Variance Theory

Variance Theory

Summer 2013

Q. Comment on the commercial significance of the fixed production overhead volume variance that you have calculated.

A. The fixed overhead volume variance is a measure of the firm’s success in utilising available capacity. By producing 1,800 Units more than the budgeted output of 8,000 units, management are credited with making economical use of fixed capacity resources such as accommodation, machinery and supervisory staff. The variance is valued at the fixed overhead absorption rate of €9.50 per unit.

However this does not stand up to commercial scrutiny, as the additional produce was not sold. Indeed because sales were less than budgeted, stock at the end of April was at 5,700 units compared to 3,000 units at the beginning of the month. Arguably it would have made commercial sense to produce less than budget, rather than incurring greater storage cost, and the risk of stock deterioration and obselesence.

The variances calculated under marginal costing only give credit when the produce is sold, and highlights the benefit of using marginal costing for planning, control and decision making.

Summer 2012

Q. Explain how management should interpret the direct material mix and yield variances and the market size and share variances.

A. The favourable direct material mix variance €5,250, indicates that the less expensive material Q has to some extent been substituted for the more expensive material P.

The adverse direct material yield variance €11,160 indicates that a greater volume of materials than standard has been used. This may be due to a variety of factors, one of which could be the non-standard mix used. This should be investigated further.

The favourable market size variance planning variance €60,000 (€58,740) arises because national sales were 6,000 greater than budgeted, and based on the company securing the budgeted 10% share of this increase contribution will increase by €60,000. The adverse market share variance €20,000...