## **Learning Outcomes**

After reading this article, you will be able to distinguish between planning and operational variances in both price and usage, calculate and interpret these variances, and understand their significance for performance evaluation and management accountability. You will also be able to explain why separating planning from operational effects is important for fair performance appraisal and identify common exam pitfalls in this area.

## **ACCA Advanced Performance Management (APM) Syllabus**

For ACCA Advanced Performance Management (APM), you are required to understand the implications of advanced variance analysis, especially when separating planning from operational causes. This is essential for effective performance control, fair responsibility assignment, and critical exam scenarios where examiner expects deep evaluation.

- Explain and evaluate the difference between planning and operational variances for price and usage
- Identify how planning and operational variances improve accountability and fairness in performance review
- Discuss circumstances leading to large planning variances
- Analyse the effect on managerial motivation and behaviour
- Apply calculations and critical comments to exam case scenarios

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What is the primary purpose of splitting a total material usage variance into planning and operational components?
2. When should a material price planning variance be calculated?
   a) When there is an unexpected price change only  
   b) When a revised standard is set after the budget  
   c) Never in ACCA exams  
   d) Only for direct materials, not labour
3. True or false? The operational variances are always controllable by the manager.
4. A company set a material standard price at \$5/kg, but due to a sudden market shortage, the realistic price is \$7/kg. Actual purchases were at \$6.90/kg. Calculate the price planning and operational variances for 1000kg purchased.
5. List two benefits and two drawbacks of splitting variances into planning and operational elements.

## **Introduction**

In advanced performance management, variance analysis is not just about calculating numbers. It is about understanding why variances occurred and assigning accountability appropriately. Traditional variance analysis can be unfair when managers are judged for factors beyond their control. The split between planning and operational variances separates those caused by poor forecasting or environmental change from those arising from actual day-to-day operations, thus improving fairness and the effectiveness of performance management.

## **Understanding Advanced Planning and Operational Variances**

Many businesses use standard costing and variance analysis for control. Sometimes, the original standard is no longer fair or realistic due to unexpected changes in external factors. To avoid punishing managers for these uncontrollable changes, variance analysis can be split into planning and operational (sometimes called usage or price) components.

> **Key Term: planning variance**  
> The part of a total variance that results from inaccurate forecasting or flawed planning, reflecting a difference between the original and the revised standard.
>
> **Key Term: operational variance**  
> The component of a total variance that results from actual performance against the revised standard, reflecting how well managers controlled actual operations.

## **Why Split Variances?**

Separating variances into planning and operational elements allows an organisation to:

- Hold managers accountable only for those outcomes within their control (operational variance)
- Identify when standards are out of date or planning was weak (planning variance)
- Focus corrective action where it is most effective
- Encourage fairer and more accurate performance appraisals

## **How the Split Works**

The process can be illustrated using material price or usage (quantity) variances as an example. The total variance is broken into:

- A planning variance caused by using an outdated or unrealistic standard
- An operational variance caused by actual performance compared to the updated, realistic standard

The same logic applies to labour rate and efficiency variances or sales price and sales volume variances.

### Total Variance Formula

For a price variance:

- **Total Price Variance** = (Standard Price – Actual Price) × Actual Quantity

For planning/operational split:

- **Planning Variance** = (Original Standard Price – Revised Standard Price) × Actual Quantity
- **Operational Variance** = (Revised Standard Price – Actual Price) × Actual Quantity

The total variance will always equal the sum of the planning and operational variances.

## **Applying Planning and Operational Variance Analysis**

When significant unexpected events occur (such as market supply shocks, new regulations, or product design changes), management should consider revising the relevant standard. The split enables a more objective investigation of controllable versus uncontrollable elements.

### **Worked Example 1.1**

A manufacturer budgets for a material to cost \$10/kg, expecting to use 2,000 kg for a batch. Due to a regulatory ban, only a more expensive material at \$12/kg is now available. The manager negotiates a deal at \$11.80/kg and uses 2,100 kg.

**Required:** Calculate the total material price and usage variances, splitting each into planning and operational components.

> **Answer:**
>
> **Price planning variance:** (\$10 – \$12) × 2,100 = $-4,200 (Adverse)
>
> **Price operational variance:** (\$12 – \$11.80) × 2,100 = \$420 (Favourable)
>
> **Total price variance:** (\$10 – \$11.80) × 2,100 = $-3,780 (Adverse)
>
> **Usage planning variance:** (2,000 – 2,100) × \$10 = $-1,000 (Adverse)
>
> **Usage operational variance:** (2,100 – 2,100) × \$12 = \$0
>
> **Total usage variance:** (2,000 – 2,100) × \$10 = $-1,000 (Adverse)

### **Worked Example 1.2**

A food company budgeted to use 500 litres of oil per week at \$1.20/litre. An unanticipated drought increased the price to \$1.70/litre. The manager was able to secure supplies at \$1.65/litre, and used 520 litres.

**Required:** Calculate the price planning variance, price operational variance, and usage variance (use planning/operational split).

> **Answer:**
>
> Price planning variance: (\$1.20 – \$1.70) × 520 = $-260 (Adverse)
>
> Price operational variance: (\$1.70 – \$1.65) × 520 = \$26 (Favourable)
>
> Total price variance: (\$1.20 – \$1.65) × 520 = $-234 (Adverse)
>
> Usage planning variance: Not needed unless standard usage should be revised due to a real change in circumstances.

## **Benefits and Pitfalls of Planning and Operational Analysis**

### Benefits

- Managers judged fairly on what they can control
- Delivers focus for corrective action in future planning or operational control
- Encourages better standards and forecasting

### Drawbacks

- Can be misused to shift all adverse variances into planning with hindsight, leading to lack of accountability
- May demotivate if revised standards are tougher than the original after the fact
- Requires judgement to decide when a standard should be revised

### **Exam Warning**

> In the exam, always state why a variance should be split—reference uncontrollable planning errors versus controllable operational actions. Avoid labelling all variances as planning just because they are adverse; support your reasoning with facts from the scenario.

### **Revision Tip**

> Practise splitting variances with clear workings: always show both planning (budget vs new standard) and operational (new standard vs actual) steps in your calculations.

## **Summary**

Splitting operating variances into planning and operational elements provides clarity on who should be held responsible for variances. Planning variances highlight issues with forecasting or outdated standards, operational variances show how well current management has performed against realistic expectations. This approach enables more effective control, better motivation, and fairer appraisal of managers.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain the reason for splitting variances into planning and operational components
- Define planning variance and operational variance
- Calculate price and usage variances, split into planning and operational elements
- Analyse the impact of revised standards on performance appraisal and control
- Identify risks associated with the inappropriate application of variance splitting
- Apply variance splitting to scenario-based exam questions

## **Key Terms and Concepts**

- planning variance
- operational variance

Advanced operating and planning variances - Planning vs operational price and usage