Hello, my name is Jo Ryan, a subject specialist from BPP
and I'm here today to give you some guidance on how to deal with variances
in your F5 examination.
The syllabus areas that we'll be focusing on are D2, 3, 4 and 5.
To give you overview then, we'll be looking at the style of questions
and how best to approach them
during your exam.
The F5 exam builds on knowledge that you will have gained
from your FMA examination
but what we have to realise then is what the examiner is looking for here
is very different in terms of style and technique.
The time of 'rote learning' has passed and we're looking here for some application
towards how the business is performing,
thinking about the fact
that we are appraising the company's performance
and thinking about how it's being managed.
The additional syllabus areas that you will need to be aware of for variances
are to do with material mix and yield variances,
thinking about sales mix and quantity variances;
also thinking about breaking it down into planning and operational variances
as well as being asked to prepare full operating statements
and either marginal costing
or absorption costing.
So previously then you may be used to just calculating one variance for two marks;
here you could be asked to pull together the whole operating statement
and you will need to have remembered the pro forma
and think about the approach and the layout as well as the content of your answer.
Something else which is very critical at F5 is the interdependence of variances.
So thinking about discursive elements as well as actually being able
to perform the calculations.
Undertaking a review then of five exams
that were sat from June 2009 to June 2011 -
all five of those contained a twenty mark question on variances
so it's an absolutely critical topic area
for students about to embark on this paper.
You need to be prepared for discursive elements as well as the calculations.
In these papers then twenty five percent to forty percent of the marks awarded
were for discussion
so it's not enough to just be prepared for the calculations
and I cannot emphasise enough how important it is
to practise the discussion parts of questions
as part of your revision phase
as well as those calculations.
So we need to be prepared to think about
why things are important, we need to be able to discuss the performance,
we need to be able to look at the standards that are being used
and possibly to critique what exists in the scenario.
So if we're thinking then about how the business has performed in our
Performance Management paper
and we can use variances to help us,
we might want to think about using
a real question,
so I'm going to talk you through 'Crumbly Cakes,'
a question which occurred
in the June 209 examination.
The examiner here has said that the calculations were well undertaken
but students struggled with part A.
Here then we've got the information from the scenario and I've highlighted
some of the key points
which I'm going to talk you through now
and think about the processes that should have been going through your mind
as you were preparing for this question.
This is something that could have been undertaken during the reading time
of the exams so you could have got your thoughts well-organised
before the exam actually started
to give you a head start over the other students.
So first of all then
I like to know what it is that the company is about
so that I can get the idea and get in the mindset of the company straight away.
So, 'Crumbly Cakes' are making cakes directly sold to the public.
We're told that the production manager is looking at using organic ingredients
in the cake production
and we're not expected to know they're more expensive, we're given that information
and we're told that these organic ingredients
lead to improved flavour
and health benefits to the customer.
All of this is the background information
and it's important to bear this in mind as we're reading through the rest of the scenario.
Here then - and this is very important - it's a responsibility-based
standard costing system
and the managers only get a bonus when
favourable net variances
are allocated to them.
We're given information then about the fact that this change starts in March
in production
but we don't make any changes to the standard costs
so the variances that have been calculated for us
are based on the old costs, which include
the non-organic ingredients.
We're given the information then, and the actual variances.
I've put a yellow box around those because I wouldn't actually get too bogged down
in the detail of these
until I was ready to start writing my answer.
Obviously I'm reading this out loud and I've slowed it down
but during the exam
you need to be reading and digesting the information quickly.
The production manager then is upset that he's lost all hope of a bonus
under the system
and yet the sales manager thinks that it's excellent,
and we're also told they have no inventory.
So if we have a look at the detailed requirement
we're being asked to assess the performance of the production manager and the sales manager
and indicate whether the current bonus scheme is fair to those concerned.
