Variance Analysis in Performance Evaluation

This report provides a comprehensive study on variance analysis and its application in evaluating the performance of managers. It includes the computation of sales price variance, sales volume contribution variance, material price planning variance, and material price operational variance. The report also critically evaluates the benefits and limitations of using variances in performance analysis. The subject is management accounting and the document type is a report.

XLG

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
PART A......................................................................................................................................3
1. Computation of sales price variance and sales volume contribution variance...................3
2. The material price planning variance and material price operational variance..................5
3. Critically evaluating benefits and limitation of using the variances in analysing the
performance of managers.......................................................................................................6
PART B......................................................................................................................................9
Make or buy decision.............................................................................................................9
CONCLUSION..........................................................................................................................9
REFERENCES.........................................................................................................................10

INTRODUCTION
Variance analysis is considered as an essential tool in the management accounting
because of the value it adds to the business. It is utilized in determining the difference in the
actual outcome with regard to the standards set by the organization. This is used by the
management for the purpose of evaluating the performance of the business on account of the
standards set. Through this, the causes for the not achieving the standards is determined so
that corrective steps can be taken for reducing the gap. This report includes a complete study
about the various types of variance with their pros and cons. It also covers the investment
decision proposal in respect to whether to buy the product from Brazil or make it in-house.
PART A
1. Computation of sales price variance and sales volume contribution variance
Sales price variance
The SP variance is used for measuring the expansion or reduction in the revenue
because of a distinction in the standard selling cost and real selling cost. Standard price (SP)
is the cost at which the business hopes to sell its items. In cost and management accounting
(MA), this tool variance analysis is carried out every year with the point of holding expenses
and incomes under check. It is a strategy for restricting use or period costs before they are
brought about with an emphasis on most maximum gainfulness (Edwards, 2016). The sales
price variance would be favourable (F) when the real selling price (SP) is more noteworthy
than the standard selling price. This clearly brings about higher revenue income than the
planned income. An increase in the SP could be because of any of the accompanying reasons
such as abatement in cost of complementary good, reduction in the substitute and pattern
change. Despite what might be expected, the selling price difference would be ominous or
adverse (A) when the real selling price is not exactly the budgeted selling cost. The
repercussion is a lower amount of turnover than what was normal. A diminishing in cost
could be because of some reasons like increment in rivalry, lower quality products and
diminishing in cost of substitute product.
Computation of sales price variance
Product Chemical X Chemical Y
Actual sales revenue
38250 (850 *
45)
27750 (750 *
37)
Actual units 850 750
Actual sales price 45 37

Standard price 35 30
Difference in price (Actual price – Standard price) 10 (45 – 35) 7 (37 – 30)
Actual units 850 750
Sales price variance (Difference in price * Actual
units) 8500 (850 * 10) 5250 (750 * 7)
Total sales price variance (8500 + 5250) 13750 (F)
On the basis of the situation given, the SP variance of the organization is £13750
being favourable as the actual SP is greater than the standard SP.
Sales volume contribution variance
Sales volume (SV) variance is the proportion of variation in the contribution because
of the contrast among real and planned sales amount. SV variance measures the impact of an
adjustment in the degree of sales on the contribution over the period. SV contribution
variance varies from other volume based differences, for example, material use variance and
labour efficiency variance in that it computes not simply the changes in sales income because
of the adjustment in action however it evaluates the general change in the contribution
(Holzer and Schoenfeld, 2019). The idea of the SV contribution variance helps in shaping a
more significant examination of different fluctuations in the readiness of the operating
statement. For instance, the material use variance needs to consider the distinction between
the real utilization of material and the standard utilization of material for the real number of
units sold since the SV variance considers the variation in the material expense brought about
by the contrast among planned and real sales volume.
The favourable (F) SV variance proposes a better standard contribution than the
budgeted one. The reason behind this favourable outcome includes favourable sales quantity
difference (for example higher number of units sold than planned), favourable sales mix
fluctuation (for example higher extent of more profitable items sold than the planned one).
The unfavourable (A) demonstrated a lower standard contribution than the planned one (Tan
and Low, 2017). Foundations for such outcome include: unfavourable sales amount variance
(for example lower number of units sold than planned). unfavourable sales mix change (for
example higher extent of the less gainful items sold than foreseen in the financial plan).
Computation of sales volume contribution variance
Product 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)
Total sales volume contribution variance 9475 (F)
The total SV contribution variance is £9475 (F) because the actual units sold is more
than the budgeted one.
2. The material price planning variance and material price operational variance
The material price (MP) planning variance is exceptionally helpful for the
organizations as it helps in giving review in regard to how the talented administrators of the
association are assessing the future costs of the item. The planning variance analyses the first
financial plan and then the reconsidered plan. The MP operational variance is viewed as more
important as it helps in estimating the proficiency of the purchasing division as for the
predominant economic situations at that time (Windapo and Moghayedi, 2017). It doesn't
include the factors which cannot be controlled. The planning and operational fluctuation
makes the standard costing significant. The operating difference furnishes the organization
with a cutting-edge data about its working productivity. The MP planning and operational
change helps in breaking down those differences which are either controllable or
uncontrollable by the association. This helps the management in distinguishing the areas
where real doesn't coordinate the planned which caused adverse outcomes.
The MP planning variance permits the managements to decide how viably the
associations plan process is. It helps in distinguishing where the correction in the spending
plan is required regarding the adjustments in the business condition which are unforeseeable
when the financial plan was made (Collis, Holt and Hussey, 2017). In circumstances where
the guidelines fail to envision the market trends then it mirrors the shortcoming in the
standard setting arrangement and furthermore there are planning differences caused on
account of bad standard setting over them moves can be made as it is controllable in nature at
the planning stage. The planning and operational difference gives help to the administration
in making distinction between the changes which has been caused in light of the unessential
components of the association and the planning fluctuations or the mistakes and different
variances which are caused due to the variables which are in the control of the administration.
In view of this, the less time is really spent on researching the changes which are not in
control of the administration which lessens the odds of getting the staff being considered
answerable for the differences which has been brought about by the variables which are out
of control.

