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AAT Level 3Costs & Revenues

AAT Level 3 – Costs & Revenues

Objectives:

1.Correctly explain what is meant by a budget. 2.Compare budget costs with actual costs, identifying variances.3.Correctly identify when variances are significant.4.Be able to suggest possible causes of variances.5.Discuss the two different types of budgets (fixed and flexible).6.Correctly calculate flexed budgets and analyse variances for management reports.7.Prepare a full variance analysis using a fixed budget.

AAT Level 3Costs & Revenues

Fixed & Flexible Budgets & Variance Analysis

A financial plan .. that is prepared in advance

Budget

BudgetA financial plan .. that is prepared

in advance

Used to monitor costs and income

Allows managers to control costs/incomeCutting down on wasteEliminating unnecessary costsChanging suppliersChasing debtors

Why bother?

Adverse

(Bad for business)

What is a variance?

Favourable

(Good business)

The difference between the comparative value and the actual

value

Variance - The difference between the comparative value and the

actual value

Profit for the year 2013 averaged at £25,000 per weekProfit for the year 2012 averaged at £55,000 per week

Corresponding periodPrevious period

Budget

VariancesAdverse or Favourable?

Adverse/Favourable results depend on the variance being considered

Budget Actual Variance£120,000 £125,000 £5,000

Budget Actual Variance£120,000 £125,000 £5,000

Costs

Income

Calculating Variances

To calculate £ variance = A - B

Where A = Actual figure

B = Comparative figure

(Budget, Previous, Corresponding)

Question 1: September

8000

3000

1600

0

3400

F

F

A

A

0

Question 2: OctoberAnswer

Question 2: October

Variances – The Golden Rules

To calculate £ variance = A - B

To calculate the % variance = A – B X 100

B

Where A = Actual figure

B = Comparative figure

(Budget, Previous, Corresponding)

Remember!!! Never divide by the Actual figure!!!!!

Hint: Identify & label your columns

A & B first!!!

TolerancesAn acceptable percentage variance

from the comparative

The business will only investigate variances outside the tolerance levels

e.g. variances of 10% +

Significant Not Significant

BudgetsYou should now be aware that the f ollowing cycle should take place:

Set budget amount

Compare budget amounts with actual amounts

Calculate total variance

Analyse total variance

Explain reasons f or variance

Take action

What may cause a variance?

Colman ToysColeman Toys make traditional wooden toys for the overseas market.

Colman ToysColeman Toys make traditional wooden toys for the overseas market.

At the beginning of the year they estimated that their Direct Material costs would be £150,000 and their Direct Labour Costs £400,000.

Colman ToysColeman Toys make traditional wooden toys for the overseas market.

At the beginning of the year they estimated that their Direct Material costs would be £150,000 and their Direct Labour Costs £400,000.

It is now year end and they have actually spent £180,000 on materials and £375,000 on labour.

Colman ToysColeman Toys make traditional wooden toys for the overseas market.

At the beginning of the year they estimated that their Direct Material costs would be £150,000 and their Direct Labour Costs £400,000.

It is now year end and they have actually spent £180,000 on materials and £375,000 on labour.

What may have caused these variances?

Causes of Variances

Direct Materials

DirectLabour

FixedOverheads

SalesRevenue

What factors may effect these costs?

Causes of Variances

Direct Materials

DirectLabour

FixedOverheads

SalesRevenue

QualityWastageCostTheftSpecification change

Pay risePoor supervisionSkill levelMachines-Breakdown-Increase speed–Decrease speed

InflationSupplier changeStepped cost

Price increase or decreaseVolume sold

Causes of Variances

Direct Materials

DirectLabour

FixedOverheads

SalesRevenue

QualityWastageCostTheftSpecification change

Pay risePoor supervisionSkill levelMachines-Breakdown-Increase speed–Decrease speed

InflationSupplier changeStepped cost

Price increase or decreaseVolume sold

Solutions?

