Still struggling with variances

Clarekaye

I am having a battle with variances, I have done questions and read all I can read but when it comes to doing them I still cant remember where you need to you standard hours or budgeted hours.....is there a easy way to remember which one uses what?

I am finding financial performance harder than statements, infact i quite enjoyed statements compared to this :crying:

coojee

Clarekaye wrote: »

I am having a battle with variances, I have done questions and read all I can read but when it comes to doing them I still cant remember where you need to you standard hours or budgeted hours.....is there a easy way to remember which one uses what?

I am finding financial performance harder than statements, infact i quite enjoyed statements compared to this :crying:

I recall that somebody posted a really useful way of remembering all these not too long ago. Have a search around in the forums to see if you can find it. Or, hopefully, the person who very kindly posted it will see this and point you in the right direction

Mollypod88

If you find the post can you let me know please

Jo Clark

This might be the post... http://forums.aat.org.uk/showthread.php?36862-Financial-Performance-question&p=264784#post264784... there are so many of them

coojee

Jo Clark wrote: »

This might be the post... http://forums.aat.org.uk/showthread.php?36862-Financial-Performance-question&p=264784#post264784... there are so many of them

That's the one, thank you. I tried to find it yesterday but couldn't

Nps

This is another thread I wrote around the same time as the one above. It follows the same formula but is a different question for you to practice on.

http://forums.aat.org.uk/showthread.php?37322-Back-to-Financial-Peformance-after-a-long-time-off....&highlight=Variances

Clarekaye

I have asked before and tried but went back to the original way but nothing is working.
It works on the easy questions but then I get stuck on ones like this...please can someone put the figures in the right places so I can see what goes where sorry for being such a pain!

Bugeted fixed overheads 94600
budgeted number of standard direct hours worked 2200

The actual output for the period was 2500 standard hours
although this took the direct labour workforce 2600 hours
the actual fixed overheads were 99000

Nps

I assume you are being asked to calculate the total fixed overhead variance?

Lets forget formulas for the time being. Read the question and ask yourself what is being asked for in plain English.

The total fixed overhead variance is the same as the total over/under absorption. So this is, what is the difference between the actual fixed overheads, and what was actually absorbed.

The OAR is £43 per hour (from the budgeted figures of 94,600/2200).

So what was actually absorbed? Ignore the bit about 2500 hours - this is not relevant as absorbed overheads are calculated on what was worked, not how long it should have taken (that bit is just in there to test you!). So the amount actually absorbed is 2600*43 = £111,800. How does this compare to the actual fixed overheads of £99,000 - well it's an over absorption of £12,800 so favourable.

You now know that the total of the expenditure variance and the volume variance must add up to 12,800 (as these are the 2 elements of the total fixed overhead variance).

The first bit, the Expenditure variance is easy - Replace the words "expenditure variance" with "whats the difference in expenditure?", hence what was the difference between the budgeted overheads of £94,600 and the actual overheads of £99,000 (£4,400 Adverse).

So even without knowing how to calculate the volume variance, you can work it out as you know that when it is added to 4,400A it must come to 12,800F (therefore volume variance is 12,800-(-4,400)= 17,200F)

You can check this by actually calculating the volume variance. The volume variance is actually just another way of saying "how much of the total variance was due to a change in volume". So calculate the OAR x budgeted hours and compare it to the OAR x actual hours (2,200*43 compared to 2,600*43 which gives you a difference of £17,200Fav,mother volume variance).

Try and keep in mind what the variances are actually showing and I think you might find it easier.

Clarekaye

The question is to work all the variances, but if I do total for example its saying the answer is 8500F
Std 94600/2200 = 43 x 2500 = 17500 - 99000 = 8500F

Your saying not to use 2500 *even more confused*

Basically when working them all out the only two that use standard (flexed hours/units) are the total variance and efficiency? The rest use budgeted hours?

Nps

Can you just clarify the question? When you say the actual output was 2500 hours but took 2600 hours, are you saying that the actual output should have taken 2500 hours but actually took 2600 hours?

Nps

You will need to use the 2500 figure now (sorry if I confused you by saying you didn't for the first calculations).

The volume variance can be further broken down to give the efficiency variance and the capacity variance (and adding them together will bring you back to the figure for the volume variance).

I'm just doing the question again from scratch but I'm trying to AAT with one hand and entertain 2 boisterous toddlers with the other, so it's not going well...........

Nps

Right, the boisterous toddlers definitely need both my hands so I'll try to type this out quickly....The efficiency and capacity ratios are asking you how much of the total volume variance is attributable to each. So how much of the volume variance is due to a change in efficiency and how much is due to a change in capacity. The efficiency is the difference between the hours which should have been taken to produce the output compared to how many hours it actually took (so the difference between 2500 x 43, and 2600 x 43). The capacity is the difference between the amount of hours budgeted and the amount which should have been taken for the output (so the difference between 2200 x 43, and 2500 x 43). The two added together will give you the volume variance (in other words, the difference between 2200 x 43 and 2600 x 43 which is the combination of the two calculations).

Nps

Sorry if the above has made no sense, or if there are mistakes. Hopefully someone can confirm, correct, or explain better! If you are still stuck later, I can try again when I've put the kids to bed and I can actually concentrate!

Nps

Right, the monsters 😋 are in bed so I can now actually think straight, so will try to explain in a more organised way!

First thing, you mention a flexed budget, but based on the info you have given, there is no flexing to be done.

Your 2 key points to keep coming back to, and to start from, are the OAR, and the main total fixed overhead variance. All your values will use the OAR, and all the calculations stem from the total fixed o/h variance.

1) Your total fixed o/h variance is the over/under absorption so should be fairly straightforward to calculate.

2) Now ask yourself what could have caused this over/under absorption? 2 things should spring to mind, a) actual overheads being different to what were budgeted for, and b) the number of hours worked being different to those expected (hence more or less overheads absorbed). In other words, an expenditure variance, and a volume variance.

3) The expenditure variance is not broken down any further.

4) Now ask yourself, what could have caused the difference in the actual vs budgeted hours worked (volume variance). Again, 2 things should spring to mind, a) more/less units may have been produced, and b) those units may have been produced quicker or slower than normal. In other words, a capacity and an efficiency variance.

Once you understand what the variances actually mean, you should find it easier to pick out which figures you need to calculate them. In this case, all calculations use the OAR.

Clarekaye

Thanks for trying to help again NPS1976 but I think I am going to stick with my own way of messing it up as the below has totally confused me my heads spinning more than before.
Thanks anyway :thumbup1:

Nps

Sorry I couldn't be more help, I was hoping that by explaining it in different ways, one of them might just suddenly click for you :001_unsure: I hope you find the way that does click for you.

We're always happy to work through questions with you if going through a question step by step will help.

amyjayne27

Hi Clare

Did the formula not help you at all?

I have really struggled with variances but thanks to Nps1976 I have cracked them!

She explained it really well and I can finally answer questions without having to look through my book for ages.

let me know if I can be of help as its good revision for me too, I have my exam coming up in the next month!