«“Non-Conventional Variance Analysis [Ncva], Its Adaptability In Managerial Decisions” Dr. Omah, I (B.Sc,M.Sc, M.PHIL, PhD. Accounting) Dept of ...»
British Journal of Arts and Social Sciences
ISSN: 2046-9578, Vol.6 No.1 (2012)
©BritishJournal Publishing, Inc. 2012
“Non-Conventional Variance Analysis [Ncva], Its Adaptability In
Dr. Omah, I
(B.Sc,M.Sc, M.PHIL, PhD. Accounting)
Dept of Accounting &Finance
Faculty of mgt. Sciences.
Lagos State University.
Ojo – Agbodu A.A
(B.Sc, M.SC FCA – Chartered Account) Dept of Accounting & Finance Faculty of Mgt. Sciences Lagos State University.
E-mail: Ojoagbodu@yahoo.com Dr. Kehinde J.S.
(B.Sc, M.Sc, PhD. Financial Mgt) Dept of Accounting & Finance Faculty of Mgt. Sciences Lagos state university Ojo- Nigeria E-mail:pastorKehindebox@yahoo.com British Journal of Arts and Social Sciences ISSN: 2046-9578 Abstract Purpose: The aim of this paper is to highlight the advantage(s) of non- conventional – variance analysis in comparison to conventional / Traditional –variance – analysis, when environmental factors changes, mere routine comparison of actual performance with standard stipulation will not reflect the desired result.
Methodology / Approach:
An empirical survey – based on historical data collection and primary data from some specified functional / corporate organizations in Lagos State Metropolis. Data analysis is tailored to achieve a dependable outcome, as non – conventional – variance analysis is a complex approach.
Non – Conventional – Variance – analysis tends to establish the distincions between the original Budget (ex-ante budget) and reversed Budget (ex-post budget) which represents the planning variance.
This enables the management to appraise the efficiency of its planning methods with a view to improve future planning processes. Operating and planning variances are subsets of material variance replacing conventional usage and price variances. These variances are used to isolate variances caused by unforeseen circumstances (planning variance) and operational variance, which reflects non-standard performance.
Research Limitations / Implications:
(i) When environmental factors changes, mere routine comparison of actual performance with standard stipulation will not reflect the desired outcome, (i.e. analysis which takes into consideration charges in original plan).
(ii) The extent to which the causes of variances are established depends upon the amount of time, effort and money a company is willing to spend in data collection as the variances occur.
(iii) In variance analysis, a point is reached where incremental cost of data procurement does not commensurate its incremental income. This point indicates the limit of variance analysis and this point may be determined by individual judgment.
Practical Implication: This paper tries to establish the validity of non – conventional – variance – analysis as means of appraisal of management. Performance in a strategic management oriented enterprise. Variance analysis must be devised to suit the conditions prevailing within the organization.
Originality / Value: This paper highlights both the practical and the theoretical adaptability of nonconventional –variance-analysis as a measure of management strategic planning mechanism.
Keywords: Planning – Variance, Operational _Variance, Standard stipulation, Actual performance, Environmental factors, Non-conventional – Variance, ex-post budget, routine comparison, highlight.
Introduction: A comparison of actual performance with standard stipulation reveals the variance. A variance represents a deviation of the actual result from the standard result. Therefore, there can be cost variance, profit variance, sales value variance, sales margin variance, operational variance and planning variance. Whether a variance is favourable or Adverse is ultimately determined with reference to its impact on profit. For example, a cost variance will be adverse if the actual cost exceeds standard stipulation or vice-versa.
British Journal of Arts and Social Sciences ISSN: 2046-9578 Variance analysis is an exercise, which involves efforts to isolate the causes of variances in order to report to the management those situations which can be corrected and controlled by timely action.
Conventional – variance analysis suffers from some recognized disadvantages. When environmental factors changes, mere routine comparison of actual performance with standard stipulation will not reflect the desired result. For this reason, there should be ex-post variance analysis, analysis which takes into consideration changes in original plan.
The extent to which the causes of variances are established depends upon the amount of time, effort and money that a company is willing to spend in accumulating data, as the variances occur. In variance analysis, a point is reached where incremental cost of information procurement does not commensurate its incremental income. This point indicates the limit of variance analysis and this point is determined by judgement in the light of individual circumstances. Variance analysis must be devised to suit the conditions prevailing within a particular organization. Analysis of variances must be followed by intelligent and factual interpretation.
Adaptability The basic concept of non-conventional – variance – analysis is to analyse variances due to operational factors (hence controllable) and variances due to planning errors (some of which might be avoidable and some entirely unavoidable i.e. unforeseeable price changes). The difference between the original budget (ex-ante budget) and reversed (ex-post budget) represents the planning variances.
It is analyzed into avoidable and unavoidable elements. This enables the management to appraise the efficiency of its planning methods with a view to improve future planning. According to chartered Institution of Management Accountant, London (CIMA), operating and planning variances are subsets of material total variance replacing traditional usage and price variances. These variances are used to
isolate variances caused by:
Unforeseen circumstances i.e. planning variance and, Operational variance, which reflects non-standard performance.
Precisely, these variances can be stated as:
Operational/Planning Variance: Subsets of direct material total variance replacing traditional usage and price variances, used to isolate variance caused by unforeseen circumstances (planning variance) leaving operational variances that better reflect cost of non-standard performance. This can also apply to labour and overhead.
Operational Price Variance (OPV): (Actual materials used or purchased at reversed standard price) less (Actual materials used for purchased at actual price).
