Management Accounting: Variance Analysis and Decision Making

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
PART A...........................................................................................................................................3
Sales price and sales volume contribution variance....................................................................3
Material price planning and material price operational variance................................................5
Advantages and disadvantages of using variances......................................................................7
PART B...........................................................................................................................................9
Assessment of the make or buy decision for XLG......................................................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Management accounting is a very broad field that involves the overall management and
preparation of the different aspects associated with the costing etc. In this field, variance
analysis is of key importance that adds in the overall value of the business. The difference
between the standards that were set and the actual that is achieved is basically computed in
variance analysis (Rosyidi, 2019). In this report, the case study of XLG will be evaluated in
context of the different variances whose implementation will help in decision making. Further
the positive and negative aspects of using variance analysis will also be illustrated in the report.
MAIN BODY
PART A
Sales price and sales volume contribution variance
Sales price variance basically indicates the increase or decrease in the revenue generation
due to fluctuation in the standard selling price and the actual sales price. The standard selling
price is mainly established so that company can earn the desired profit through their products
sold by selling the goods at a price of their choice (Tan and Low, 2017). And actual price is the
one at which they are able to actually sell goods in the market.
The use of this variance helps in strategically planning for increasing the overall profit
earning capacity of the organisation. The variance is said to be Favourable (F) when the actual
sale price exceeds the standard that was set up as the revenue generation increased creating a
beneficial situation. At the same time, variance can be Adverse (A) as well if the actual sale price
is less than the standard one. Favourable variance can arise when the economy is facing inflation
or the sale price charged is very high etc. and adverse variance can be incurred if the quality is
poor or if standards are not set properly etc. (Windapo and Moghayedi, 2017). The formula for
calculating sales price variance is:
Sales Price Variance = (Actual Rate – Standard Rate) * Actual Quantity sold
For XLG, the sales price variance for both their chemicals X and Y can be ascertained in
following manner:
Particulars Chemical X Chemical Y
Actual units 850 750
Actual sales price 45 37
Actual sales revenue
(Actual units * selling price)
38250
(850 * 45)
27750
(750 * 37)
3

Standard price 35 30
Deviation in price
(Actual price – Standard price)
10
(45 – 35)
7
(37 – 30)
Actual units 850 750
Sales price variance
(Deviation in price * Actual units)
8500
(850 * 10)
5250
(750 * 7)
Total sales price variance (8500 + 5250) 13750 (F)
The tabulation above indicates that the total sale price variance for XLG is £13750 in
favourable position i.e. company is in a profitable situation and they have been able to do so
because the actual sale price is higher than the standard one.
Sales Volume contribution variance can be used to identify the differences in the
contribution i.e. profit that is earned by an organisation due to difference between the actual sales
and the estimates sales volume i.e. quantity. This variance actually helps in ascertaining that how
the variation in sales volume can actually affect the overall profits (Bai, 2016). There are two
methods of evaluating this variance i.e. to use absorption costing method by calculation of per
unit profit or by using marginal costing where the standard contribution on a per unit basis is
ascertained.
The favourable variance situation can arise when the total units sold are higher than the
budgeted ones and this can be due to increased demand, better quality of services etc. The
adverse variance can arise when the demand is not very high or when there is a better
competitive product etc. (Farkas, Kersting and Stephens, 2016). The formula that can be used to
calculate the sale volume contribution variance can be calculated as follows:
Sales volume contribution variance = (Actual Sales Units – Budgeted Sales Units) * Standard
margin
In consideration of the XLG Company, the statement for sales contribution variance can
be ascertained in following manner:
Particulars Chemical X Chemical Y
Actual sales units 850 750
Budgeted sales units 595 595
Difference
255
(850 – 595)
155
(750 – 595)
Standard margin 25 20
Sales volume variance
6375
(255 * 25)
3100
(155 * 20)
4