Paper P1 performance operations: variance analysis is a standard management accounting technique, but too many P1 candidates struggle to apply it because they don't bother to understand what all the variances actually mean.
| Position | Study notes |
Students tend to find the P1 exam difficult because the information given in the scenarios and the requirements vary considerably from question to question. Rote learning for this paper, therefore, will not be effective.
Section C of the exam often includes a question requiring a variance analysis. I have invariably been disappointed by how badly most candidates have performed on answering such questions, particularly because it's a core area of the syllabus that they should see as their bread and butter. Post-exam guides have stated that students tend to try to learn by rote for this subject, rather than understanding what they are trying to achieve. Variance analysis is not about learning formulas; it's about working out what the variances mean. Once these are understood, the figures necessary to calculate them usually become clear.
Let's attempt question 3 in section C of the November 2011 P1 paper, which required candidates to perform a variance analysis. Here is the scenario it gives, along with part A of the requirement:
TP makes wedding cakes that are sold to specialist retail outlets, which decorate the cakes according to the customers' specific requirements. The standard cost per unit of its most popular cake is as follows:
Direct material: $ Ingredient A 4kg at $25 per kg 100 Ingredient B 3kg at $22 per kg 66 Ingredient C 2kg at $11.50 per kg 23 Direct labour: 3 hours at $12 per hour 36 Variable overhead: 3 hours at $8 per hour 24 Standard cost: 249 The budgeted production for the period was 10,000 units.
Actual results for the period were as follows: Production: 9,000 units.
Direct material: $ Ingredient A 35,000kg 910,000 Ingredient B 28,000kg 630,000 Ingredient C 27,000kg 296,000 Direct labour: 30,000 hours 385,000 Variable overhead: 230,000 The general market prices at the time of purchase for ingredient A and ingredient B were $23 per kg and $20 per kg respectively.
TP operates a just-in-time (JIT) purchasing system for ingredients and a JIT production system. Therefore, there was no inventory during the period.
Prepare a statement that reconciles the flexed budget material cost and the actual material cost. Your statement should include the material price planning variances and the operational variances, including material price, material mix and material yield (12 marks).
The first thing to note is that a reconciliation statement is required. Many candidates didn't produce a statement and, while this omission was treated fairly leniently in the marking...
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