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Variance Analysis
Minimise Volume FC
Costs
Techno-Economics VC
Process Discipline FC + VC
Cost Classification
Raw Materials Variable
Fuel Variable
Operating Services (Elec./Gas/Water) Variable
Salary & Wages Fixed
Stores & Spares Fixed
Refractories / Rolls / Consumables Variable
Repair & Maintenance Fixed
Contractor Payments Fixed
Int.on Working Capital / Comm.Capital Fixed
Depreciation Fixed
Cost Classification on Variability
Raw Materials Variable
Fuel Variable
Operating Services (Elec./Gas/Water) Variable
Salary & Wages Fixed
Stores & Spares Fixed
Refractories Variable
Operating Consumables Variable
Rolls Variable
Maintenance Consumables Fixed
Repair & Maintenance Fixed
Contractor Payments Fixed
Interest Fixed
Depreciation Fixed
Difference between contribution & Profit
Contribution Profit
Includes fixed cost and profit Does not include fixed cost
Quantity Produced
Break-Even Diagram
Cost or
Revenue
($)
Quantity Produced
Break-Even Diagram
Break Even Quantity
Break Even Quantity
Profit / Loss
Corridor
Variable
Cost or Costs
Revenue
($)
Fixed Cost Fixed Cost
Quantity Produced
Break-Even Diagram
Break-Even Diagram
Increased Fixed Costs
Variable
Costs
Cost or
Revenue
($)
Fixed Cost
Quantity Produced
Lets understand Break Even Point
Prodn.Capacity 10,000 units / p.m.
Variable Cost / Unit Rs.7/- per unit
Fixed Cost Rs.15,000/- p.m.
NSR Rs. 12 per unit
At BEP, Fixed Costs per unit = Rs.15000 / 3000 = Rs.5 per unit
Total Cost (at BEP) = VC + FC = Rs.7 + Rs. 5 = Rs.12 (equal to NSR)
ALTERNATIVELY
At BEP, total Contribution = Rs.5 x 3000 units = Rs.15000
Less : Fixed Costs, i.e, Rs.15000
Net Profit / Loss : - NIL -
Question on BEQ
M Ltd manufactures three products P,Q and R.the
unit selling prices of these products are Rs 100,Rs
80 and Rs 50 respectively. The corresponding
unit variable costs are Rs 50,Rs 40 and Rs 20. The
proportion (quantity wise)in which these
products are manufactured are and sold are 20
%,30 %, 50 % respectively. The total fixed costs
are Rs 14,80,000.
Given the above information, you are required to
work out the overall break-even quantity and the
product wise break-up of such quantity.
CALCULATION OF BREAK EVEN QUANTITY
PRODUCTS OVERALL
P Q R
Selling price per unit Rs Rs Rs
100 80 50
Less: Variable cost per unit 50 40 20
Contribution per unit 50 40 30
Proportion of goods manufactured 20 % 30% 50%
& sold
Weighted Contribution Margin Rs 10 Rs 12 Rs 15 Rs 37
(Contribution X Proportion of (50X20%) (40X30%) (30X50%)
quantity)
Total Fixed Costs Rs 14,80,000
Overall BEQ : Total FC 40,000 Units
------------------------------------- (14,80,000/37
Overall Contribution Margin
Prodn wise BEQ (Units) 8000 12000 20000
(Total BEQ X Proportion) 40000X20% 40000X30% 40000X50%
Break-Even Quantity
Unit
Monthly production target MT 177500
Production for the month ( MT 158811
Sal Steel)
Average NSR Rs/T 32653
Average variable cost Rs/T 19547
Total Fixed Cost Rs 176 Crore
Calculate the Break Even Quantity ( also as % of Production)
Calculate the Profit Rs/ Crore
Break-Even Quantity
Monthly production target MT 177500
Production for the month ( MT 158811
Sal Steel)
Average NSR Rs/T 32653
Average variable cost Rs/T 19547
Contribution/Unit Rs/T 13106
Total Fixed Cost Rs 176 Crore
Break Even Quantity =FC/Cont/unit = 1760000000/13106=
134290 Ton ( 84.5 % of production)
Calculate the Profit Rs/ Crore =32.13 crore
(158811-134290 ) X Rs 13106 = Rs 321372226
Alternative Methods of Production
Marginal costing is helpful in comparing the
alternative methods of production i.e machine
work or hand work
Q- Product X can be produced either by machine A or
machine B. Machine A can produce 100 units of X
per hour and machine B 150 units per hour.Total
machine hour available during the year are
2500.Following data has been given to you based on
which you have to determine the profitable method
of manufacture. Assume fixed expense for both as
equal.
