1. BPP UNIVERSITY COLLEGE BPP University College of Professional Studies Financial Performance- Revision session 4 th December 2012 BPP UNIVERSITY COLLEGE

2. Exam Info! -2.5 hour exam -2 sections- all questions need to be answered -70% competency required in both sections -Calculation and written questions in each section -Calculation questions are computer marked -Written questions are human marked 2 TITLE HERE 00 MONTH 0000

3. BPP UNIVERSITY COLLEGE Common pitfalls — Variance analysis calculation and understanding is vital for passing FNPF- MUST LEARN — Students don’t like written questions! You need to get to grips with them as they appear in ALL level 4 exams. — Read the question carefully, don’t panic! Take your time reading all the requirements to approach the question correctly. 3 TITLE HERE 00 MONTH 0000

4. BPP UNIVERSITY COLLEGE Section 1 4 TITLE HERE 00 MONTH 0000 1.1Standard cost card 1.2Direct cost variances 1.3Fixed overhead variances 1.4Operating statement 1.5Index nos/time series etc 1.6Explain variances

5. BPP UNIVERSITY COLLEGE Section 2 5 TITLE HERE 00 MONTH 0000 2.1KPIs inc ratios 2.2Break even - what if - limiting factors 2.3 Target Costing – Life Cycle Costing 2.4 Explain the differences between gross profit /net profit margin etc

6. BPP UNIVERSITY COLLEGE Tonight we focus on: 6 TITLE HERE 00 MONTH 0000 1.3Fixed overhead variances -A task marked by the computer 1.6Explain variances (interpretation) - A human marked task

7. BPP UNIVERSITY COLLEGE Task 1.3 Fixed Overhead Variances 7 TITLE HERE 00 MONTH 0000 Fixed overhead variance ExpenditureVolume EfficiencyCapacity Budgeted expenditure vs Actual expenditure

8. BPP UNIVERSITY COLLEGE Volume variance —What are we comparing? —Budgeted production units —Actual production units —If we actually produce more units than budgeted is this a adverse or favourable variance? —Favourable! —How do we value to variance? —At standard OAR per UNIT 8 TITLE HERE 00 MONTH 0000

9. BPP UNIVERSITY COLLEGE Efficiency variance —What are we comparing? —Standard hours (Actual units x Std hours per unit) —Actual hours —If actual hours are more than standard hours is this an adverse or favourable variance? —Adverse, the workforce has taken longer to produce units! —How do we value to variance? —At standard OAR per HOUR 9 TITLE HERE 00 MONTH 0000

10. BPP UNIVERSITY COLLEGE Capacity variance —What are we comparing? —Budgeted hours (Budgeted units x Std hours per unit) —Actual hours —If actual hours are less than budgeted hours is this a adverse or favourable variance? —Adverse! Tricky one, ask yourself if you have 10000 hours budgeted and we only worked 8000 hours, what happened to the 2000 hours? IDLE TIME- bad  —How do we value to variance? —At standard OAR per HOUR 10 TITLE HERE 00 MONTH 0000

11. BPP UNIVERSITY COLLEGE Practice Question 11 TITLE HERE 00 MONTH 0000 1.You have been given the following information: —Budgeted overheads are £600000 —Budgeted output is 20000 units —Budgeted hours is 40000 hours —Actual output is 25000 units —Actual overheads are £680000 —Actual hours are 53000 hours a) The fixed overhead expenditure variance is (adverse/favourable) b) The fixed overhead volume variance is (adverse/favourable) a) The fixed overhead efficiency variance is (adverse/favourable) b) The fixed overhead capacity variance is (adverse/favourable)

12. BPP UNIVERSITY COLLEGE Answers a) The fixed overhead expenditure variance Budgeted expenditure £600000 Actual expenditure£680000 Variance£80000 Adverse 12 TITLE HERE 00 MONTH 0000

13. BPP UNIVERSITY COLLEGE b) The fixed overhead volume variance Budgeted production units 20000 Actual production units25000 5000 Favourable x Standard OAR per unit (W1)x £30 Variance£150000 Favourable (W1) Budgeted overheads = £600000 = £30 per unit Budgeted units20000 units 13 TITLE HERE 00 MONTH 0000