So what we've got here then
are two things that we need to do:
assess the performance of both
the production manager
and the sales manager
but also need to make some kind of comment on whether the
bonus system is fair,
and I think it's a good idea to get it very clear in our heads before we start
writing
what it is that we want to do.
What we need to think about then when we're actually answering this question
in terms of ideas,
is that we've got seven marks available here
and so it's indication we need to be coming up with
about seven well-explained points.
We need to recognise that the move towards organic ingredients is a fundamental
change in the business
and the nature of the company.
Before then - and it's important to look at the before as well as the after -
the production manager had albeit very small but favorable variances
and therefore would have been getting a bonus.
The move towards the organic ingredients
was his idea
and yet it's going to leave him with overall adverse variances.
Material price is adverse because we are told that the organic ingredients
are more expensive
and the mix is also adverse
and although we've got a very slightly favorable yield so we're getting
a little bit more out of the process
it's not enough to compensate for those
very high additional costs for the organic ingredients.
So the organic food is leading to adverse variances for the
production manager.
However, if we think about the business as a whole
sales have gone up as represented by the very favorable variances that
the sales manager is experiencing.
So in February they were adverse sales variances for him and no bonus
whereas in March
these variances
are favorable in terms of the number sold
and also
the price of those.
What we see then is that the sales manager has been involved in actually
pushing these organic things
and so will have had to be
involved in the selling process
and so can take some of the claim for responsibility
but it was the production manager's idea and
therefore he should take some of the credit too.
What we see here then is that the company needs to change some of the
standards, and also
needs to think about changing the bonus system
to make it fairer.
Having looked at that question then
we can see that the discussion elements are really important
and need to be properly planned
before we start writing
so that you're clear in your head
of what the structure of your answer's going to be
and also the content of it.
I've pulled some of the key points out to remember here
and something that the examiner is very keen on
is that adverse variances are not always bad
and conversely
favourable variances aren't always good news.
So in the overall case of 'Crumbly Cakes,'
the choosing to use the organic ingredients
was a good idea.
However
it led to an adverse material price variance
which we might initially think is bad news, but when we looked at it
in the overall context we saw that for the company overall
it was the right decision in terms of sales volumes and sales revenues.
That brings me on to my next point then:
variances shouldn't be viewed in isolation.
We need to think about
all of the variances and what the overall picture is that they show.
In addition to that
you might need to look at trends over time in different questions
and you might also need to be thinking about when it would be appropriate to
investigate
and when it wouldn't be.
The other thing to remember is that the performance management systems are
not perfect,
so just because a company has a system in place
doesn't necessarily mean
that it is the best way to appraise their staff
and allocate rewards.
So thinking about motivation
and thinking about the importance that it has on behavioral implications
for employees is also very important.
Also you need to think about the appropriateness of the standards used.
In the case of the last question
using
the standards for non-organic ingredients when we are making organic cakes
clearly made the appraisal system
much less useful
because we're not using like with like to make our comparisons.
So how should we approach our questions then?
Well we've seen that we need to establish the context
and get the ideas buzzing around in our head
about what the company does
and we also need to underline our key verbs and key requirements to make sure
that we are clear what requirements there are within a sub-requirement.
We also need to allocate our time
not just to the individual questions but to the sub-parts of the questions.
We can use 1.8 minutes per mark as a guide to how long we need
to spend thinking about it
and planning it as well as writing it
but also as a guide for the volume of work required.
If something is going to take you thirty minutes
the examiner's not going to give you two marks for it,
so if you're approaching a two mark requirement and spending ages on it
then you need to be moving on
and you've perhaps got the wrong idea.
Also decide on the order - play to your strengths first.
You don't have to do part A first,
you can do part B.
When you review 'Crumbly Cakes,' which I suggest you do,
you'll see that part B was asking you to calculate some variances and you may have
felt more comfortable doing the calculations first and as long as you
make sure that you leave yourself sufficient time
to approach part A afterwards
then you could have done it in that way.
Also make sure that your answer
refers back to the scenario.
