variances for pev exam

smileyface

Hi,

Is anyone able to hlep me on variances, I have trouble with rememberring the formulae even though I'm semi-ok on the calculations of them. Is there and easy way for me to remember these equations?


Thanks

S :001_smile:

Pigpen

I'm with you Smiley face - Just working my way thru unit 8 and have brain freeze - So would welcome any help too - I think I am quite bright but I think maybe I have studied too much today - I think its the way its explained thats complicated - Not the variances - Anybody got any good tips?

SandyHood

Understanding variance analysis

Very few AAT students work in firms where variance analysis is used, so my advice is to leave formulae to one side to start with and just think about why a firm might want the information variances produce.

Let us imagine we are working for a firm that sells plastic bottles of freshly squeezed orange juice.
When the firm started looking at this line of business the sales manager asked us to work out how much a single bottle costs.

• We rang the orange suppliers and got them to give us a price on how much we would have to pay for a box of oranges.
• We bought a box and squeezed as many as we needed to fill a bottle
• We timed the orange squeezing process so we'd know the time needed per bottle
• We checked wage rates locally, and found the going rate for staff working at squeezing oranges
• We looked at all the overhead costs we'd expect for a period
• We asked the production manager to forecast the number of labour hours in an accounting period.

So we were able identify:

1. The standard number of oranges needed to make a bottle
2. The standard cost per orange
3. The standard labour time needed to make a bottle
4. the standard rate per labour hour
5. the overhead absorption rate per labour hour

SandyHood

We can then produce a standard cost card for a bottle of orange juice:
.......................................................................................................................................£..p
Materials
Oranges needed per bottle x cost per orange = ...............................................................standard material cost
Labour
Labour time needed per bottle x hourly rate = .................................................................standard labour cost
Fixed overhead
Labour time needed per bottle x overhead absorption rate per labour hour =.......................... standard overhead cost
.............................................................................................................................Total cost per bottle

SandyHood

The first accounting period passes (a month).
Lots of bottles of oranges are produced
Lots of oranges are bought
Lots of hours of labour time are worked
Wages are paid
Fixed ovehead invoices are received and paid

The accounting period is then over

SandyHood

We then look back and see what happened

• The number of oranges we bought during the period and how much we were charged
• The number of labour hours worked, and the total wage bill
• The total fixed ovehead paid

SandyHood

Material usage variance
We know the standard number of oranges we worked out each bottle would need, so now we know how many bottles were made we can work out the standard number of oranges we should have used.
We know how many oranges were really used.
If we multiply the difference by the standard cost per orange, then we will have the material usage variance.

Material price variance
We know how many oranges were really used, we had originally calculated the standard cost per orange. Multiplying them together we get the standard cost of the oranges really used.
If we take away the actual cost we paid for the oranges to give the material price variance.

Labour efficiency variance
We know the standard time we worked out each bottle would need, so now we know how many bottles were made we can work out the standard labour hours we should have used.
We know how many labour hours were really used.
If we multiply the difference by the standard rate per labour hour, then we will have the labour efficiency variance.

Labour rate variance
We know how many labour hours were really used, we had originally decided on the standard rate per hour Multiplying them together we get the standard cost of the labour hours really worked.
If we take away the actual labour cost we paid that will give the labour rate variance.

Fixed overhead expenditure variance
We produced a budget for fixed overhead costs before the accounting period started.
We know how much the fixed overheads actually were.
The difference is the fixed overhead expenditure variance.


