Variances........

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Please someone help........

just done 5 hrs practising these, then tried an exam question - cant do it.

a typical basic direct material price variance that i have practised and understand is:

data: 7m @ £3p/m
300 units made using 2250m costing £6650.

therefore direct material price variance is:
2250m x £3 = £6750
actual cost= £6650
difference = £ 100 F

so no problem for me there........

but exam question gives this data:

budget / actual
material 12,500L @ 106,250 / 11,520L @ £99,072
material p/L £8.50 / £8.60
units produced 2,500 barrels / 2,400 barrels

straightaway you can see that less was actually spent (106,250 - 99,072 = £7178 F)

but all the practice ones ive done have always used actual material usage x the price per L, therefore: 11,520 x £8.50 = 97,920
actual = 99,072
difference = 1,152 A

but it cant be adverse can it - we have spent less, and we have to assume the 980L not used is still on the shelf

so two styles of data, both asking for same thing - but confused as to why using practice method in the exam task doesnt work out favourably, like it should do.

doing my head in - 5 hours of studying and no reward for my efforts - makes a mockery of the phrase "put the effort in and you will reap the rewards"

completley xxxxxx off to be honest.

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Variances........

    Isn't it becuase your price per litre is higher than that budgeted, you did spend less than budget, however you used less than budget as well, so your price variance is adverse becuase it cost you more for less material?

    I'm not really very good at variances myself though...
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Variances........

    Hi

    Your calculation of 11,520 x £8.50 is incorrect as it should be multiplied by £8.60 which gives you the £99,072. Yes you have spent less, but you have produced less and the price per litre is more that budgeted. So one variance might be favourable,but others might be adverse due to increase costs and lack of efficiency. All the variances need to be taken into account.
    Eva :D

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Variances........

    first of all,

    thanks EvaG and dlpbach for attemptimg to sort me out!

    sadly, iam still none the wiser.

    all the practice ones only state a standard cost for rate per litre, so i cant see why suddenly the actual rate per litre should be used. also as you said using the £8.60 would give a total of £99,072, that would then mean there is no variance at all

    it all seems a bit hit and miss - just plucking any old figures from anywhere and just playing around with them - sometimes do this, sometimes do that, with no strict formula to stick to which works whichever way you tackle it.

    ill have to get tutor to have a look, but im on half term now, and wanted to clear it up so i can move on so i dont waste the week.

    (wouldnt it be great if we could just press a button and conjure up a hologram of a tutor to give some one on one, as and when required!!!!)

    thanks for trying though - much appreciated
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Variances........
    budget / actual
    material 12,500L @ 106,250 / 11,520L @ £99,072
    material p/L £8.50 / £8.60
    units produced 2,500 barrels / 2,400 barrels

    Output: 2,400 barrels at 5 litres per barrel costing £8.50 per litre means that the standard cost of the actual production was £102,000

    Input: 11,520 litres at £8.50 per litre = £97,920

    Because 2,400 barrels have a standard usage of (2,400 x 5 litres)12,000 litres but only 11,520 litres were actually needed there is a favourable material usage variance of:- £4,080

    Actual cost: £99,072

    Because 11,520 litres have a standard cost of £97,920 but actually cost £99,072 there is an adverse material price variance of £1,152
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Variances........

    In the politest way please let me point out an error in the following quote:
    straightaway you can see that less was actually spent (106,250 - 99,072 = £7178 F)

    Variance analysis looks at the standard cost of what we produced as the point where the calculation of material variances starts.

    You are bringing in the budgeted cost of the budgeted production.
    This information allows you to confirm the standard cost per litre and to calculate the standard number of litres per unit.
    £10,6250 =£8.50 per litre
    12500 litres
    12,500 litres =5 litres per unit
    2,500 units

    We are not trying to find the value of the difference between what we budgeted to produce and what we actually produced. So the budgeted cost is not part of the analysis.


    sandy.hood@chichester.ac.uk
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Variances........

    hi again,

    sandy.........many thanks :D

    it took a bit of working it through my head, but yes ive got it now.

    really appreciate clearing this up, so i can move on instead of it sitting there bugging me.

    some other good news - i had spent several hours doing a DFS income statement and balance sheet (first real one on my own, incorporating dividends/debentures/shares etc) and of course, typically i couldnt get it to balance, got in a right stressed state - but after having a break and going back to it - redoing it from scratch, i found several errors id made - and YES! it balanced!!

    so im very happy bunny now.

    im sure to be back with more confusions though in the coming months - standby.........!

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