Cima P2 Exam Questions 23

Question No 23:

Explain, the importance of calculating planning and operational variances for responsibility centers.

The market size is not within the control of the sales manager and therefore variances caused by changes in the market size would be regarded as planning variances. However, variances caused by changes in the selling prices and consequently the selling price variances and market shares would be within the control of the sales manager and treated as operating variances. The market size variance compares the original and revised market sizes. This is unchanged for DVD players so the only variance that occurs relates to the Blu-ray players and is: 500 players x $95 = $47,500 F It is important to make this distinction because as can be seen from the scenario the measurement of the manager's performance is distorted if the revised market size is ignored. The favorable volume variance of $19,000 referred to in the sales manager's e-mail is made up of two elements, one of which, the market size, is a planning variance which is outside their control. It is this that has caused the overall volume variance to be favorable, and thus the manager is not responsible for the overall favorable performance