Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Adverse variance: where an expense item is greater than budgeted or where an income item is less than budgeted Favourable variance: where an expense item is less than budgeted or where an income item is more than budgeted

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning The process of responsibility accounting ensures that problems are tracked to their source Responsibility must be correctly attributed or resentment and demotivation may result

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning A system of costing that can be used in business environments where repetitive operations are carried out Standard costs are the budgeted costs of individual units of production Standard cost is compared to actual cost to calculate an overall variance

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning The overall variance can be broken down in order to identify: The effects of variation in the volume of resource inputs The effects of variation in the price of the resource inputs

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Example: Sherborne Suggate Standard cost card:

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Example: Sherborne Suggate Budget for January 20X3:

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Example: Sherborne Suggate Actual for January 20X3

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning It is important to compare like with like. The initial budget assumes sales of 1000 units. Actually, 1100 units were sold. To make a valid comparison we must FLEX THE BUDGET

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning A key element of the overall variance is that more units were sold than originally budgeted. Sales profit volume variance is the difference between the original budget profit and the flexed budget profit: £ £ = £10 000

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Although extra sales have been made, the selling price is lower than budgeted

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Direct materials price variance We compare: Actual quantity of materials used at actual price Actual quantity of materials used at standard price

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Direct materials quantity variance We compare Actual quantity of materials used at standard price Standard quantity of materials used at standard price

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Direct labour rate variance We compare: Actual hours of direct labour at actual wage rate Actual hours of direct labour at standard wage rate

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Direct labour efficiency variance We compare: Actual hours of direct labour at standard wage rate Standard hours of direct labour at standard wage rate

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Criteria to use in deciding which variances should be investigated: Significance in percentage or monetary terms Frequency of occurrence

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Examples: Sales volumes - may vary because of greater than expected success of an advertising campaign Materials quantities - may vary because of better or worse quality of material than expected Labour rates - may vary because of unexpected increase in rate arising from negotiations over wage levels