BPP University College of
Professional Studies
Financial PerformanceRevision session
4th December 2012
BPP
COLLEGE
BPP
UNIVERSITY
COLLEGE
BPP UNIVERSITY
UNIVERSITY
COLLEGE
Exam Info!
-
2
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.
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Section 1
1.1
1.2
1.3
1.4
1.5
1.6
4
Standard cost card
Direct cost variances
Fixed overhead variances
Operating statement
Index nos/time series etc
Explain variances
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Section 2
2.1
KPIs inc ratios
2.2
Break even - what if - limiting
factors
Target Costing – Life Cycle Costing
2.3
2.4
5
Explain the differences between
gross profit /net profit margin etc
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Tonight we focus on:
1.3
1.6
6
Fixed overhead variances
-A task marked by the computer
Explain variances
(interpretation)
- A human marked task
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Task 1.3 Fixed Overhead Variances
Fixed overhead variance
Expenditure
Volume
Budgeted expenditure
vs Actual expenditure
Efficiency
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Capacity
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
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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
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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
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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 25000 units
— Actual overheads are £680000
— Actual hours are 53000 hours
a) The fixed overhead expenditure variance is
b) The fixed overhead volume variance is
a) The fixed overhead efficiency variance is
b) The fixed overhead capacity variance is
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(adverse/favourable)
(adverse/favourable)
(adverse/favourable)
(adverse/favourable)
Answers
a) The fixed overhead expenditure variance
Budgeted expenditure
£600000
Actual expenditure
£680000
Variance
£80000
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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
Budgeted units
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20000 units
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= £30 per unit
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
Budgeted hours
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40000 hours
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= £15 per hour
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
Budgeted hours
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40000 hours
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= £15 per hour
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
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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
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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?
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— 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!
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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
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—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?
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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?
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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”.
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THANK YOU
ANY QUESTIONS PLEASE?
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