Back to Financial Peformance after a long time off....

amyjayne27

Hi all,

I am returning back to Financial Performance after a time off due to personal circumstances.

I am trying to learn and understand the variances, but they are just making sense to me.

Can anyone explain in easy terms the variances in particular the material and labour variances and what they mean?

I would be really grateful.

Thanks

Nps

Hang on a sec, I typed out the way I remember the formulae on a thread a few weeks ago, I'll just try and find it.

Nps

http://forums.aat.org.uk/showthread.php?36862-Financial-Performance-question&p=264784#post264784

The above link explains how I remember the formulae and I touch on what they actually mean. Happy to expand if it doesn't fully answer your query.

amyjayne27

Thanks Nps1976, that is so helpful!! I will give that a go and hopefully that will help me.

Thanks again, your explanation seems much simpler than any of the explanations in the book, I will see if I can apply it to a question and see how I get on :-)

Nps

No problem. Try a question and if you get stuck, just post it on here, and show us how far you've got and one of us will guide you through the rest.

James Patterson

I'm going to be picking this up after a while as well, not had a look yet but i'm sure i'll have a few questions for you in the future Nps1976 :P x

amyjayne27

I have now printed this off and am going to attempt it tonight so wish me luck!

Do you think that if I get my head down a month gives me enough time? Bear in mind I am really rusty and still not understanding variances as yet.

Thanks

James Patterson

amyjayne27 wrote: »

I have now printed this off and am going to attempt it tonight so wish me luck!

Do you think that if I get my head down a month gives me enough time? Bear in mind I am really rusty and still not understanding variances as yet.

Thanks

Yeah i think thats enough time, i assume you're working full time too?

Just get your head in books, and see how you go with the variances first off, thats my plan

amyjayne27

Thanks James,

Yes working full time too so just evenings and weekends for me.

I will book it I think, that will give me something to focus on then if I dont feel ready I am sure I will be able to move it.

Scary stuff though, this and Financial Statements is supposed to be the hardest!

Thanks

amyjayne27

Hi Nps,

I printed off your explanation and went through the question in the question you answered, but I am stuck now that an example has a different layout?

I have budgeted and actual figures like a table, I have tried attaching the photo but AAT says its not a suitable file even though its jpeg like they want?

Maybe I could inbox you?

Thanks in advance for your help

Nps

Just PM'ing you my email address.

amyjayne27

Just want to say a MASSIVE thanks to Nikki for giving me the link to the formula for variances, I think I have cracked it at last!

The formula makes it so much easier to understand so thank you!

Nps

My pleasure Amy.

Was trying to copy and paste the question and answer in case it was useful to anyone else, but not having much joy!

Nps

Basically the question was, if the budget was for 10,000 units which require 10,000kgs of material at a cost of £2000, what is the materials price and usage variances if 11,000 units are actually produced using 11,300kg of materials at a cost of £2034.

And I explained the answer as follows....

AQ x AP = 2034
AQ x SP = 2260
SQ x SP = 2200

The difference between the first two lines is 226 Fav as only the price has changed so must be due to the price variance.

The difference between the last 2 lines is 60 Adv and as only the quantity has changed, this must be due to the usage/quantity variance.

The total of both these figures (or the difference between lines 1 and 3) is 166 Fav and is the combination of the price and the usage variances.

To decide if something is Adv or Fav, take your accountancy hat off and just look at it logically. Was it better or worse than you were expecting. In the price variance, we were expecting to spend £2,200 but actually spent less at £2,034 so this is favourable etc etc


To get to these figures, let's just check you've followed the right steps
1) Flexed your 10,000 units budget to show the budget for 11,000 units. This gives you 11,000 items at a budgeted cost of £2,200 (SQ x SP)
2) Calculated the Standard Price (SP) using 2000/10000 (from the original budget) to get 0.2 each
3) Using this to get AQ x SP (11300 x 0.2)
4) AQ x AP is given to you in the question (2034)

Is that making sense?

Rizwan

Yes, that would give your exact answers.

Congratulations to you for the excellent formulae remembering method. It makes life so much easier.

Nps

Would love to take all the credit, but Kaplan use a very similar one in their ACCA books!