The performance of the operational managers is then contrasted with the balanced
standards which then shows the conditions wherein the supervisor work under the given
period (Graybeal, Franklin and Cooper, 2018). In the event that, the planning and operational
fluctuations of the association are not recognized in that circumstance there is a chances for a
dysfunctional conduct in the conditions where the supervisor has been working appropriately
and fittingly and is additionally being decided by the components over which there is no
control.
Computation of material price planning variance
Product Original
budget
Revised
budget
Actual
Chemical X 2.5 4.5 3.7
Chemical Y 2.5 4.5 3.7
Budgeted production 800 800 1600 (800 + 800)
Material price planning
variance
(4.5 - 2.5)
*1600
3200 (A)
Computation of material price operational variance
Product Original budget Revised budget Actual
Chemical X 2.5 4.5 3.7
Chemical Y 2.5 4.5 3.7
Budgeted production 800 800 1600
Material price operational variance (3.7 - 4.5) *1600 -1280 (F)
3. Critically evaluating benefits and limitation of using the variances in analysing the
performance of managers
As stated by Davis and et.al (2020), variance analysis can be defined as the
comparison among the pre-determined information with the past related information for
determining an adherence to the plans. This analysis is considered the most valuable tool for
the supervisors to evaluate execution and in lessening risk of the organization. It gives
important data which helps the administrators in evaluating future risk while the other assist
in improving the past presentation of an organization. This tool takes into account the
performance of the project, division with that of standard set so gap between the planned and
real presentation can be estimated in viable way. The management of the organization sets up

standards against which the presentation would be estimated. It is the way toward deciding
the reason for the variety in costs and income of current year from that of planned one. It
helps in productive planning activity as the company's administration wants having lower
measure of deviations from that of arranged spending plan. This helps the administrators in
settling on forward-looking and itemized budgetary choices. It goes about as the control
instrument where investigation of the huge distinction on significant things helps an
endeavour in knowing causes and help the board in looking towards potential methods of
discovering deviations and guaranteeing effective controlling. Notwithstanding, this method
is an action which is mostly founded on the budgetary outcomes that are uncovered after a
quarter. This delay may influence the corrective moves in making a capacity up-to certain
degree. On the off chance that the planning or analysis isn't been made in consideration with
evaluation of each factor, exercise of planning may lose, that will undoubtedly go other
direction from the genuine numbers.
Ahmad (2017), analysed that variance analysis permits controlling of cost and
assessment of execution through looking at the real and standard figures. The fundamental
target of controlling expense is delivering thing with ease in agreement to the pre-decided
standards of value. It inspires laborers for achieving objectives and pinpointing obligation
regarding the unfortunate execution so as to make remedial move. On opposite side, it
supports insensitivity on supervisors’ part as they disregard the other significant tools which
may profit to organizations. It encourages connections inside firm like top administration and
bosses which supports staff in performing ideally. In any case, in this there may be propensity
to concentrate on fulfilling guidelines to a rejection of other pivotal target like improving and
looking after quality, fulfilment and satisfaction of clients and on time delivery. Besides, it
guarantees that a substance is in acceptable monetary state and furthermore guarantees that
the administrators or managers underscore and empower direction of results. On opposite
side, it demoralizes commencement as the laborers probably won't require to bringing
innovation especially if such sort of new thought may result to negative or unfavourable
fluctuation in beginning. It may likewise prompt a wrong choice that may bring about falling
of organization since information that is utilized in computing differences may be considered
faulty.
Concerning the given case, before figuring the MP planning and the operational
differences, the main data which was made accessible with respect to buying was that the MP
variance of £27000 which was good. As characterized by Kerzner (2017), the purchasing