Per unit of Product X
Machine -A Machine-B
Marginal Cost Rs 5 Rs 6
Selling price Rs 9 Rs 9
Fixed Cost Rs 2 Rs 2
PROFITABILITY STATEMENT
Machine -A Machine-B
Selling price Rs 9 Rs 9
Marginal Cost Rs 5 Rs 6
Contribution/Unit Rs 4 Rs 3
Output per hour 100 units 150 units
Contribution per hour 400 450
Machine hrs per year 2500 2500
Annual contribution 10,00,000 11,25,000
Hence production by machine
Make or buy Decision
Issue:
A Product Xtakes five hours to produce on a machine which is
already booked to capacity.
Selling Price of the Product is Rs.45/- per unit
Variable Cost of the Product is Rs. 30/- per unit
It is the more valuable use of the scarce resource the lathe, yielding a contribution
margin of $30 per minute as opposed to $24 per minute for the Webs.
Limited Resources
Lets calculate the contribution margin per unit of
the scarce resource, the lathe.
Products
Webs Highs
Contribution margin per unit $ 24 $ 15
Time required to produce one unit 1.00 min. 0.50 min.
Contribution margin per minute $ 24 min. $ 30 min.
45
An overview of a standard costing system
46
Relationship between the budgeted and actual profit
Budgeted profit
plus
All favourable variances
minus
All adverse (unfavourable) variances
equals
Actual profit
47
What are standard costs and prices?
Standard costs
These are predetermined costs. They are target costs
that should be incurred under efficient operating
conditionson a per unit basis (Drury, 2005, page
340)
Standard costing is most suited for organisations
where the activities are common or repetitive. The
examples we shall use will be for manufacturing
organisations.
48
Types of cost standard
Basic cost standards
Left unchanged over long periods of time. Helps to establish
efficiency trends. Seldom used, as they do not represent
current target costs, so not very useful for control.
Ideal standards
Represent perfect performance. Minimum costs under the
most efficient operating conditions. Can be demotivating and
unlikely to be used in practice.
Currently attainable standards
Costs that should be incurred under efficient operating
conditions. Difficult, but not impossible, to achieve. Can be
set at various levels of difficulty.
49
Materials Variances
Material Price Variance: What did we pay for the
quantity of materials we actually bought compared
to what we had budgeted for?
(SP AP) X QP =
(Standard price Actual price) X Quantity purchased
= Material Price Variance
50
Materials Variances
Materials Usage Variance: How much
materials did we use compared to what we
thought we should have used? Work this out
at budgeted costs.
(SQ AQ) X SP
(Standard quantity Actual quantity) X
Standard price= Material Usage Variance
51
Example Variance Analysis
Q. The standard material required to manufacture
one unit of product X is 10 Kg and the standard
price per kg of material is Rs 2.50. The cost
accounts record, however reveal that 11,500 kg
of materials costing Rs 27,600 were used for
manufacturing 1000 units of product X. Calculate
material variances.
Solution
Standard price of material per kg = Rs 2.50
Standard Usage per unit of product X = 10 kg
Therefore standard usage for an actual output of 1000 units of
product X = 1000 X 10 Kg= 10000 Kg
Actual Usage of material=11,500 Kg
Actual cost of materials= Rs 27,600
Actual price of material per Kg =Rs 27,600/11500= Rs 2.40
a) Material Cost variance
Standard Cost of Matl Actual Cost of matl
or Std Usage X Std Rate- Actual Usage X Actual Rate
10000 kg X Rs 2.50 -11,500 Kg X Rs 2.40
= Rs 25000 Rs 27600 = Rs 2600( adverse)
Solution Contd..