Budgets

Fixed Budget Flexible (Flexed) Budget

****Cost behaviours***

Question 3: September flexed budget

I/D Fixed costs (Overheads)

31200 0

Selling price = 160000/4000 = £40Flexed = 4200 x £40 = 168000

168000

0

0

0

1560

Materials = 60000/4000 = £15Flexed = 4200 x £15 = £63000

63000

Labour = 32000/4000 = £8Flexed = 4200 x £8 = £38640

33600

38640

Question 4: October flexed budget

I/D Fixed costs (Overheads)

35000 4500

260000

6500

52000 6500

78000 0

97500 7000

Questions 5, 6 & 7

Question 8

Question 8a - Answer

Total materials variance = Budgeted cost for actual output - actual cost(4 kg x £26 x 22200) = 2308800 – 2010800 = 298000 F Total direct labour variance = Budgeted labour cost for actual output – actual cost(2 hrs x £9.40 x 22200) = 417360 – 413760 = 3600 F Total fixed overhead variance = Fixed overheads budgeted – actual(21400 units x 2 x £9.40) = 402320 – 398460 = 3860 F 

Question 8b

Variance Reconciliation Statement

Fixed budget profit  

Variances:  

Sales volume (B Profit – F Profit)

Selling price (A Sales – F Sales)

Labour (A Labour – F Labour)

Materials (A Materials – F Materials)Fixed costs

Actual profit

Fixed budget profit 105,000 

Variances:  

Sales volume (B Profit – F Profit) 105,000-95,000=10,000

Selling price (A Sales – F Sales)

Labour (A Labour – F Labour)

Materials (A Materials – F Materials)Fixed costs

 

Actual profit

Variance Reconciliation Statement

Fixed budget profit 105,000 

Variances:  

Sales volume (B Profit – F Profit) 105,000-95,000=10,000

Selling price (A Sales – F Sales)

Labour (A Labour – F Labour)

Materials (A Materials – F Materials)Fixed costs

 

Actual profit

Variance Reconciliation Statement

Fixed budget profit 105,000 

Variances:  

Sales volume (B Profit – F Profit) 105,000-95,000=10,000

Selling price (A Sales – F Sales) 266,500 – 260,000=6,500 

Labour (A Labour – F Labour)

Materials (A Materials – F Materials)Fixed costs

 

Actual profit

Variance Reconciliation Statement

Fixed budget profit 105,000 

Variances:  

Sales volume (B Profit – F Profit) 105,000-95,000=10,000

Selling price (A Sales – F Sales) 266,500 – 260,000=6,500 

Labour (A Labour – F Labour) 78,000-78,000=0 

Materials (A Materials – F Materials)Fixed costs

 

Actual profit

Variance Reconciliation Statement

Fixed budget profit 105,000 

Variances:  

Sales volume (B Profit – F Profit) 105,000-95,000=10,000

Selling price (A Sales – F Sales) 266,500 – 260,000=6,500 

Labour (A Labour – F Labour) 78,000-78,000=0 

Materials (A Materials – F Materials)

58,500 – 52,000=6,500 

Fixed costs

 

Actual profit

Variance Reconciliation Statement

Fixed budget profit 105,000 

Variances:  

Sales volume (B Profit – F Profit) 105,000-95,000=10,000

Selling price (A Sales – F Sales) 266,500 – 260,000=6,500 

Labour (A Labour – F Labour) 78,000-78,000=0 

Materials (A Materials – F Materials)

58,500 – 52,000=6,500 

Fixed costs 35,000 – 39,500= 4,500

 

Actual profit

Variance Reconciliation Statement

Fixed budget profit 105,000 

Variances:  

Sales volume (B Profit – F Profit) 105,000-95,000=10,000

A

Selling price (A Sales – F Sales) 266,500 – 260,000=6,500 

F 

Labour (A Labour – F Labour) 78,000-78,000=0 

0 

Materials (A Materials – F Materials)

58,500 – 52,000=6,500 

A 

Fixed costs 35,000 – 39,500= 4,500

A 

 

Actual profit

Variance Reconciliation Statement

Fixed budget profit 105,000 

Variances:  

Sales volume (B Profit – F Profit) 105,000-95,000=10,000

A

Selling price (A Sales – F Sales) 266,500 – 260,000=6,500 

F 

Labour (A Labour – F Labour) 78,000-78,000=0 

0 

Materials (A Materials – F Materials)

58,500 – 52,000=6,500 

A 

Fixed costs 35,000 – 39,500= 4,500

A 

  (14,500) 

Actual profit

Variance Reconciliation Statement

Fixed budget profit 105,000 

Variances:  

Sales volume (B Profit – F Profit) 105,000-95,000=10,000

 A

Selling price (A Sales – F Sales) 266,500 – 260,000=6,500 

F 

Labour (A Labour – F Labour) 78,000-78,000=0 

0 

Materials (A Materials – F Materials)

58,500 – 52,000=6,500 

A 

Fixed costs 35,000 – 39,500= 4,500

A 

  (14,500) 

Actual profit 90,500 

Variance Reconciliation Statement

Question 9 – Green Ltd

Practice Questions

Complete practice questions 10 – 18 in your Excel workbook.

Email completed workbook to:katecroft@3aaa.co.uk