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Advanced Variance Analysis

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Advanced Variances are part of P2  (Advanced Management Accounting) CIMA syllabus. 

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Transcription:

00:00:13 (bright light music)
00:08:26 - [Instructor] Hello, in this video
00:10:01 we're going to be having a look
00:11:04 at some of the advanced variances that are examinable
00:13:24 for CIMA PT Advanced Management Accounting
00:17:13 and the two sets of Advanced Variances
00:19:17 we're gonna be looking|at in this short video
00:21:21 are Mixed and Yield variances
00:24:08 and Planning and Operational variances.
00:27:21 So let's start off then, by|looking at Mix and Yield.
00:33:00 Traditionally, we would|calculate variances
00:35:22 for materials based on price and usage.
00:41:12 Now if there are more than one materials
00:46:10 input into a process
00:48:20 and there is an element|of substitutability
00:58:00 between those products...
01:03:27 So for example, we might have...
01:07:03 Going into a pasta sauce
01:08:24 we're gonna be having|to look at in a minute,
01:10:13 we might have some|tomatoes and some onions
01:12:20 going into a pasta sauce,
01:14:02 you could have more|onions and less tomatoes
01:16:22 and that would be a difference in mix
01:19:02 and it makes sense to|consider the impact then
01:21:07 of a difference in mix.
01:23:01 What we're not gonna be|looking at here is for example,
01:25:06 if you were making cars, it|would be an odd thing to say
01:28:23 you can substitute|steering wheels for tires,
01:32:14 you couldn't really have
01:33:09 one more steering wheel and one less tire,
01:35:04 it just wouldn't work.
01:36:16 So if there's an element|of substitutability
01:38:16 between the materials, you've|got more than one material,
01:41:19 then we can have a look at the impact
01:43:10 of the inputs being in a|different mix to a standard
01:47:10 and the financial impact of that
01:49:08 and also the yield, the results,|what came out, the outputs
01:54:20 from the process compared|to what should've come out.
02:06 So the mix and the yield|variances between them
02:03:04 are a sub-analysis of the usage variance,
02:05:28 so that means, if you add|together mix and yield,
02:09:05 you should get back to your|traditional usage variance.
02:12:15 Easiest to see, as always I|think, by looking at an example,
02:16:02 so we're gonna have a look at|that pasta sauce example now.
02:19:10 So what we've got on|the left-hand side here
02:21:11 is the standard cost card, so|it's just a standard recipe
02:24:19 for one batch of pasta sauce.
02:26:11 We have a kilo of onions goes in there
02:29:03 and we have a kilo of tomatoes,
02:31:05 the onions are relatively|inexpensive at $2.00 a kilo,
02:34:17 the tomatoes, $4.00 a kilo,
02:36:27 so the cost of one batch of pasta sauce
02:40:09 is $6.00 worth of materials.
02:42:20 So that's our standard, that's our budget,
02:45:02 that's our recipe.
02:47:04 What actually happened in the period
02:48:21 we're gonna be looking|at is we made 550 batches
02:52:09 using 600 kilos of tomatoes|and 530 kilos of onions,
02:58:07 so I can already tell, in|terms of the mix there,
03:02:22 that we've used more onions than tomatoes
03:06:09 and in the standard mix it|was equal amounts of each one,
03:09:19 so that must mean it's|a more expensive mix,
03:12:10 I'm expecting not good news
03:14:11 when it comes to the mix variance.
03:17:20 So mixed variance, first of all then,
03:20:10 is trying to look at the|financial impact of the inputs
03:24:24 having gone into the cooking process
03:28:27 at a different mix to standard.
03:33:00 So first of all, here's our actual mix,
03:36:29 we actually put in 530 kilos of onions
03:40:16 and 600 kilos of tomatoes,
03:43:06 so in total, 1,130 kilos|of material went in.