B) Material Price Variance
Actual usage( Standard unit Price- Actual Unit Price)
11500 Kg ( Rs 2.50 Rs 2.40)= Rs 1150 Favourable
C) Material Usage Variance
Standard Unit Price( Std Usage-Actual Usage)
Rs 2.50( 10000kg 11500 kg) = Rs 3750( adverse)
Verification
MCV = MPV + MUV
Rs 2600 Adverse = Rs 1150 Fav + Rs 3750 Adverse
Rs 2600 Adverse = Rs 2600 Adverse
Sales Variances
Difference between Original Budget Profit and Flexed
Budget Profit = Sales Volume Variance
(Drury calls this the sales margin volume variance)
Difference between Flexed Budget Sales and Actual
Sales = Sales Price Variance
55
Labour Variances
Labour Rate Variance: What did we pay for
the hours we actually used compared to what
we had budgeted for?
(SR AR) X AH = Labour Rate Variance
(Standard rate Actual rate) X Actual hours =
Labour Rate Variance
56
Labour Variances
Labour Efficiency Variance: How much labour
did we use compared to what we thought we
should have used. Work this out at budgeted
costs.
(SH AH) X SR= Labour Efficiency Variance
(Standard hours Actual hours) X Standard
rate = Labour Efficiency Variance
57
Variable & Fixed overhead variances
Can be broken down into: Variable Overhead
Expenditure Variance and Variable Overhead
Efficiency Variance
58
Purposes of Standard Costing
Providing a prediction of future costs that can
be used for decision-making purposes
Providing a challenging target
Assisting in setting budgets
Acting as a control device
Simplifying the task of tracing costs to
products for profit measurement and
inventory valuation
59
Should variances always be investigated?
60
Reasons for variances (from Brown 1999)
Demski (1967) divided variances into planning and operational
variances. Advocated isolating permanent changes and making an
after the fact budget.
Variances should be analysed as:
Planning (uncontrollable) variances
Arise from the difference between the original planned
performance and the revised planned performance
These variances provide a check on forecasting skills and also help
to provide a revised base for use in forward planning
Operational (controllable) variances
Arise from efficiencies or inefficiencies between target and actual
results
These variances provide a more relevant focus for management
control action
61
Some examples of reasons for variances
(Drury 2005)
Sales volume variance (adverse)
Economic recession
Increase in selling price
Direct materials usage variance (adverse)
Careless handling of materials
Substandard materials
Pilferage
Consider interplay of variances how might
materials usage/materials price variance, and labour
rate/labour efficiency variances affect each other?
62
Points in favour of standard costing
Planning
Standards may be useful as building blocks for
budgeting, which has to happen even in a TQM
environment
Control
Even where automated input of materials occurs, it
may still be relevant to analyse costs of changes from
plan
Decision making
Existing standards may be the starting point for the
estimated costs of new products
63
ADMINISTRATION
1.Procurement and distributions of Stock/Non-stock items of Stationeries.
Thank You
2.Arrangement for repair of furniture/office equipments etc.
3.Arrangement for binding of records.
4.Dak receiving (including postal), distribution and dispatch of Dak.
5.Collection & distribution of Diaries, Directories & Canteen coupon.
6.Processing of Fresh, duplicate and revalidation of Medical Cards.
7.Processing of applications of Identity Cards.
8.Arrangement for printing of forms / registers.
9.Maintenance of Imprest /Temporary Advance.
10.Issuing of NDC for the separated employees.
11.Allocation of Messengers to different sections.
12.Processing of miscellaneous bills against order placed through Administration for
local purchase case, postal bills, Auditors bills, etc.
OVERHEADS