SFMA Assessment – Variances
If there is a variance question on the assessment it will be around the actual number of pre-packed sandwiches produced during the year and the actual costs incurred in making the sandwiches. It seems likely we would be asked to do the variances for one month’s production, or overall variances for the entire year, when given actual quantities produced and costs incurred in the extra information on the day of assessment. It would also be likely that we reconcile the actual profits with the budgeted profits for the month.
On the next page is a list of the appropriate variances for reference in the assessment and when reading through the following. The process for finding the variances and doing the profit reconciliation is as follows:
∘ When given the actual number produced for the month/year, compare with what the budget was for the month/year and from there the sales variances can be worked out (contribution = selling price – cost of production). There will be no sales price variance since sandwiches were sold at budget price.
∘ (This next step may not be necessary judging from what is in the material, but just in case we’re asked to prepare the flexed budget I’ve included it anyway) To prepare a flexed budget, multiply what the expected cost of materials/labour/production costs were by the actual quantity/time given. These are the figures for budgeted costs for actual production.
∘ To get the budgeted time/quantity as required by the usage and efficiency variance formulas, multiply what the expected quantity or time is by the actual level of production.
∘ The materials and labour variances are fairly self-explanatory. It would probably be less complicated to compute the material variances for the bread and the filler separately and add them together at the end to find the overall material variance. The extra information on the day could give either the actual costs incurred for materials and labour or the actual quantities of time spent, filler used or bread/slices used. Be careful with the bread if this is the case as the standard unit per sandwich is two slices (sounds obvious, but caused me some confusion yesterday!). Also we may be given the labour rate per hour or something like that so make sure you convert the rate into rate per unit produced to make calculations easier (be careful if they say as well that the amount of time it took to prepare each sandwich was longer/shorter when computing your rate – this makes it a bit trickier but I don’t think they’d ask this).
∘ Packaging costs are a variable production overhead – use appropriate variable overhead variance formulas. It is important to recognise this cost is not fixed; it will increase as its cost driver, the level of production, increases.
∘ Fixed costs per the standard cost card in the information already given are considered a fixed overhead cost. There will only be a spending variance here if the extra information given tells us the actual fixed costs are different from the expectation (expectation = budget number of sandwiches sold in period * fixed cost per sandwich as on page 7). There is no other variance to consider than the spending variance for the fixed costs.
∘ The reconciliation of budgeted to actual profit for the period is difficult to explain in words and I’d recommend having a read through the illustration starting at page 613 of the management accounting textbook as it is a good example of this, with the actual reconciliation on page 617. I don’t think it’d be necessary or worthwhile in the assessment including the percentages as they have in the example reconciliation. The overall idea is that from the budgeted profit, you add the favourable variances and take away the adverse variances to end up giving you the actual profit figure for the year.
∘ Also included in the formula sheet below are market size and share variances. There has been nothing in the material to suggest they...
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