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Sales Variances

Sales Variances. Variable Costing System Total sales contribution variance= Actual contribution margin - Budgeted contribution margin Actual Sales x Actual contribution margin per unit – Budgeted Sales x Std contribution margin per unit

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Sales Variances

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  1. Sales Variances • Variable Costing System • Total sales contribution variance= • Actual contribution margin - Budgeted contribution margin • Actual Sales x Actual contribution margin per unit – Budgeted Sales x Std contribution margin per unit • Variance is due to both difference in volume and difference in contribution margin

  2. Illustration • AQ= actual sales = 9000 units • BQ=budgeted sales=10000 units • AP=actual price=RM90 • BP= budgeted price= RM88 • AVC/SVC=RM68 • Budgeted FC per unit=RM12

  3. Sales Contribution Variance Total Actual contribution margin: 9 000 × (RM90-RM68) RM198 000 Total Budgeted contribution margin: 10 000 × (RM88-RM68) RM200 000 Total Sales Contribution Variance RM2 000A

  4. Sales Contribution Variance Sales Margin Price + Sales Margin Volume (AM – SM) × AQ + (AQ – BQ) × SM Sales Margin Price= [(RM90 – RM68) – (RM88 – RM68)]× 9 000 = (22 – 20) x 9000 = RM18 000 F

  5. Sales margin volume Sales margin volume = (AQ – BQ) × SM AQ= actual quantity sold BQ = budgeted quantity of sales SM = standard contribution margin per unit Sales margin volume = (9 000 – 10 000)× (RM88-RM68) = 1000 x RM20 = RM20 000 A Total Sales Margin Variance = RM18,000F + RM20000A = RM2000A

  6. Sales VarianceAbsorption Costing Sales margin price = (AP-BP)AQ= RM18000F  Sales margin volume variance = difference in volume x std profit margin = 1000 units × (RM88- RM68-RM12)= 1000 x RM8 = RM8 000 A Total sales variance = sales price variance + sales margin volume variance = RM 18000F + RM8000A = RM10000 F

  7. Sales Mix and Quantity Variances When a company sells several different products that have different profit margins, it is possible to divide the sales volume variance into sales mix and quantity variances. Example Budgeted contribution of products X, Y, Z: X = 8 000 units at RM20 contribution = RM160 000 Y = 7 000 units at RM12 contribution = 84 000 Z =5 000 units at RM9 contribution = 45 000 20 000RM289 000

  8. Sales Mix Variance Actual sales X = 6 000 units at RM20 contribution = 120 000 Y = 7 000 units at RM12 contribution = 84 000 Z =9 000 units at RM9 contribution = 81 000 22 000 RM285 000 Sales Mix Variance = (AQ – AQ in budgeted proportions) × SM AQ – AQ in budgeted proportions X Standard margin X 6 000 – 8 800 (40%) × RM20 = RM56 000 A Y 7 000 – 7 700 (35%) × RM12 = RM 8 400 A Z 9 000 – 5 500 (25%) × RM9 = RM31 500 F 22 000 RM32 900 A

  9. Sales Quantity Variance Sales Quantity Variance = (AQ in budgeted proportions – BQ) × SM X = (8 800 – 8 000) × RM20 = RM16 000 F Y = (7 700 – 7 000) × RM12 = RM 8 400 F Z = (5 500 - 5000) × RM9 = RM 4 500F RM28 900 F

  10. Material Mix and Yield Variances If actual material mix varies from standard mix, both quality and cost may be affected. The effect on cost can be determined by separating the material quantity variance into two variances referred to as material mix and material yield variances. Variances help to control the proportions of each material in a production mix. A standard mix is desirable as it helps to ensure a quality product at the lowest possible cost.

  11. Material Mix Variance A mix variance occurs when the materials are not mixed or blended in standard proportions and it a measure of whether the actual blend is cheaper or more expensive than the standard mix A material mix variance arises when the actual mix differs from the predetermined standard mix.

  12. Material Mix Variance Mix variances will indicate whether the actual proportions of materials used are more or less expensive than the standard proportions If a greater proportion of cheaper materials is used in the blend, there will be a favourable mix variance, otherwise (if a greater proportion of the more expensive materials is used) there will be an adverse mix variance.