So in this case thinking about cakes, thinking about using words like 'eating.'
If we're looking at a hospital for example
we wouldn't talk about customers, we would talk about patients -
just little things that you can put into your answer
to give them style
and to impress the marker.
What we should ask ourselves then, if I were in the manager's shoes
would comments make sense to me?
so do they relate back to the scenario enough.
It's not sufficient to just rote learn things from a text book -
at this level you need to be making sure that you apply them.
The next thing I want to think about is why you're calculating these variances,
what's the purpose of them, what is it that you're trying to achieve?
And I'm going to use a question from June 2010's exam to help
with this:
'Sticky Wicket.'
So here we've got part B
and this time we're going to look at how to approach the calculations side
of the question.
So I've underlined the requirement here:
calculate the material,
labour
and sales variances from May 2000
and x zero
in as much detail as the information allows.
Phrases like
'as much detail as the information allows' throw people
because they don't like not being told what exactly it is that the examiner wants.
So how could you have known what to do?
Well in this case you could think about the type of company - this company makes
cricket bats
and you could think about what it is that you want a
material variance for.
We want to know whether you paid more for your materials
or whether you used them efficiently.
So thinking about what it is that they're showing will also help.
Another tick which would have helped with this question
is by using the rest of the question, and this part
came first before requirement A,
we've given a variance report then for the month of April
and we're given there a list of five variances.
So we could use those as a starting point for our answer to part B.
So giving you some structure
for your answer to part B
to work out which variances you could calculate.
And rather than being asked to calculate total variances
which is much information so we need to break those down
into price and usage for materials.
In labour,
the biggest hint that we needed to calculate the idle time variance was the
fact that we had one
in April
and we're given information
about idle time in this scenario.
When it came to calculating our sales variances then
the question I'm often asked is, how do you know
whether to calculate
your sales volume variance
under absorption costing or marginal costing?
And again here the answer is in the scenario.
So it uses a standard costing system based on marginal costs
so you would need to use marginal costing.
Once decided what you wanted to do
calculating the variances then
would have been quite straightforward
and hopefully would have generated you a good number if marks if you were well-prepared.
In previous Examiner's Reports
they have commented
that it's naive of students to go into the exam not knowing the basic variances
because if these are tested
they're a good opportunity for the well-prepared candidate
to score well.
It might be that you don't get the basic variances though - you might have to
calculate some of those mix and yield variances
like you did in 'Crumbly Cakes.' If that's the case you need to make sure that you're happy
with the
techniques required to do so.
If you would like some more practice
some good questions to try from past papers
are listed here for you.
So from December 2010 there was the question 'Carad,'
which was looking at planning and operational variances.
This is one where you were given the answers, the totals,
and you had to break them down.
This can be a blessing but it can also be a
distraction.
If you don't get it to reconcile back to the answers that you've got
but you think you've made your best stab at the technique, and you've run out of time, move on.
There's no point in chasing marks that you don't know how to get when you've got
other parts of the paper unattempted.
Question 2 from June 2010,
was 'Sticky Wicket,' which we've already looked at a little bit.
It had those basic variances for thirteen marks
but there were also seven marks available for discussion
of performance which you may like to look at.
From December 2009 there was 'Secure Net,'
which was looking at planning and operational variances as well as the
usual discussion
and then question three that we'd seen part A of, the discussion,
but there are also some mix and yield variances there for you to calculate.
If you want to know more, there are some articles that you might find useful to read
in the archives of the Student Accountant magazine available from the ACCA website
from April 2011.
There's an article on materials mix and yield variances,
information about calculating those variances;
there's also an article written by the old examiner Geoff Cauldwell
about measuring planning variances
and it outlines the approach that he recommends to dealing with planning and operational
variances.
Finally there's an article about how to approach
and impress the examiner
when faced with variance questions in the exam that you may also find useful.
I hope that you found this presentation useful
and I would recommend that you do lots of question practice on this key area.
I would like to wish you good luck in your examination.