Papers PI & P2 performance management: although variance analysis is not mentioned specifically in the P2 syllabus, candidates should always be prepared to apply techniques they have learnt when studying for previous papers.
| Author | Walker, Janet |
| Position | Study notes |
The calculation of sales mix contribution and sales quantity contribution variances was examined in the May 2011 PI and P2 papers. Both examiners commented in their post-exam guides that the answers to these two questions were generally poor.
Let's look at the relevant sections of the PI question in detail to see how it should have been answered and where the common errors were made in both papers. Having completed a number of calculations in the first parts of this question, students had the data in table 1 (see opposite page) available to calculate the sales mix contribution variance and the sales quantity contribution variance.
The sales mix contribution variance
This variance measures the change in the standard contribution caused by a difference in the mix of products actually sold from the budgeted mix of products. Some goods earn a higher contribution than others and, if proportionately fewer of these more profitable products are sold, the potential contribution that could be earned will be lower.
The PI examiner commented that candidates often wrongly evaluated the variances by using selling price rather than contribution. But note the full titles of the two variances: both are referred to as contribution variances and must therefore be evaluated using contribution rather than selling price. Remember that we are monitoring the change in contribution caused by a change in the mix or quantity of sales. Or, to be more precise, we're monitoring the change in the standard contribution caused by a change in the mix or quantity of sales.
The original question also provided actual unit costs and selling prices for each product. A second common error committed by exam candidates was to use the actual contribution rather than the standard contribution to evaluate the variances. This is wrong because we are monitoring the potential extra contribution (or loss of contribution) caused by a change in the mix or quantity of sales. The fact that the selling prices or costs are different from standard is monitored by the selling price variance and the various cost variances.
The first step is to calculate the standard weighted average contribution per unit of the products in the standard mix using table 2. So the standard weighted average contribution per unit is $575,400/800,000 = $0.71925. This is the average contribution per unit that should be earned if the products are sold in the standard mix.
Next we need to look at the contribution per unit...
To continue reading
Request your trialCOPYRIGHT GALE, Cengage Learning. All rights reserved.
