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Student Pages – Technical Article

By Jacky Brabon Relevant to ACCA Paper 9 There has been much discussion recently about the usefulness of traditional standard costing and variance analysis. This article provides an introduction to some of the problems which can arise in interpretation and some possible solutions to these problems. Firstly, we need to consider the main purposes behind standards and variances, which include: Planning – standards are a necessary starting point for the budgeting process. Control – to enable us to control activities and aim for continual improvements. Performance measurement and responsibility accounting – standards help to give us something against which to measure the performance of the company, or a particular manager. With these in mind, we can now consider the problems which may arise with “traditional” variance analysis. The expected standard This is a pre-determined standard, set at the start of the period, which is our estimate of the activities for the coming period. This will be based on a combination of past data, past experience and forecasting techniques for the future. However, the important thing to appreciate is that it can only be the best estimate possible based on the information available at that time. The question must then be – what happens if circumstances have changed? We may then find ourselves comparing our actual results against standards which are not realistically achievable, and this breaks our most important rule in management accounting. Every calculation we do must provide information which is useful to the business in the areas described above. It is this problem which gives rise to the necessity to use a planning and operational variance approach. This will enable us to revise the standard to take account of any additional information available, so that actual results can be compared with sensibly achievable results.

Planning And Operational Variances Their Calculation And Use


200 78. 2. The method used here has followed that used by the examiner in a recent article.5 kgs. Planning And Operational Variances Their Calculation And Use 2 . but in the exam you must be careful to read the question and follow instructions.000 units of production 26.Student Pages – Technical Article Consider a very simple example to illustrate the calculations: Original materials budget for 8. These will.200 ADDITIONAL INFORMATION SUBSEQUENTLY AVAILABLE: 1. as the standard can be changed at any time during the period.000 £ 96.000 @ £3.15 per kg. These will be based on the originally budgeted level of activity. NOTE : There are different acceptable ways of calculating these variances. we can see that the variances calculated above are no longer very helpful. Operational variances will therefore consider the comparison of actual results with realistically achievable results.000 x 4 @ £3 Price variance Usage variance £5.000 kg @ £3.000 units of production 32. Due to upgrading of the machines.000 kg @ £3 Actual results for 7.000 83. Planning variances will consider the impact of changing the standard. the standard usage per unit should have been 3. therefore. be based on the actual level of activity.20 TRADITIONAL VARIANCE ANALYSIS Actual materials @ actual price 26. of course. it does not make sense to use a standard price of £3 per kg to assess the performance of the purchasing manager when we now know that it was not possible. For example.000 @ £3 Standard materials @ standard price 7. The aim.20 Actual materials @ standard price 26.000 84.000 (F) 83. IMPLICATIONS With this additional information.200 (A) £6. The average market price for the material was £3. is to revise the standard to a realistically achievable one before comparing with the actual results.

we still need to be very careful in the interpretation and use of the results. the interpretation and use must always take into account the other practical factors involved if the actions taken are to be beneficial to the business.15 £88. Indeed. A good example of this is the operational usage variance.200 £81. but it is now adverse.000 x 3.800 (A) £12.15 £83.000 @ £3. However. we need to consider its use. CONCLUSION Where additional information becomes available after the original setting of the standard.5 @ £3. The production manager had gone through the period on the understanding that the standard usage was 4kg per unit.Student Pages – Technical Article Operational variances Actual materials @ actual price Actual materials @ revised standard price 26.000 Price variance Usage variance £4.000 x 3.5 @ £3. While this reflects the revised standard which should have been achievable.600 (F) £1. Planning And Operational Variances Their Calculation And Use 3 .300 (A) £4.725 (A) INTERPRETATION Although these variances undoubtedly give us much better information than the traditional variances. but if it was not then its use could cause demotivation.800 Original standard materials @ original standard price 8. then the responsibility is reasonable.000 x 4 @ £3 £96.175 Price variance Usage variance Planning variances Revised standard materials @ revised standard price 8.900 Revised standard materials @ revised standard price 7.15 £100. Under the traditional variances this was a favourable result. whatever approach has been taken. he had managed to keep his actual usage below that figure.15 £77. we can obtain more useful information by the application of a planning and operational approach. To then hold him responsible for an adverse usage variance caused by a change in the standard raises a very important question – did he know? If the change had been communicated to him.200 Original standard materials @ revised standard price 8.000 x 4 @ £3.