Analyzing and reporting financial performance-Analysis of variances

MCS

Standard Costing

• Standard costing is a technique which uses standards for costs and revenues for the purpose of control through variance analysis.

• Standard is a pre-determined measurable quantity set in defined conditions against which actual performance can be compared, usually for an element of work, operation or activity.

• Standard cost is a predetermined calculation of how much costs should be under specified conditions.

• Standard Price-It is a predetermined price fixed on the basis of specification of a product or service and of all factors affecting the price.

• Standard selling price per unit: it is a predetermined price for a product or service for a specified unit to be sold. A unit may consist of a single item or a batch of processed output.

• Standard operating profit-unit- It is the predetermined profit from the sale of a product or service at the standard selling price.

• Standard profit –Total-It is the predetermined profit arising from the sale of actual quantities of products or services at standard selling price, over specified period.

• Actual no of units sold x ( Standard selling price per unit – standard cost per unit)

Variance Analysis

• ‘Variance’ is the difference between planned, budgeted or standard cost and actual costs and similarly in respect of revenues.

• This should not be confused with the statistical variance which measures the dispersion of statistical population.

• ‘Variance Analysis’ is the analysis of variances arising in a standard costing system in to their constituent parts. It is analysis and comparison of the factors which have caused the difference between pre-determined standards and actual results, with a view to eliminating inefficiencies.

• Variance analysis highlights areas of strengths and weaknesses, but does not indicate what action, if any, should be taken.

• Variances can be classified as under:• Material , Labor, Variable overhead, Fixed overhead, Sales and Profit

variances.

Types of Financial Performance Variance• Cost/Expenditure Variance• Fixed Cost Variance• Variable Cost Variance

• Revenue variance• Sales Price variance• Sales Volume Variance – Sales Mix Variance - Sales Quantity variance – Market Share Variance - Market Size Variance

Revenue Variance

• Revenue Variance is the difference between the actual and planned revenue of the organization.

• This difference can occur due to the difference between the actual and planned sales volume, due to difference between the actual and planned selling price or both.

• Sales variance can be calculated either through the value method (sales value) or through the profit method (profit margin).

Costing details of three soap brands of Autumn Soaps Limited for the year ending 2010

Spring Sandal Soft TotalPlanned number of units sold

2,500,000 5,000,000 3,000,000 10,500,000

Actual number of units sold

3,000,000 4,000,000 1,800,000 8,800,000

Estimated Market size

6,000,000 7,000,000 5,000,000 18,000,000

Actual market size 5,500,000 7,500,000 4,500,000 17,500,000

Standard selling price per unit

10 5 8 23

Actual selling price per unit

8 6 7 21

Standard margin per unit

5 1 3 -