Operational Usage Variance (OUV): (Standard materials used at reversed standard price) less (Actual materials used at reversed standard price).
Planning Price Variance (PPV): (Reversed standard material cost). The reversed standard is an efficient buying price, determined at the end of the period. An example will illustrate this
concept more precisely:
CASE 1: Suppose ABC Co. has set the standard price of material at N2 per kg before the start of the
period. During the period:
Standard quality of material specified for the output in the period 20,000kg.
Actual material purchased and used 21,000kg.
Actual purchase price paid N2.80, due to unforeseen occurance which led to a material shortage. At the end of the period, a price of N3.00 was agreed to have been an efficient
British Journal of Arts and Social SciencesISSN: 2046-9578
buying price in the period. The standard costing system shows a direct material total
variance of N18,800 made up of:
Material usage variance N2000 (Adverse) Material price variance N16, 800 (Adverse) Management wishes to distinguish between controllable and uncontrollable effects on performance.
Actual cost of purchase (21000 x N2.80) = N58, 800 Material actually purchased and used at reversed standard cost (21000 x N3.00) = N63,000.
Reversed standard cost (20,000 x N3.00) = N60,000 Standard cost (20,000 x N2.00) = N40,000
CASE II: The management committee of RIV. Corporation Ltd feels that standard costing and variance analysis has little to offer in the reporting of some the activities of the company. According to the accountant, although we produce a range of fairly standardized products, “prices of many of the raw materials are apt to change suddenly and comparison of actual prices with a predetermined, and often unrealistic, standard price is of little use. For some of our products we can utilize one of several equally suitable raw materials and we always plan to utilize the raw material which will in our opinion, lead to the cheapest total production costs. However, we are frequently caught out by price changes and the material actually used often proves, after the event, to have been more expensive than the alternative which was originally rejected.
For example, considering the experience over the last accounting period of two of our products, „X‟ and „Y‟. To produce a unit of „X‟ we can use either 5kg of „A‟ or 5kg of „B‟. We planned to use „A‟ as it appeared to be cheaper of the two and our plans were based on a cost of „A‟ of N3 per kg. Due to market
movements, the actual prices changed and if we have to purchase efficiently the costs should be:
A = N4.50/kg B = N4.00/kg Production of „X‟ was 2000 units and usage of „A‟ amounted to 10,800kg at a total cost of N51, 840.
Product „Y‟ uses one raw material „C‟, but again the price of this can change rapidly. It was thought that „C‟ would cost N30 per tone but we paid N25/tonne and if we had purchased correctly, the cost would British Journal of Arts and Social Sciences ISSN: 2046-9578 have been less as it was freely available at N23/tonne. It usually takes 1.5 tonnes of „E‟ to produce one (1) tonne of „Y‟ but our production of 500 tonnes of „Y‟ used only 700 tonnes of „E‟.
(B) (i) Planning Variances test management‟s forecasting ability by comparing the original standard (ex-ante) and the reversed standard based on known factors (ex-post) (ii) Operation variances indicate management‟s current level of operating efficiency by comparing actual with an up-to-date standard (reversed standard) Utility of Non-Conventional-Variance-Analysis In times of inflation, when there are rapid price level changes, those variances due to inflation can be distinguished from others.
It distinguishes between controllable and non-controllable variances.
It shares the effect of setting unrealistic targets.
Difficulties In Non-Conventional Variance Analysis The resistance to change from the conventional approach to non-conventional approach, as the latter is more easily exposes controllable errors.
The difficulty in obtaining accurate information about what the reversed standard should be.
The assumption that the alternatives are (ASU AT SCPU) – (BSU AT SCPU). Perfect substitutes for the materials actually used, e.g. can „B‟ be used instead „A‟.
Overview of non-conventional-variance-analysis.
Non-conventional-Variance-Analysis should include:
Quality-Cost-Variance (QCV): It represents the difference between actual quality cost and the standard/budgeted quality cost. In the era of technological changes and acute competition, this variance attracts extra attention. It may be segmented to reflect cost classification of prevention, appraisal and failure. It is not a part of pyramid of inter-related variance, because quality cost is incurred within various functions.
QCV = (AQC - SQC) Market-Share-Variance (MSV): It represents the difference between actual sales units at standard contribution per unit and sales units representing the budgeted share of actual market at standard contribution per unit. It is a subset of sales volume contribution variance. It is applicable when actual size of a product or product group is known. It indicates how well market share has been maintained.
(ASU at SCPU) – (BSU at SCPU) MSV = Market-Size-Variance (MS1V): It represents the difference between sales units representing the budgeted share of actual market at standard contribution per unit and budgeted contribution. It should be noted that step(b) in preceding variance becomes step(a) in the variance and this represents the difference between the two.
(BSC at SCPU) – (BC) MS1V = Market-Cost-Variance (MCV): It represents the difference between actual marketing cost and budgeted marketing cost. Where marketing cost is variable and fixed, approach can be adopted
(AMC – BMC) MCV =
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Factors Responsible for Revision of Non-Conventional-Variance-Analysis.
It is a common experience that the standard becomes out dated very quickly. Mostly, it is due to change in circumstances and inflation is the main factor contributing to this need. Other factors, which
invalidate the existing standard may include:
Technological changes such as changes in production methods, changes in design of products and changes in office equipment.
Organizational changes such as different sales mix, changes in warehousing and distribution methods, changes in management, new agreements, changes in remuneration methods, new health and safety provision.
Changes in fiscal policy.
Changes in economic environment.
Exchange rate variation e.t.c.