Financial Performance Q & A with Jeff Grimston from Premier Training

Natasha Everard I would like to know why variances seem to cause everyone so much trouble?

Natasha Everard Jeff Grimston

Rosalyn Carrington Variances and written questions

Katie Lowen Bookkeeper Hi, I’m working with variances on budgeting at the moment. I feel like I’ve finally got it and then it just mashes up in my head again.

Natasha Everard Overhead variances seem to be another area for confusion.

Jeff Grimston Focus on meanings and the methods become self-explanatory

Jeff Grimston With overheads only three things can change:

Jeff Grimston 1) The amount we spend

Jeff Grimston 2) The amount we produce

Jeff Grimston 3) How many hours we work

Jeff Grimston We have notes to simplify these – say if you’d like a copy

Rosalyn Carrington Notes please

Chris Strubin notes please

Jeff Grimston If we buy 500 units at a price of £5.00 but standard price is £4.90 the price variance is 500 x 10p The material cost variance is also affected by the difference between the amount we should have used and the amount we actually used

Jeff Grimston If we should use 600 kgs @ 7.00 but we use 550 kgs for the same amount of output as expected this is a favourable usage variance of 50kgs x 7.00 = £350

Katie Lowen Bookkeeper So the price is the difference in price x actual production

Jeff Grimston Difference in price x actual material used

Jeff Grimston The price variance is not affected by what you actually do with the material bought!

Jeff Grimston When we compare how much material is used against how much we should have used to make this much product this is the usage variance (amount is multiplied by standard cost per kg)

Jeff Grimston If to make 100 units we should need 200kgs @ £4 = £800 and we actually spend £850 to make 100 units this is a total material cost variance of £50

Jeff Grimston It can be caused by differences in price paid and amount used and is the combination of these two

Katie Lowen Bookkeeper Ok, thank you Jeff. I’m going to note down your examples and study them again

Jeff Grimston You’re welcome!

Katie Lowen Bookkeeper I guess the notes you refer to are those you send me the other day

Natasha Everard Does ABC Costing appear in the assessment?

Jeff Grimston It has in the past

Jeff Grimston usually in FP

Natasha Everard What are the main points to remember when completing the written sections?

Jeff Grimston Read the scenario carefully and try to picture it as a real business with real products

Jeff Grimston Jot down obvious points in rough and don’t leave out anything that seems too obvious such as as ‘sales have increased’

Jeff Grimston There may well be set marks for such obvious items

Jeff Grimston Put your points in order and write them up concisely but use proper sentences

Jeff Grimston You’ll think of ‘cleverer’ points as you go along

Jeff Grimston Ultimately the answers to questions in these units are actually quite straightforward but it’s the reading of the questions that is the difficult part

Jeff Grimston ‘How many hours should it take to produce this many units?

Jeff Grimston How many hours did it actually take?

Rita Lees Hi Im currently studying Budgeting (my first level 4 unit) and I have financial performance next – I know elements of budgeting and level 3 costs and revenues are covered in financial performance – can you name any topics in financial performance that will be new to me that you think I might find hard to get to grips with or that commonly others find hard (Ive really struggled with indexing)

Jeff Grimston Multiply by standard hourly rate = efficiency variance

Jeff Grimston At level 4 we go deeper into fixed overhead variances

Jeff Grimston measuring quality is totally new

Jeff Grimston There are new ratios to learn

Jeff Grimston The topics we all find difficult are the ones that seem academic rather than practical

Jeff Grimston In every case if you can see behind the words and figures to what it is you’re trying to achieve it becomes straightforward

Jeff Grimston For indexation think of house prices

Jeff Grimston if you want to compare a house price today with one of 30 years ago you have to adjust to compensate for different wage levels

Jeff Grimston That;s what an index does

Jeff Grimston So if a house is ten times the price but wages are five times as high we can say that houses are really only twice as expensive as 30 years ago

Jeff Grimston That’s the underlying logic

Katie Lowen Bookkeeper All sounds fairly logical when you put a physical item like a house in the scenario

Jeff Grimston Precisely!!!

Jeff Grimston Katie has identified the key point

Katie Lowen Bookkeeper My daughter found it a lot easier to learn fractions when we talked about it being a cake. Maybe i need to have a fictional product

Jeff Grimston The more you can picture it as ‘real’ the more your natural common sense will kick in and work it out for you

Jeff Grimston A well written scenario should always involve a believable product or service

Jeff Grimston Mmmm… cake

Jeff Grimston Now everyone is distracted by the thought of cake 🙂

Jeff Grimston The key words with variances are ‘should’ and ‘did’

Natasha Everard Does anyone have any further questions?

Jeff Grimston This much product should require this much material but did need …

Jeff Grimston This much material should cost …

Jeff Grimston This amount of production should need this many hours …

Jeff Grimston and so on

Jeff Grimston Is there any cake in your office Natasha?

Natasha Everard Nope sorry 🙁

Jeff Grimston This pair of curtains should use this many meters … and this many metres should cost … etc

Jeff Grimston Anyone wanting notes please make sure we have your email address

Katie Lowen Bookkeeper This cake needs this much flour .. And this much flour should cost …

Jeff Grimston exactly difference in amount of flour x std price = usage, difference between four used x std price and actual price paid is price

Jeff Grimston flour not four

Katie Lowen Bookkeeper I think I’ve frightened everyone off with variances 🙁

Jeff Grimston No – they’ve all gone to make tea and eat cake 🙂

Suzanna Rich I can make lemon drizzle cake

Katie Lowen Bookkeeper Cake v variances – no contest

Jeff Grimston Please send cake samples to …

Suzanna Rich On a serious note thanks so much doing this Jeff, definitely should be repeated !

Jeff Grimston Glad it’s been useful

Katie Lowen Bookkeeper Yes thank you Jeff. Speak soon

Natasha Everard Okay does anyone have any further question? If not, i would like to thank Jeff for his time this evening and everyone who has participated in the event 🙂

Rita Lees Thank you Jeff Grimston

Jeff Grimston You’re welcome

Rose Crockett Well done everyone 👍