Page 187 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes  Variance analysis identifies the occurrence of variance, but it does not tell ‘why’ the
variance occurred. When using variance analysis, it is difficult to decide whether a variance
is significant or not.

8.6 Keywords

Flexible Budget: A flexible budget (as called as variable budget) is a budget that is adjusted for
changes in the level of the cost (or revenue) driver.

Full-cost Systems: In a full-cost system, the manufacturing cost of a product includes both
variable costs and fixed costs.
Sales Margin Mix Variance: It is that portion of sales margin volume variance which is due to the
difference between the quantities of actual sales mix and the budgeted sales mix.
Sales Margin Volume Variance: Budgeted Margin per unit × difference between actual quantity
of sales and budgeted quantity of sales.
Sales Variance Method: In this method, the variances are computed on the basis of sales value.
Total Sales Margin (Value) Variance: It is the difference between actual margin from sales and
budgeted margin (Profit).

8.7 Review Questions

1. Identify which of the four variances - material price, material quantity, labour rate, labour
efficiency - would be useful in evaluating the following and explain why?
(a) Purchase manager
(b) Production manager
(c) Personnel manager
2. Comment on the following statements:

(a) All variances are bad
(b) All variances should be investigated
(c) Only unfavourable variances should be investigated.

3. The monthly variance analysis reports have just been released. The assembly line report
shows:
Labour mix variance ` 26,000 unfavourable

Labour yield variance ` 37,400 favourable
The assembly line supervisor states, “I knew we should not have hired all these skilled
workers. Look at the horrible labour, mix, variance we generated.” Do you agree with the
supervisor’s assessment? Explain.
4. Discuss the nature and use of contribution margin variance analysis.

Answers: Self Assessment

1. Variance 2. Variance analysis
3. Sales value or Turnover method and 4. Sales Margin Quantity Variance

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