14. BPP UNIVERSITY COLLEGE 14 TITLE HERE 00 MONTH 0000 c) The fixed overhead efficiency variance Standard hours (25000 x 2 hours per unit)50000 Actual hours53000 3000 Adverse x Standard OAR per hour (W1)x £15 Variance£45000 Adverse (W1) Budgeted overheads = £600000 = £15 per hour Budgeted hours 40000 hours

15. BPP UNIVERSITY COLLEGE 15 TITLE HERE 00 MONTH 0000 d) The fixed overhead capacity variance Budgeted hours 40000 Actual hours53000 13000 Favourable! x Standard OAR per hour (W1)x £15 Variance£195000 Favourable! (W1) Budgeted overheads = £600000 = £15 per hour Budgeted hours 40000 hours

16. BPP UNIVERSITY COLLEGE Task 1.6 Explain variances —The examiner will provide the variances calculated with some additional information. Your task will be to explain, analyse and make recommendations. You must be able to: 1.Identify the sign of each variance (adverse/favourable) 2.Explain what the variance means (define the variance in general) 3.Provide a possible reason for each variance 4.Explain any links between the variances 16 TITLE HERE 00 MONTH 0000

17. BPP UNIVERSITY COLLEGE 1. Identifying if Adverse and Favourable —Calculations needed -Material Price – Standard cost per kg/litre/metre -Material Usage - Standard materials required for actual production units -Labour rate – Standard rate per hour -Labour Efficiency - Standard hours for actual production -Fixed overhead variances- OAR per unit/ hour 17 TITLE HERE 00 MONTH 0000

18. BPP UNIVERSITY COLLEGE 2. Definition of variances (what are we comparing?) —Material Price- how much we should have paid for actual purchases (kgs/ litres) based on standard price per kg/litre to what we did actually spent. Have we paid more or less? —Material Usage- how many kgs/ litres should we have used to produce actual units and how many kgs/ litres did we use. Have we used more or less material than standard? —Labour rate- how much we should have paid for actual hours worked based on standard rate per hour and what did we did actually pay our staff. Have we paid more or less than standard? —Labour efficiency- how many hours should staff have worked to produce actual units and how many hours did they work. Have the staff taken longer to produce actual units? 18 TITLE HERE 00 MONTH 0000

19. BPP UNIVERSITY COLLEGE —Fixed overhead expenditure- what did we budget to spend on overheads and what did we spend. Have we paid more or less than we should have done? —Fixed overhead volume- how many units should we have absorbed budgeted overheads over compared to how many we actually produced. Have we made more units than budgeted? —Fixed overhead efficiency- how many hours should staff have worked to produce actual units and how many hours did they work. SAME AS LABOUR EFFICIENCY! —Fixed overhead capacity- how many hours were budgeted compared to actual hours worked. If we have capacity we should be using it! 19 TITLE HERE 00 MONTH 0000

20. BPP UNIVERSITY COLLEGE 3. Reason for variances —What might have caused the variances- not what does the variance mean! —Look out for clues in the scenario/ narrative —For example- favourable material price variance means a lower price per kg/ litre was paid. —BUT what might be the cause? 1.Discounts for bulk purchasing 2.An incorrect standard price 3.Inferior quality material 4.A new supplier 20 TITLE HERE 00 MONTH 0000

21. BPP UNIVERSITY COLLEGE —A new supplier….. —Material usage what might happen? —Material price what might happen? —Old machines are in use that have not been fully maintained in recent years…. —Material usage what might happen? —Labour efficiency what might happen? 21 TITLE HERE 00 MONTH 0000

22. BPP UNIVERSITY COLLEGE 4. Linking variances How can the following variances link? 1.Material price v Material usage? 2.Labour rate v Labour efficiency? 3.Material usage v Labour efficiency? 4.Labour efficiency v Fixed overhead efficiency? 22 TITLE HERE 00 MONTH 0000

23. BPP UNIVERSITY COLLEGE How to pass Task 1.6! 1.Know how to spot adverse/favourable variances 2.Go into the exam “knowing” a definition for each variance 3.Practice plenty of questions, and see what have been the causes of variances. AND think. There will be clues but you have to be able to use them. 4.Learn about the links. AND know when to say “this variance does not link to any of the other variances”. 23 TITLE HERE 00 MONTH 0000

24. BPP UNIVERSITY COLLEGE THANK YOU ANY QUESTIONS PLEASE?