INFORMATION FOR

COMPARISON
LESSON 3
 TYPES OF COMPARISON
• Comparing actual results with other
information helps management to understand
how the organisation they are managing is
performing and also know the areas of the
business that may require attention.
• Actual results may be compared against
previous periods, corresponding periods,
forecast and budgets.
• Comparisons may be financial or non financial.
COMPARISONS WITH PREVIOUS PERIODS

• The most common comparisons of a previous

period is when one year’s final figures are
compared with the previous year’s. A
business’s statutory financial accounts contain
comparative figures for the previous year as
well as the figures for the actual year. As
financial accounts are sent to shareholders,
this comparison is obviously of great interest
to them.
 COMPARISONS WITH FORECASTS
• Businesses make forecasts for a number of
purposes. A very common type of forecast is
the cash flow forecast.
• The purpose of making forecasts is for the
business to be able to know how likely it is to
have problems maintaining a positive cash
flow. If the cash balance becomes negative, the
business will have to obtain an overdraft and
have to pay interest costs.
 COMPARISONS WITH BUDGETS
• Most organisations have long term goals which
can be divided into objectives and action plans.
• A budget is an organisation’s plans for the
forthcoming period, expressed in monetary form.
• Any deviation from the budget is an indication
that either something is not working according to
plan and must be investigated as to why this is so.
 NON FINANCIAL COMPARISONS
• As well as being made in financial terms(costs
and revenues), you may make comparisons in
other ways. For example you may compare
units produced or sold. Other possible
comparisons include measures of
quality/customer satisfaction, time taken for
various processes etc.
IDENTIFYING VARIANCES- DIFFERENCES
• Variances can be calculated by comparing the budget with
actual results(total Variances) or comparing flexed budgets
with the actual results(efficiency of usage and price variance)
• There are two ways of looking at variances. The first way is to
compare the budget figures to the actual figures achieved
and this is called a total cost variance(or total sales variance)
• Example, Z Ltd produces product V. the following information
is available for october.
Budget Actual Variance
• Material cost $5,000 $7,000 $2000 adverse
VARIANCES AND FLEXED BUDGETS
• The problem with this type of variance calculation is that
the volume may be different from the budgeted volume.
This means that variance may not be very helpful for
management making decisions on the product.
• Flexed budgets should be used for comparison of
direct/variable costs if the actual level of production is
different from the original budget.
• A flexed budget is a budget which recognises different
cost behaviour patterns and is designed to change as
volume of activity changes.
 FLEXED BUDGET
Example
Here is a production cost reports for week 22 for
the department making sweets.
Actual Budgets Variance
Production(units) 5,000 4,800

$ $ $
Direct Materials 1,874 1,850 24 Adverse
Direct Labour 825 810 15 Adverse
Prime cost 2,699 2,660 39 Adverse
Fixed costs 826 840 14Favourable
TOTAL COSTS 3525 3,500 25 Adverse
 Required: prepare a flexed budget for
week 22.
Exercise: prepare a flexed budget
Actual Budget
Production and sales 3000 2000
$ $
Sales revenue 30,000 20,000
Direct materials 8500 9000
Direct Labour 4500 4000
Fixed overheads-depreciation 2200 2000
Fixed overheads- Rent and rates 1600 1500
Total cost 16800 13500
profit 13200 6500
 CALCULATING VARIANCES
• Variance
  reports help budget holders to perform
their function of control. The reports are
especially useful if they separate controllable
from non controllable variances.
• Variances are favourable if the business has more
money as a result
• Adverse if the business has less money as a
result.
• Variance % =
 Example: Calculation of variances as a
percentage
budgeted Actual variance Variance
$ $ $ %
Laundry 1000 1045
Heat and light 1500 1420
Catering 8500 8895
Nursing staff 7000 6400
Ancillary staff 10600 10950
 SALES REVENUE VARIANCES
CALCULATIONS
There are three types of sales revenue variances.
These are the total sales revenue variance, the
sales price variance and the sales volume
variance.
• Total sales variance = sales volume(Activity)
variance + sales price variance
• The total sales revenue variance measures the
difference between sales revenues achieved
and the budgeted sales revenue. The formula is
actual sales revenue – budgeted sales revenue.
 SALES REVENUE VARIANCES
CALCULATIONS
• The sales price variance measures the
difference between actual sales price and
budgeted sales price. The formula is Sales
price variance = (actual sales price- standard
price)x actual quantity sold.
• The sales volume variance measures the
difference between actual sales volume and
the budgeted sales volume. The formula is
sales volume variance =(actual sales units –
budgeted sales units) x standard sales price.
 SALES REVENUE VARIANCES
CALCULATIONS
Example:
The following budgeted cost and selling price data relate to SM Ltd’s single product.
$per unit $per unit
Selling price 21.00
Direct cost 12.25
Overhead cost 1.75
14.00
7.00
Data for last period were as follows:
Budgeted sales units 740
Actual sales units 795
Actual sales revenue $16,200

REQUIRED:
Calculate the total sales revenue, sales price and sales volume variances.
 EXERCISE
Jasper Ltd has the following budget and actual figures
for 2018.
Budget Actual
Sales units 600 620
Selling price per unit $30 $29
Budgeted full cost of production = $28
REQUIRED
Calculate the total sales revenue, sales price and sales
volume variance.
 COST VARIANCES CALCULATIONS
• There are three types of cost variances. These are the total
direct cost variances, the activity variance and the purchase
price variances.
• Total direct cost variance = activity variance + purchase
price variance
• The activity(volume) variance measures the difference
between the budget volumes and the actual volumes
bought.
• The purchase price variance measures the difference
between the actual price paid for materials and budgeted
price.
 FORMULAS
• Total direct cost variance = actual cost for
materials – budgeted cost for materials
• Activity(Volume) variance = (actual volume –
budgeted volume) X standard price
• Price variance = (actual price – standard price)
x actual quantity.
 example
• The budgeted materials for CTF Ltd were 800
units at a cost of $20 each. Actual material
costs for the month were $17600 and 820
units were produced.
REQUIRED:
Calculate total material variance, price variance
and activity variance.
 exercise
The budgeted materials for XYZ Ltd were 500
units at $15 each. Actual material costs for the
month were $5000 and 550 units were
produced.
REQUIRED
Calculate the total material, activity (usage) and
price variances.
 LABOUR
example.:
The budgeted labour cost for Bob Co was $10.20
per unit for 20 000 units. Actual labour costs
were $10.50 per unit for 22,000 units.
REQUIRED
Calculate the labour total, rate and efficiency
variances.
 THE REASONS FOR COST VARIANCES

There are a wide range of reasons for the

occurrence of adverse and favourable cost
variances.
variance Favourable Adverse
(a) Material price Unforeseen discounts received Price increase
More care taken in purchasing Careless purchasing
(b) Material usage Material used of higher quality Defective material
than standard Excessive waste, theft
More effective use of material Stricter quality control
Errors in allocating materials to jobs Errors in allocating
materials to jobs.
© Labour rate Use of apprentices or other Wage increase, use of
workers at a lower pay rate higher grade labour
(d) Labour efficiency Output produced more quickly Lost time in excess of
than expected because of work standard allowed.
motivation.
 EXCEPTION REPORTING AND
INVESTIGATING VARIANCES
• Exception reporting is the reporting only of those
variances which exceed a certain amount or %.
• All variances above a certain limit should be
investigated and an explanation given as to why they
happened.
• The decision to investigate a variance can also depend
on whether it is controllable or non controllable
• A variance is controllable if it can be rectified by a
responsible manager.
• A variance is non- controllable if it is due to external
factors beyond the manager’s control.