splitting down variances - PEV

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi All

It is me again begging for help.

I keep having real problems when the question asks to split down a certain variance (usually material price or labour efficiency) into the change relating to a drop/increase or training and then other reasons.

Is there a logical way of doing this, because I know that the resulting 2 variances must equal the original one, but I cannot figure out which figures to use to start with.

Any help would be great.

Many thanks again
Eva :roll:

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:splitting down variances - PEV

    I think you have to compare like with like, so adjust the original standard price to the new inflation adjusted price.

    the original variance was

    actual quantity x (std price-actual price)
    split this formula into two. The first item must be first in the inflation adjusted formula, and the last item must be the last item in the 'other reasons' formula, so your inflation adjusted price goes in the middle

    inflation= actual quantity x (std price - inflation adjusted price)

    other reasons = actual quantity x (inflation adjusted price - actual price)


    I'm so sad I actually colour co-ordinate all my variances - my exam sheet is going to look like a rainbow!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:splitting down variances - PEV

    Hi Jackie

    That is brilliant - I will give it a go.

    Many thanks
    Eva :D:D
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:splitting down variances - PEV

    To calculate your inflaction price you will be give some kind of index number or additional information

    i.e:- (based on additional information)

    Labour Efficiency subdivision

    actual hours were 36,800 for 20,000 units of output costing 184,000, standard hourly output was 2hrs @ £4.85.

    Once trained efficiency will be improved by 15%.

    Calculations:

    Labour Efficiency Variance = £15,520 (F)
    (40,000(2x20,000)-36,800)) x 4.85 = 5520

    Variance due to untrained workers = £26,772 (A)
    36,800hrs x 15% = 5,520hrs
    36,800hrs - 5,520hrs = 31,280hrs
    (36,800hrs - 31,280hrs) x 4.85 = 26772

    Variance due to other reasons = £42,292 (F)


    Regards

    Dean

    p.s if you have time and want to prove the variance due to other reason you can do so like this:-

    budgeted hours = 40,000hrs
    revised standard = 31,280hrs

    (31,280 - 40,000) x £4.85 = 42292F
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:splitting down variances - PEV

    i.e:- (based on index numbers)

    Material Price subdivision

    actual litres used were 36,000 @ £1.20 per litre the standard being £1.50

    The standard was based on a price indexation of 15 but when the actual production took place it was 20.

    Calcualtions:

    Material Price Variance = £10,800 (F)
    (1.50-1.20) x 36,000 = 10800

    Variance due to indexation = £3,600 (A)
    1.20 x (20/15) = 1.60
    1.50 - 1.60 = 0.10
    0.10 x 36,000 = 3600

    Variance due to other reasons = £14,400 (F)

    Regards

    Dean

    p.s if you have time and want to prove the variance due to other reason you can do so like this:-

    actual price 1.20
    revised standard 1.60

    (1.60-1.20) x 36,000 = 14400(F)
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:splitting down variances - PEV

    Many thanks Dean, that is really useful aswell.
    Eva :D
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:splitting down variances - PEV

    I've just made that up so it would be good if Sandy could check that to make sure its right :) but your more than welcome!

    Regards

    Dean

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