manager
accordingly, prevent dysfunctional effects, and help in achieving goal congruence.
• Price planning variance of RM2 million (A) is not controllable by the purchasing manager. It is due
to the market demand exceeding supply. Hence, he should not be held accountable for it.
• Price operating variance of RM0.5 million (F) is controllable by the purchasing manager. In this
case, he has done well to purchase at lower price than market.
• Any other logical comments.

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(b)
(iii) Market Size Variance :
[(Actual Mkt Size - Original Mkt Size)* Original Mkt Share]* Std Margin
(25800000 - 20000000) * 10% * 15 = 8,700,000 F
^ ^ ^ ^
(iv) Market Share Variance :
[(Actual Mkt Share - Original Mkt Share)* Actual Mkt Size]* Std Margin
(0.09 - 0.1) * 25,800,000 * 15 = (3,870,000) A
^ ^ ^ ^
Assess the performance of the sales manager:
• The segregation ensures accurate measure on manager's performance, separating controllable and
non-controllable elements, and to fairly hold the manager responsible for what he/she can control.
• Accurate performance measure enhances manager’s level of motivation, goal congruence, overall
effectiveness and efficiencies, and avoids dysfunctional behaviour.
• Market size variance RM8.7 million (F) measures variance that is caused by the market, an external
factor which is not controllable by the manager.
• Market share variance RM3.9 million (A) measures the ability of the manager, thus is controllable
by the manager. He is accountable for the loss in market share.
• It seems that the gain from sales margin volume variance is more of a market influence than sales
manager's efforts.
• Any other logical comments.

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