  13. AQ in standard mix Actual quantities of material used are adjusted to the quantities that would have been used if actual materials usage had conformed to the standard mix rather than some other mix. The actual quantities adjusted represent the quantities that would have been used if the same total quantity had been placed in production, but in proportion to the budgeted mix ratios for each product.

  14. Material Mix Variance • Calculate AQ in std mix for each type of material in the mix. • · Actual input of each material x standard mix ratio • Material mix variance = (AQ – AQ in std mix) x std price of material

  15. Illustration Mix Variance Standard mix to produce 9 litres of output: 5 litres of X at RM7 per litre = RM35 3 litres of Y at RM5 per litre = RM15 2 litres of Z at RM2 per litre = RM 4 Standard cost per 9 litres of output RM54 Standard loss =10% of input. Actual output = 92 700 litres Actual inputs: RM 53 000 litres of X at RM7 = 371 000 28 000 litres of Y at RM5.30 = 148 400 19 000 litres of Z at RM2.20 = 41 800 100 000561 200

  16. Material Mix Variance Mix variance = (AQ in standard mix – AQ) × SP (AQ in standard mix ×SP) (AQ ×SP) X =100 000 × 5/10 × RM7 350 000 53 000 × RM7 371 000 Y =100 000 × 3/10 × RM5 150 000 28 000 × RM5 140 000 Z =100 000 × 2/10 × RM2 40 000 19 000 × RM2 38 000 540 000549 000 Mix variance = RM9 000 A

  17. Material Yield variance • Yield variances will indicate the efficiency of the usage of all the materials together in the mix. • Yield variance is the difference between the standard output for a given level of inputs and the actual output

  18. Material Yield variance Yield variance is the difference between the standard output for a given level of inputs and the actual output =(Actual yield –Standard yield from actual input) × SC per unit of output =(92 700 – 90 000 )× RM54/9 =RM16 200 F

  19. Material Mix and Yield Variances Mix and yield variances are interrelated and should not be interpreted in isolation. Summary Total variance = SC (92 700 ×RM6) – AC (RM561 200) = RM5 000 A Price variances RM12 200 A + Mix variance RM 9 000 A + Yield variance RM16 200 F RM5 000 A The sum of the mix and yield variances must be equal to the material quantity variance.

  20. Material Variance • Material price variance: actual price versus standard price times the actual quantity (purchase quanity if purchase price variance, usage quantity if usage price variance); purchasing department's responsibility • Material usage variance : actual quantity used versus standard quantity allowed for the actual units produced time the standard price; production's responsibility • Material mix variance: actual blend (mix) quantity of each material used versus the standard blend (mix) quantity allowed for each material; production's responsibility • Material yield variance: actual quantity of output versus the standard output quantity allowed based on the actual input; total actual input at the average standard input price versus the standard price of the standard input quantity for each material; production's responsibility

  21. Mix and Yield Variances DIY • Chemia Ltd. manufactures a chemical using in the process two components: component1 (C1) and component 2 (C2). • The standard materials usage and cost of one unit of the ready chemical are: C1 5kg @ RM2 RM10 C2 10kg @ RM3 RM30 In a particular period, 80 units of the chemical were produced from 500 kg of C1 and 730 kg of C2.Question:Calculate the materials usage, mix and yield variances.

  22. Investigation of Variances Variance investigation models can be classified into the following categories: • Simple rule of thumb models. • Statistical models that do not incorporate costs and benefits of investigation. • Statistical decision models that take into account the cost and benefits of investigation.

  23. Investigation of Variances Reasons for variances • Measurement errors. • Out-of-date standards. • Out-of-control operations. • Random or uncontrollable factors.

  24. Investigation of Variances Investigation will indicate that variance is due to: • Random uncontrollable factors when the operation is under control. • Assignable causes, but the cost of investigation exceeds benefits. • Assignable causes, but the benefits of investigation exceed the cost. Note : The aim is to investigate only those variances in the final category.

  25. Criticisms of Standard Costing The usefulness of standard costing has been questioned, and its demise predicted, because of the following: The changing cost structure Inconsistency with modern management approaches Over-emphasis on the importance of direct labour Delay in feedback reporting

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