PQ ACCA Performance Management
Take a visual approach V
Jo Tuffill introduces a new approach to calculating variances
ariances is a tricky topic. Not only do students get confused with calculating them, they also find the interpretation aspect hard. Students say, “I just can’t get those formulae in my head” or “I don’t understand the ‘should and did’ approach.” Well, if you are one of those students for whom the tried and trusted approaches just don’t work, let me introduce you to an alternative. Variances using diagrams First of all, meet Carla and her candles. Carla’s Candles are very on-trend for millennials, who want urban themed candles at an inexpensive price. Until this year Carla has been selling through local shops and trade fairs, receiving trade price for her candles. But this year, due to Covid, she moved online. This has enabled her to sell direct to the public through her website linked to her Instagram and Facebook accounts. Materials have been more difficult to get hold of and she has sometimes had to buy in smaller quantities than she would have liked. Carla has sourced alternative materials from different suppliers to alleviate the problem. She normally has two staff members producing the candles for her once a week, but this year one member has had to shield and was not able to work. Carla was able to furlough her under a government scheme. This has meant that her other staff member has been working two longer days. Figure 1 shows Carla’s results for 2020. Carla’s original budget is based on 2019 actual sales and costs operating over a 40-week year.
Splitting the cost variances using triangles To understand the real story behind the cost variances we need to split and analyse the variances. Here in figure 3, the materials variance is split into price and usage using triangles. The total variance is represented by a rectangle and naming its top two corners with the actual quantity and price, then the bottom two corners with the standards you can visually see how the variance is split into two triangles and then calculated. Figure 3 – Materials Variance part 1
In figure 4, we allocate the numbers to the corners using the standards and actuals given. You may need to calculate the price or usage quantity from the narrative but always be aware that you are flexing the standard usage quantity for the actual volume. The original budget is ‘off limits’. Figure 4 – Materials Variance part 2
Figure 1 Flexing the budget to get meaningful comparisons for variance analysis To be able to find the underlying performance of ‘Carla’s Candles’ we need to flex the original budget for the actual volume that was made and sold. Comparing a budget of 2000 units to an actual of 2500 units will render any variances calculated, based on that budget, as meaningless. In figure 2, the flexed budget column is calculated by taking the standard per unit and multiplying it by the actual volume. The sales volume variance is the difference between the original budget and the flexed budget (for actual volume) at the standard contribution. This shows a $5,000 favourable variance and shows how much more contribution should be made at the higher volume of sales. We place a ‘cross’ over the original budget as that is now off limits! All other variances are calculated from the flexed budget compared to actual results, being sales price, total materials and total labour variances.
Figure 2 34
Using the triangles as your guide you take the difference between the vertical corners and multiply by the horizontal corner to get the variance. • Price is the difference $1.25 to $1 ($0.25) multiplied by 5,500kg used resulting in $1,375 Adverse. • Usage is the difference 5,500 kg to 5,000kg (500kg) multiplied by $1 price resulting in $500 Adverse. • Total Variance is $1,375 A + $500 A = $1,875 Adverse. Have a go at applying this to the labour variance see figure 5. Calculate the variances for yourself using the diagram. See answers at the end of the article to check if you are correct. Figure 5 – Labour Variance
What is the story of Carla’s Candles 2020 results? Exam questions don’t just require you to calculate they also require you PQ Magazine August 2021