03:47:28 What we're looking at|now is that 1,130 kilos
03:51:27 in total that went in, if that|went in in the standard mix
03:55:15 and that was half and|half onions and tomatoes,
03:59:09 then that would have|been 565 kilos of each.
04:02:09 All we've done there is|take the 1,130 total inputs
04:07:17 and split it 50/50 between the two.
04:11:07 So we've got 'Actual inputs did take'
04:13:24 and 'Actual inputs should take',
04:17:11 I suppose we could change the word
04:19:04 from 'take' to 'mix' there,|'Actual input did mix'
04:23:23 and 'Actual input should mix'.
04:27:15 So we've got, for onions,
04:31:04 the actual inputs did go in, 530,
04:35:02 should have don 565, so|we've used 35 less onions
04:40:17 than the standard mix, so|that's good news in itself,
04:43:16 multiply that by the standard price,
04:46:28 because this isn't a price variance,
04:48:10 so it's always valued up at standard,
04:49:27 just like the usage variances,
04:52:01 gives it a $70.00 favorable|variance on onions.
04:55:19 But when we look at tomatoes,
04:57:18 we actually used 600 kilos of tomatoes
05:04 compared to the standard recipe of 565,
05:02:29 so we were 35 over there|and they are more expensive,
05:07:05 so 35 times $4.00 is $140.00 adverse,
05:11:14 so overall, we've got|an adverse mix variance,
05:15:24 because we're using more of|a more expensive ingredient.
05:21:28 So mix; inputs-focused,
05:25:05 yield; what's come out,|given what's gone in.
05:28:13 So, our standard cost card
05:30:25 said we needed two kilos of|materials to produce one batch,
05:34:14 so given that 1,130 kilos went in,
05:38:18 we would have expected that to produce,
05:40:15 divide that by two, 565 batches.
05:45:07 What it did yield was 550 batches,
05:50:19 which is not great again,
05:51:27 that's 15 batches less than|we would have expected.
05:55:02 Now we are concerned about|the mix of that 1,130,
05:58:12 because this isn't the mix variance,
05:59:22 we've already looked at that,
06:00:18 so we're just looking at it|in total and we value that up,
06:03:23 remember that's 15 batches of pasta sauce
06:06:27 and a standard cost of a batch|of pasta sauce was $6.00,
06:11:24 so 15 x 6 gives us
06:15:18 an adverse yield variance of $90.00.
06:21:03 So if I take the mix and yield variance
06:22:22 and add them together,
06:23:28 that comes out to my overall|usage variance on materials,
06:27:21 90 + 70 is 160 adverse.
06:32:12 Now you can apply this to|labor as well actually,
06:35:08 so you'd use different grades of labor,
06:38:09 as opposed to different types of material,
06:40:02 but you do very similar|calculations there.
06:44:08 So that's Mix and Yield then.
06:46:02 The other set of variances|we're gonna look at
06:48:09 is Planning and Operational variances,
06:50:08 which is essentially correcting the budget
06:52:21 to make it a fair benchmark.
06:54:21 What we traditionally do, is|compare the actual results
06:59:06 with our original budget,|our flexed original budget
07:03:16 and say; Is it favorable or adverse?
07:06:25 What we're saying now is; If|the budget needs revising,
07:09:25 because of either a mistake|in the original budget
07:13:09 or things outside the organization's|control have happened,
07:16:15 like the market shrunk
07:18:03 or the worldwide price|of something has gone up,
07:21:19 something like that, then|we should correct the budget
07:24:27 for those things before|we actually use them
07:28:02 to assess our actual performance.
07:30:14 So what we'd do, first of|all, is correct the budget
07:33:28 and that's what we're gonna|call a Planning Variance
07:37:02 and then, once you've|corrected the budget,
07:39:12 you then compare the actual|results to that corrected budget
07:44:06 and that's what we call|the Operating Variance.
