Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed
Price variances and efficiency variances
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| Price variances and efficiency variances Students get confused about the relations among these variances. Emphasise that levels of variance analysis can be likened to peeling an onion. With each deeper level of analysis, the manager peels away another layer and acquires a further insight into the problem. Also, emphasise the overall structure of the analysis. Level 2 analysis decomposes the SBV into (1) FBV and (2) SVV. Level 3 decomposes the FBV into (1) input price and (2) input-efficiency variances. The FB (and FBV and SVV) can be calculated without information on budgeted and actual input prices and quantities. This is important since many companies do not keep detailed records of input prices and quantity, especially in non-manufacturing areas. Such companies can still gain much insight from a Level 2 FB analysis, but students must understand that Level 3 analysis – decomposition of the FBV into price and efficiency variance – does not require such information on inputs. Price and efficiency variances are subcomponents of the FB variance. Managers generally have more control over efficiency variances than price variances because the quantity of inputs is primarily affected by factors inside the firm, whereas price changes arise primarily because of factors outside the firm. Students do not have to memorise the formulae if they grasp the intuition. The price variance is obviously the difference in prices multiplied by some quantity. The purchasing agent is responsible for the price variance. Commonsense suggests that purchasing agents should be responsible for buying all the inputs (AQ purchased, not just the inputs that should have been used. Hence, the price variance is Difference in price × AQ purchased. In evaluating purchasing agents, most companies also emphasise other factors beyond price variances e.g. quality and timely delivery are very important, especially in companies that have adopted JIT. Stress the intuition behind the efficiency variance so that students do not memorise the formula. The plant supervisor is responsible for the efficiency variance. The efficiency variance (often termed a quantity variance) is the difference between the actual quantity of inputs used (not purchased, the plant supervisor generally has no control over purchases) and the quantity that should have been used to obtain the actual number of outputs. This quantity is then costed at some input price. Since the supervisor is not responsible for the AP of inputs, the variance is costed at the budgeted price Difference in quantity) × BP = (AQ − BQIA) × BP Students are nearly always confused by BQIA (total budgeted quantity of inputs allowed for actual number of outputs. They must first distinguish between inputs (e.g. metres of materials, DLH, MH) and outputs (e.g. finished jackets. BQIA is the total budgeted quantity of inputs allowed for good actual outputs achieved. It is calculated by working backwards from the actual number of good outputs to see how many inputs should be used. The FB for inputs is based on BQIA. Another explanation for U efficiency variances is poor-quality material inputs. If purchasing agents are evaluated primarily on price variations, they have incentives to purchase low-cost, perhaps poor-quality materials, particularly if they are not held responsible for subsequent U materials and labour efficiency variances. Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5 th Edition, Instructor’s Manual © Pearson Education Limited 2012 In the Sofiya example, labour is a variable cost, so it is appropriate to calculate labour efficiency variances. However, if labour is viewed as more of a fixed cost, workers are paid regardless of the amount of production. If the firm has excess capacity, then workers efficiency is not a vital issue as long as they are efficient enough to produce sufficient units to satisfy demand. Even if workers were more efficient and finish the work quickly, they would still get paid the same amount (since labour is a fixed cost. However, managers who are evaluated on labour efficiency variances maybe tempted to improve this variance by increasing production. If there is excess capacity, this extra production increases stock, counter to recent stock reduction initiatives (e.g. JIT). Download 1.72 Mb. Share with your friends:
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