OMG Confused with Variances

jewels.pjewels.p Font Of All KnowledgePosts: 1,774Registered
When calculating price Variances I dont use the Units of Production do I?

But when calculating usage variances I calculate the Standard for Actual Production using the amount of units am I right?

Thought I knew variances but now starting to panic.

Comments

  • MargaMarga Experienced Mentor Posts: 981Registered
    Price Variance: Difference of what we should have paid for actual production and what we actually paid for actual production


    Usage Variance: Difference of how much material we used for actual production and what we actually used for actual production


    Variances are based on Actual Production because you want to know what actually happened in the real world for what you produced and what it should have happened if the world was ideal for what you produced

    the original budget prepared for budgeted/standard units is to be used to calculate prices per unit and usage per unit which should be the normal usage/price per item.

    does it make sense?
  • PrimblePrimble Experienced Mentor Posts: 734Registered
    Hey, do a search on it. just before the exam i got stuck and then someone sent me a word doc with them all on and it was very clear. if you can't find it i will attach it when i am at home
  • HenryHenry Feels At Home Posts: 56Registered
    Jewels.p
    The way you should think about it is this:

    Price Variances are based on Actual Quantities
    Usage Variance are based on Standard Prices

    The clue therefore to getting the formulae right is in those phrases.

    Since we are seeking to find the Material Price Variance and we know it is based on Actual Quantity then the formula should be: Actual Quantity at Standard Price minus Actual Price Paid (or Actual Price of Actual Quantity). So we are finding out the difference between the budgeted price of the actual materials used and what we actually paid. If we paid less than what we budgeted for then the variance is favourable. If we paid more than what we budgeted for then the variance is adverse.

    With the material usage variance we are seeking to find out the difference between the quantity we budgeted for (for the actual units produced) and the actual quantity used. If we used more than we budgeted for then the variance is adverse but if we used less the variance is favourable. So what we are doing is finding out the budgeted quantity for the actual units produced minus the actual quantity used for the actual units produced. But because we have to express the variance in money terms we have to express the standard and acutual quantities in standard prices so that we can compare like with like.

    So material usage variance becomes:
    Standard quantity for actual units produced at standard price minus actual quantity at standard price.

    Note also that direct labour rate variance mirrors the material price variance and labour efficency variance mirrors the material usage variance.

    Hope this helps.
  • jewels.pjewels.p Font Of All Knowledge Posts: 1,774Registered
    Thanks guys. I think I am just panicking now as I knew these fine before I was meant to sit the exam two weeks ago! :sad:
  • MargaMarga Experienced Mentor Posts: 981Registered
    You know them so dont panic , also when you are in front of the exam with the actual figures it comes to mind easily.

    They usually give you the actual and the budgeted figures on a table and ask you to calculate the variances.

    Use the budget data to calculate the standard per unit and then apply that to actual production to get the figures that should be on the table , the difference are the variances :)
  • piratepirate Trusted Regular Posts: 469Registered
    PAUS
    Price variances are based on
    Actual quantities
    Usage variances are based on
    Standard prices.
    this helped me in my exam

    I also work out what the total variance is for each materials, labout and fixed costs.
    The price variance and the usage variance will add up to the total as a double check.
  • sarahjqsarahjq New Member Posts: 8Registered
    Hiya,

    Wth variances I have found that having a way of remembering them works well... I have allocated words to them but they won't mean anything to anyone else so maybe try find your own like People are Quite Polite Sometimes..or Perhaps Quoting Silly Poems (helps?!?!?) sounds silly but it really works!!!

    Cost
    Price
    Usage

    So CPU = PQPS

    All PQPS are actuals.

    So:

    COST
    Standard Cost @ Actual Production
    Actual Cost @ actual Production

    PRICE
    Standard Price @ Actual Quantity
    Actual Price @ Actual Quantity

    USAGE
    Standard Usage @ Actual Production @ Standard Cost
    Actual Usage @ Actual Prodcution @ Standard Cost

    The labour ones are exactly the same just with different CRE (Cost, Rate. Efficiency and obviously in hours/rate).

    For Overheads I use..

    The Is Always
    Expenditure Incurred vs Budgeted
    Variance And Back

    So:

    Total = Incurred vs Absorbed
    Expenditure = Incurred vs Budgeted
    Volume = Absorbed Vs Budgeted

    Although I am sitting FNPF on Wednesday so I have no proof this actual works yet!!

    Anyway good luck - hope this is some use.
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