Week 6

• Variances are likely to be interrelated and cannot usually be assessed individually
• Standard costing (and variance analysis) may suffer from similar deficiencies as budgeting, depending on its application
• Sales mix and quantity variances

  Divides sales volume variance into a sales quantity variance (changes in sales volume) and sales mix variance (changes in sales mix)
• Sales mix and quantity variances

  Explains how the sales volume variance is affected by a shift in the physical volume of sales and a shift in the relative mix of products.
• Note – sometimes the word ‘margin’ is used instead of ‘contribution’
• Sales mix variance

  It shows how the total contribution (or profit) is affected by customers buying different proportions of the products we sell, each of which will have a different budgeted contribution.
• Sales quantity variance

  It shows how the total contribution (or profit) is affected by customers buying different total quantities of our products, but at the budgeted proportions. 
• Mix variance shows which products were bought relatively more/less by customers
• Favourable sales mix Variance

  Suggests higher contribution earning products were bought in greater quantities than expected
• Adverse sales mix Variance

   Suggests lower contribution earning products were bought in greater quantities than expected
• Quantity variance shows if overall unit sales were higher or lower than budgeted
• Favourable

  sales quantity variance

   suggests a larger quantity of units were bought overall than budgeted
• Adverse

  sales quantity variance

   suggests a smaller quantity of units were bought overall than budgeted
• §Possible reactions to variances:

  •Amend advertising strategy

  •Review pricing policy

   

  •Improve/replace/withdraw product
• Advantages of standard costs

  Enable management by exception

  Can promote economy and efficiency
• Advantages of standard costs

  Can simplify bookkeeping by recording jobs at standard costs instead of actual costs

  Are useful in a system of ‘responsibility accounting’
• Variances only useful if reported on a timely basis
• Variance analysis often tends to focus on the negative. This can have a negative impact on staff morale and behaviour if used inappropriately
• Favourable variances can be as bad as adverse variances.
• Meeting the standard can become the main objective, at the expense of equally or even more important objectives such as quality or customer satisfaction
• Just meeting the standards may not be sufficient when the competitive environment demands continuous improvement