Explain the meaning of the variances

Introduction

Variance is the dissimilarity between a planned, budgeted, or standard cost and the definite amount incurred. The computed variance can stand for both revenue and costs. The variance aid the company in comparing their planned and the actual outcomes and the effect of the two on the performance of the firm. Further, the variance can result to either favorable or adverse variance. A favorable variance is attained when the actual performance is enhanced than projected results. An adverse/unfavorable variance occurs when the actual results are worse than the estimated results. This paper will explain the meaning of price, volume, and mix variances. The paper will consider revenues and how things turn out for the group considering aspects such as profit.

Price Variance

It is the dissimilarity between the real price that is paid by an enterprise to acquire an item and its average price, the difference is multiplied by the number of units acquired. If the result is positive, it means that the actual costs have amplified over its standard price (Davis, M. et al. 2014). Nevertheless, if the results of the variance are negative it means that the real costs have lessened over its standard price. The price variance in cost accounting occurs when a firm is preparing its annual budget for the subsequent year.

Standard price in this case is the price that the enterprise thinks that it should pay for the item that is an input for their services or product. According to Finkler, Steven A. et al. (2012), the price is usually determined months prior to the actual time of purchasing the items. Therefore, the price variance arises when the actual price at the purchase period is higher or lower that the standard price determined in the planning stage of the firm’s yearly budget. The price variance can occur in case there is change in the quantity of units required to be acquired. In our calculation in the excel sheet, the treatment of Flu Patients had unfavorable variance of about ($ 14,000).

Volume Variance

It is the dissimilarity between the total planned overhead costs and the real amount of overhead that is allocated to manufacturing processes by use of the fixed overhead rate as a result of the difference in the actual and budgeted volume of production. The variance is as a result of the variation between projected and budgeted manufacturing schedule. Further, there is a volume variance that results from the difference between budgeted and actual sales units. The possible reasons for disparaging sales volume variance comprise stiff competition from the outsiders or other competing product of the company, poor quality of products, improbable budgeted sales units, and higher sales price variance.

Mix Variance

The mix variance can occur when there is a difference in the quantity of client’s purchases of each product or services matched to the magnitudes that a business is anticipated to sell. The sales mix variance equates the real mix of sales to the budgeted mix (Finkler, Steven, A. et al. (2012). It measures the change in profit that is attributed to the disparity in the proportion of the diverse goods from standard mix. The metric is used for scrutinizing the firm’s effectiveness since some services and merchandize have advanced profit margin equated to others.

The reasons for favorable mix variance may include the surge in demand for profitable products than anticipated. Second, the decrease in the production of high margin produces due to supply side limiting aspects such as shortage of labor and raw materials. Third, upsurge in supply and demand of less lucrative products. Lastly, the sales team may not focus on selling produce that have higher margins due to lack of consciousness or skewed performance inducements. There is also material mix variance. In an organization, there is much time and money spent to establish the meticulous mix of materials. The best mix of resources is those that balance the cost of all the materials with the generated yield. The final product should reach certain quality standards.

Conclusion

Variance is described as the dissimilarity between a planned, budgeted, or standard cost and the definite amount earned. This paper has examined the meaning of price, volume, and mix variances. It has explored that the computed variance can stand for both revenue and costs. The variance aid the company in comparing their planned and the actual consequences and the effect of the two on the conduct of the firm. Additional, the variance can result to either favorable or adverse variance. A favorable variance is achieved when the actual performance is enriched than estimated results. The paper concludes that an adverse/unfavorable variance ensues when the actual outcomes are worse than the expected results. The overall project was profitable as only price variance for Flu Patients was unfavorable.

References

Davis, M., Obłój, J., & Raval, V. (2014). Arbitrage bounds for prices of weighted variance swaps. Mathematical Finance, 24(4), 821-854.

Finkler, Steven A., Thad Calabrese, Robert Purtell, Daniel Smith. Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Edition. Pearson Learning Solutions, 2012-06-01. VitalBook file.

Explain the meaning of the variances