Fixed overhead volume variance
We know how many bottles we produced, we know the standard labour time we worked out each bottle would need. If we multiply them together, that gives us the standard hours produced. If we multiply the standard hours produced by the overhead absorption rate that gives us the overhead absorbed. (remember that we absorb based on standard hours produced in a standard costing system, rather than using actual hours worked which are used in non-standard costing systems)
The overhead absorbed take away the budgeted fixed overhead gives us the fixed overhead volume variance.
This variance is caused by the actual number of bottles produced being different from the budgeted production

Volume can be more or less than budget for two reasons:-

1. The number of hours worked being more than or less than the budgeted hours
2. The hours worked have been more productive (efficiently used) or less productive than the standard

So we look at the sub-variances of the volume variance

Fixed overhead capacity variance
We know the actual labour time worked and we know the budgeted labour hours we planned to use.
The difference is the difference in the productive capacity, the more time, the more capacity - the less time the lower capacity
If we multiply the difference by the standard ohead absorption rate per labour hour, then we will have the fixed overhead capacity variance.

Fixed overhead efficiency variance
We know the standard time we worked out each bottle would need, so now we know how many bottles were made we can work out the standard labour hours we should have used.
We know how many labour hours were really used.
If we multiply the difference by the standard ohead absorption rate per labour hour, then we will have the fixed overhead efficiency variance.

SandyHood

Smileyface asked this question

smileyface
variances for pev exam
Hi,

Is anyone able to hlep me on variances, I have trouble with rememberring the formulae even though I'm semi-ok on the calculations of them. Is there and easy way for me to remember these equations?


Thanks

:001_smile:S

I'm sorry I don't think remembering formulae is the answer, I hope what I've written helps.
There are a lot of forum users who really believe in using the equations, I am sure that you could find their contributions if you look along the green top line for search and put variances into the search you will find very many mneumonics etc.

Monsoon

I didn't understand variances at all, to the point where I wasn't going to take the costing exam as I knew there would be no point.
Luckily the penny dropped, and I learned to parrot-fashion the formulae, and I passed the exams.
I didn't care about understanding it, because I knew I would never use them (I detest management accounts), I just wanted to pass the exam.

Sandy makes some really good points and I hope the posts help those in need. However as different people understand things in different ways I wanted to add my 2 pennethworth in case anyone views it the same as I did!

I can barely remember the topic now, but what clinched it for me was working out what the 3 different things were (standard cost, and 2 others i think), working out which 2 things related to which equation.
I then wrote it down on paper in marker pen and stuck them to my walls so I could see them lots and let them get into my subconscious.

I would offer to dig out my notes but they are in the loft and I can't get at them at the moment, sorry.

Pigpen

Thanks Sandy - That makes lots of sense - Just trying to print the whole thing out to put with my notes - Any more words of wisom gratefully received :001_smile:

one-eyed-womble

PEV/MAC variances - explained

I'm bumping this message up for anyone who is started PEV/MAC is struggling with variances. I was completely flummoxed by this, it just seemed really badly explained in the books I'm using (Osbourne), but Sandy's explanation here has helped enormously! I'm not using the complicated formulas anymore, but using the common sense approach instead.

Thanks Sandy, this has been invaluable.

jow774

Thanks Sandy and Womble, this is a massive help.

:thumbup:

Andypandy

Thanks for the explanation Sandy.

acc1077

Thanks Sandy and Womble, this is a great help.

Anita

confoosed

Wow. What a brilliant explanation. Thanks Sandy.

jewels.p

I am pushing this up (with my bare hands) as I am trying to learn variances and found Sandy's Orange Squeezing example a great explanation and am planning now not to learn the formulas but to learn the methods!

(and reading it made me laugh and variances dont do that to me normally they usually make me cry) :laugh:

Jonno1

Try this website www.accountingcoach.com, go to management accounting, then look under standard costing/variances. The free download explains variances in formula terms, and lays the results out in the format of a spreadsheet. I find this easier to learn, I tend to remember diagrams, interrelationships between variables, arrows, plans etc better than text.

anniebabe

This post deserves to be bumped up again! wheres the thumbs up button! lol

jewels.p

Yip bump it up all the time! As you can see from my post last September Sandy's Oranges explained variances another way and I finally got the hang of them! (Variances not Oranges)

This definitely helped me as variances are a complete nightmare when you start them. Listen to Sandy that's what I say!