CAT T2-Variances calculation

In CAT T2,students are required to be able to calculate variances and identify whether variances is favourable or adverse.Variance is basically the differences between actual result and budgeted result.Well before starting on the calculation,we need to understand a few terms first:
Fixed budget=original budget(budgeted/standard cost per unit X budgeted unit)
Flexed budget=adjusted budget to reflect what budgeted revenues and costs would have been if set at the actual level of activity,in simplier word,using budgeted/standard cost per unit X actual unit.
Actual result=actual cost per unit X actual unit
Favourable variances=good variances
adverse variances=bad variances
Total variances=actual compare with fixed budget
Price/Efficiency variances=flexed budget compare with actual
Activity variances=fixed budget compare with flexed budget

Then let's get started,you may not understand much when seeing the above terms,let me provide a simple example to make everything clear:
eg. A company budgets its material purchases cost per unit=$1,budgeted units purchases=10 units,but in actual the material purchases cost per unit=$2 and actual units purchased=20 units.

Therefore:
Fixed budget=$1/unit X 10 units=$10
Flexed budget=$1/unit X 20 units=$20
Actual=$2/unit X 20 units=$40

Total material purchases variances=$40-$10=$30(adverse) why adverse?Using common sense,our actual expenses is more than budgeted,that's why no good,as simple as that.

Price variances use flexed budget compare with actual because you see,their differences are just the cost per unit right,so to see whether the actual or budgeted price is more expensive,both of these are to be compared:
Total Price variances=$40-$20=$20(adverse) why adverse?Again use common sense,our flexed budget adjusted the fixed budget figure by using budgeted cost per unit X actual units and we used this to compare with our actual which is calculated using actual cost per unit X actual units,their differences will be cause by the differences of price,so if our actual is more than flexed budget,it means actual price is more,conclusion is no good.

Activity variances use fixed budget compare with flexed budget because their differences are just the units purchased,their cost per unit is the same,therefore to see whether the actual units purchases are more than budget or less,flexed is used rather than actual because actual result was calculated using actual cost per unit:
Total Activity variances=$20-$10=$10(adverse) why adverse again?Well common sense is quite important to help you to understand variances,when flexed budget compare with fixed budget,we are meaning that we want to find out the differences between their units purchased,because flexed budget is calculated using actual units purchased but fixed budget used budgeted units purchased,therefore if flexed budget figure is more than fixed budget figure,that means we purchased more than we budgeted,that's not good for us.

Therefore if you really understand,you can find that total variances is actually made up of activity variances and price variances,in this example:Total material purchases variances=price variances+activity variances=$20+$10=$30(same as the total material purchases variances previously calculated).

In conclusion,this paper involves a little bit of variances analysis where we analyse the variances into price and activity variances,if you can truely understand this,it will definitely help you to settle this topic and also contribute to CAT T7-Planning,control and performance management.The most important thing is to understand how it works,carefully read through this example and it will enhance your understanding.This topic is one of the most difficult topics in CAT T2,I hope this article makes you think this topic is actually easy enough. :)