BPP University College of Professional Studies

BPP UNIVERSITY COLLEGEBPP UNIVERSITY COLLEGE

BPP University College of Professional Studies

Financial Performance- Revision session26th June 2012

BPP UNIVERSITY COLLEGE


Exam Info!

- 2.5 hour exam

- 2 sections- all questions need to be answered

- 70% competency required in both sections

- Calculation and written questions in each section

- Calculation questions are computer marked

- Written questions are human marked

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Common pitfalls

— Variance analysis calculation and understanding is vital for passing FNPF- MUST LEARN

— Students don’t like written questions! You need to get to grips with them as they appear in ALL level 4 exams.

— Read the question carefully, don’t panic! Take your time reading all the requirements to approach the question correctly.



Section 1


1.1 Standard cost card1.2 Direct cost variances1.3 Fixed overhead variances1.4 Operating statement1.5 Index nos/time series etc1.6 Explain variances


Section 2


2.1 KPIs inc ratios

2.2 Break even - what if - limiting factors

2.3 Target Costing – Life Cycle Costing

2.4 Explain the differences between gross profit /net profit margin etc


Tonight we focus on:


1.3 Fixed overhead variances-A task marked by the computer

1.6 Explain variances(interpretation) - A human marked task


Task 1.3 Fixed Overhead Variances


Fixed overhead variance

Expenditure Volume

Efficiency Capacity

Budgeted expenditure vs Actual expenditure


Volume variance

—What are we comparing?— Budgeted production units

— Actual production units

—If we actually produce more units than budgeted is this a adverse or favourable variance?

— Favourable!

—How do we value to variance?— At standard OAR per UNIT



Efficiency variance

—What are we comparing?— Standard hours (Actual units x Std hours per unit)

— Actual hours

—If actual hours are more than standard hours is this an adverse or favourable variance?

— Adverse, the workforce has taken longer to produce units!

—How do we value to variance?— At standard OAR per HOUR



Capacity variance

—What are we comparing?— Budgeted hours (Budgeted units x Std hours per unit)

— Actual hours

—If actual hours are less than budgeted hours is this a adverse or favourable variance?

— Adverse! Tricky one, ask yourself if you have 10000 hours budgeted and we only worked 8000 hours, what happened to the 2000 hours? IDLE TIME- bad

—How do we value to variance?— At standard OAR per HOUR



Practice Question


1. You have been given the following information:

— Budgeted overheads are £600000

— Budgeted output is 20000 units

— Budgeted hours is 40000 hours

— Actual output is 30000 units

— Actual overheads are £680000

— Actual hours are 55000 hours

a) The fixed overhead expenditure variance is (adverse/favourable)

b) The fixed overhead volume variance is (adverse/favourable)

a) The fixed overhead efficiency variance is (adverse/favourable)

b) The fixed overhead capacity variance is (adverse/favourable)


Answers

a) The fixed overhead expenditure variance

Budgeted expenditure £600000

Actual expenditure £680000

Variance £80000 Adverse



b) The fixed overhead volume variance

Budgeted production units 20000

Actual production units 25000

5000 Favourable

x Standard OAR per unit (W1) x £30

Variance £150000 Favourable

(W1) Budgeted overheads = £600000 = £30 per unit

Budgeted units 20000 units


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c) The fixed overhead efficiency variance

Standard hours (25000 x 2 hours per unit) 50000

Actual hours 53000

3000 Adverse

x Standard OAR per hour (W1) x £15

Variance £45000 Adverse

(W1) Budgeted overheads = £600000 = £15 per hour

Budgeted hours 40000 hours

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d) The fixed overhead capacity variance

Budgeted hours 40000

Actual hours 53000

13000 Favourable!

x Standard OAR per hour (W1) x £15

Variance £195000 Favourable!

(W1) Budgeted overheads = £600000 = £15 per hour

Budgeted hours 40000 hours


Task 1.6 Explain variances

— The examiner will provide the variances calculated with some additional information. Your task will be to explain, analyse and make recommendations.

You must be able to:

1. Identify the sign of each variance (adverse/favourable)

2. Explain what the variance means (define the variance in general)

3. Provide a possible reason for each variance

4. Explain any links between the variances



1. Identifying if Adverse and Favourable

— Calculations needed

- Material Price – Standard cost per kg/litre/metre

- Material Usage - Standard materials required for actual production units

- Labour rate – Standard rate per hour

- Labour Efficiency - Standard hours for actual production

- Fixed overhead variances- OAR per unit/ hour



2. Definition of variances (what are we comparing?)— Material Price- how much we should have paid for actual purchases (kgs/

litres) based on standard price per kg/litre to what we did actually spent. Have we paid more or less?

— Material Usage- how many kgs/ litres should we have used to produce actual units and how many kgs/ litres did we use. Have we used more or less material than standard?

— Labour rate- how much we should have paid for actual hours worked based on standard rate per hour and what did we did actually pay our staff. Have we paid more or less than standard?

— Labour efficiency- how many hours should staff have worked to produce actual units and how many hours did they work. Have the staff taken longer to produce actual units?



— Fixed overhead expenditure- what did we budget to spend on overheads and what did we spend. Have we paid more or less than we should have done?

— Fixed overhead volume- how many units should we have absorbed budgeted overheads over compared to how many we actually produced. Have we made more units than budgeted?

— Fixed overhead efficiency- how many hours should staff have worked to produce actual units and how many hours did they work. SAME AS LABOUR EFFICIENCY!

— Fixed overhead capacity- how many hours were budgeted compared to actual hours worked. If we have capacity we should be using it!



3. Reason for variances

— What might have caused the variances- not what does the variance mean!

— Look out for clues in the scenario/ narrative

— For example- favourable material price variance means a lower price per kg/ litre was paid.

— BUT what might be the cause?

1. Discounts for bulk purchasing

2. An incorrect standard price

3. Inferior quality material

4. A new supplier



—A new supplier…..

—Material usage what might happen?

—Material price what might happen?

—Old machines are in use that have not been fully maintained in recent years….

—Material usage what might happen?

—Labour efficiency what might happen?



4. Linking variances

How can the following variances link?

1. Material price v Material usage?

2. Labour rate v Labour efficiency?

3. Material usage v Labour efficiency?

4. Labour efficiency v Fixed overhead efficiency?



How to pass Task 1.6!

1. Know how to spot adverse/favourable variances

2. Go into the exam “knowing” a definition for each variance

3. Practice plenty of questions, and see what have been the causes of variances. AND think. There will be clues but you have to be able to use them.

4. Learn about the links. AND know when to say “this variance does not link to any of the other variances”.



THANK YOU

ANY QUESTIONS PLEASE?

Documents

BPP University College of Professional Studies