Need some help on Financial Performance

Got the exam at the end of the week and am really struggling on some Variances part.

I feel I had a good understanding of it all but I keep on getting confused between volume, efficiency, capacity. In some of the examples it's fairly obvious whether something is adverse or favourable but for some of the questions on the green light test I have no idea which way it's meant to be going.

I just get confused which means I'm getting them wrong. Have no problems with the other questions.

Comments

  • SandyHoodSandyHood Font Of All Knowledge Registered, Moderator Posts: 2,034
    Gary
    Fixed Overhead variances have troubled AAT students for years
    Often they have no experience of working in organisations where fixed overheads are absorbed under a standard costing system.
    Here are some key points worth remembering:
    1. Volume variances are only caused by the actual production being different from the budget. The value is the difference in the volume x (when absorbed on a per unit basis) OAR per unit or (when absorbed on a per hour basis) standard hours per unit x OAR per hour
      If actual output is greater than the budget the volume variance is Favourable

    2. Efficiency variances are only found where OAR is absorbed on a per hour basis. They are the difference between the standard hours produced and the actual hours worked x the standard OAR per hour
      If the standard hours produced (actual production x standard hours per unit) is more than the actual hours worked the efficiency variance is Favourable

    3. Capacity variances are also only found where OAR is on a per hour basis. These sometimes take time to understand. If the firm had budgeted to use a certain number of labour hours, but actually used more then they had the capacity to produce more than the budget.
      When actual hours are more than budgeted hours the capacity variance is Favourable

    Sandy
    [email protected]
    www.sandyhood.com
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