division of the organization will be additionally evaluated by virtue of this change since it
can't be considered as a solid pointer of the effectiveness of the purchasing division of the
association. The fundamental driver isn't that it isn't dependable but since of the changing
economic situations which thusly prompting the ascent in the costs and this change is really
not in the control of the purchasing division. Additionally, by further examining the MP
variance and breaking it into two sections which are planning and operational changes which
is basically considered as the most helpful tool in evaluating the performance. As expressed
by Farkas, Kersting and Stephens (2016), the planning change fundamentally states about the
uncontrollable component, though the operational difference states about the controllable
elements. Both the differences can be handily determined however for certain organizations it
is simple yet for some situation it ends up being extremely troublesome. The operational
difference is likewise significant as it is used in deciding the productivity level of the
purchasing department of the association under the set economic situations. It gives help with
improving the motivational level and morale degree of the employees of the association.
Be that as it may, there are sure things which are required to be expressed obviously
like these fluctuations are additionally influenced by the specific restrictions which the
association must sway away so as to conquer it, on the off chance that they are really
actualized in the practice. In light of Jiambalvo (2019), things such as standards set ought to
be feasible and reachable and ought not be unclear. There can be times when all the
differences can be handily advocated as in light of an inappropriate and lack of foresight
which will result into no operational fluctuations being highlighted. Likewise, so as to evade
any sort of blunder or missteps, updating and dissecting the differences will be exorbitant and
tedious procedure. This may influence the financial plan of the organization also. In this
manner, it very well may be tragic that the variance analysis can't be considered as the most
important and precise apparatus for surveying the presentation of the association. In this,
progressions can be made effectively by the management as per the prerequisite which will
modify the ultimate result of the it driving less fluctuations and featuring the better outcomes
despite the fact that it isn't the situation. Subsequently, the organization should utilize this
tool however ought to think about different tools for guaranteeing the productivity and the
presentation of the organization. Likewise, successful checking of the purchase department
ought to be done so as to know the proficiency level of the directors in assessing the price of
the item for what's to come.

PART B
Make or buy decision
The XLG company has been using FamaQ which is being imported from Brazil and
this has helped it in securing a good market position. In the event of coronavirus outbreak,
this has made difficult for the company to import it due to the restrictions imposed by the UK
government (Rosyidi, 2019). Thus, the company is looking to produce the same in-house but
is not sure whether it will be beneficial or not. Thus, a report is being prepared which
provides the information in relation to make or buy decision making.
Particulars Make Buy Increase/(Decrease)
Material required for each product (1
unit for chemical X and one for
chemical Y) 3 3.7 -0.7
Number of units to produced 2320 2320 2320
Total cost 6960 8584 -1624
Thus, the XLG should make the product in house and also it will help reduce the
delivery time by 15 days.
CONCLUSION
It can be summed up from the above that the it is very beneficial for the organization
in utilizing variance analysis for effectively managing its performance. Even though it has
certain advantage and drawbacks but then too its relevance cannot be ignored. Also, a make
or buy decision making is being done which resulted into in-house production.

REFERENCES
Books and Journals
Ahmad, K., 2017. The implementation of management accounting practice and its
relationship with performance in Small and Medium Enterprises
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Finance. 101(7). pp.38-45.
Edwards, J. B., 2016. Modern gross profit analysis. Journal of Corporate Accounting &
Finance. 27(4). pp.45-55.
Farkas, M., Kersting, L. and Stephens, W., 2016. Modern Watch Company: An instructional
resource for presenting and learning actual, normal, and standard costing systems,
and variable and fixed overhead variance analysis. Journal of Accounting
Education. 35. pp.56-68.
Graybeal, P., Franklin, M. and Cooper, D., 2018. Distinguish between Financial and
Managerial Accounting. Principles of Accounting, Volume 2: Managerial
Accounting.
Holzer, H. P. and Schoenfeld, H. M. eds., 2019. Managerial accounting and analysis in
multinational enterprises. Walter de Gruyter GmbH & Co KG.
Jiambalvo, J., 2019. Managerial accounting. John Wiley & Sons.
Kerzner, H., 2017. Project management: a systems approach to planning, scheduling, and
controlling. John Wiley & Sons.
Rosyidi, C. N., 2019, August. Make or Buy Decision with Price and Quality Dependent
Demand. In Proceedings of the International Manufacturing Engineering
Conference & The Asia Pacific Conference on Manufacturing Systems (pp. 272-
277). Springer, Singapore.
Tan, B. S. and Low, K. Y., 2017. Budgeting Practice in Singapore–An Exploratory Study
Using a Survey. Asia Pacific Management Accounting Journal. 12(1). pp.77-103.
Windapo, A. and Moghayedi, A., 2017. BUILDING MATERIAL PRICE
DIFFERENTIATION IN SOUTH AFRICA: THE ROLE OF RETAILERS AND
LOCATION. WELCOME TO DELEGATES IRC 2017. p.447.