07:47:16 The planning variance plus|the operating variance
07:49:25 should come back to the|traditional variance overall,
07:53:27 but what we're doing here
07:54:22 is ensuring we've got the|correct accountability,
07:57:08 because the people who|produce the actual results
08:00:13 should be held accountable|for the operating variances
08:03:19 and the people who put the plans together
08:05:08 should be held accountable|for the planning variances,
08:08:21 but let's have a look at an example.
08:11:02 So if we have an original budget
08:13:15 of 10,000 kilos of material
08:16:23 at $5.00 a kilo and that comes to $50,000
08:19:27 and let's suppose we actually|purchased 11,000 kilos
08:24:08 at $5.50 a kilo, that|would come to $60,500,
08:29:27 so the traditional variance|would just be to compare--
08:34:00 Suppose though, there's an|error in the original budget
08:36:14 and it should have said|$6.10 rather than $5.00.
08:39:22 Let's say the world price of this material
08:41:23 went up over the period,
08:44:07 it's not fair to assess actual performance
08:47:00 with that original $5.00|if it's now out of date,
08:50:10 so what we're gonna do, first of all,
08:52:11 is correct that to $6.10.
08:54:24 So we always flex to actual,
08:56:17 so 11,000 kilos originally cost $5.00
09:00:11 in the original budget,
09:01:25 but now we're gonna correct that to $6.10,
09:04:08 so that means that we're|gonna increase the costs
09:08:15 for what we would have expected|to have to pay to $67,100
09:13:12 and that's an adverse variance,
09:15:09 because it's increasing our costs.
09:17:08 All planning variances are bad news,
09:19:17 whether they're technically|favorable or adverse,
09:21:22 it just means the plans|weren't right, that's all,
09:23:19 but $12,100 is a planning variance
09:25:28 and we'd need to see the person
09:27:13 who put the budget|together to discuss that.
09:30:06 Now we've corrected that|benchmark to $67,100,
09:34:09 we can now use that as a fair benchmark
09:38:08 for comparing to our actual performance,
09:40:00 so actually, a fair benchmark is $6.10,
09:43:21 it actually only cost us $5.50,
09:46:15 so by the time we multiply|those each by 11,000 kilos,
09:49:29 that comes out to be $6,600 favorable,
09:54:07 so in actual fact,
09:55:12 our operational performance was very good,
09:58:00 'cause the world price went up to $6.10,
00:10:00:13 we managed to get it for $5.50.
00:10:03:02 So what started off as looking like
00:10:05:06 bad operational performance at $5,500
00:10:08:15 traditional adverse variance|there, once you split it into
00:10:12:15 the planning and operational elements,
00:10:14:10 we can actually see this|is a planning issue,
00:10:16:21 operationally, we actually|performed quite well.
00:10:20:19 Now the last thing I would|say about planning variances
00:10:23:03 is that correcting the original budget
00:10:25:07 should be exceptional,|it should be unusual,
00:10:27:11 because what you don't want|is for it to get to be a habit
00:10:31:03 in the organization of|people being able to say;
00:10:33:26 Well, the budget was wrong,
00:10:35:09 that's why actual is not looking great,
00:10:37:17 because the budget was|wrong in the first place.
00:10:40:08 The budget is supposed to be...
00:10:41:27 Of course it's not right,|because it's not actual,
00:10:44:07 no one ever said it had to be actual,
00:10:45:28 it was just a statement of what you think
00:10:49:03 the cost is going to be at a point in time
00:10:52:01 to give you that yardstick,|that fair benchmark
00:10:54:25 to compare to actual performance.
00:10:57:01 So it should be exceptional,|so it doesn't undermine
00:10:59:16 the original budget as a fair target.
00:11:03:09 So that's our new variances for paper P2
00:11:06:18 Advanced Performance Management
00:11:08:20 or Advanced Management Accounting.
00:11:12:00 We've looked there at planning|and operating variances
00:11:14:20 and mix and yield.
00:11:17:13 I hope that's been useful to you
00:11:19:01 and I hope the studies are going well.
00:11:20:27 Best of luck with the real exam.
00:11:22:27 (bright piano music)

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