Fundamentals of Variance Analysis
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Chapter 16
Learning Objectives:
1. Use budgets for performance evaluation.
2. Develop and use flexible budgets.
3. Compute and interpret the sales activity variance.
4. Prepare and use a profit variance analysis.
5. Compute and use variable cost variances.
6. Compute and use fixed cost variances.
7. (Appendix 16A) Understand how to record costs in a
standard costing system.
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Budgets and Performance Evaluations
LO1
Use budgets for performance evaluation.
Operating Budgets
Budgeted income statement, production budget,
budgeted cost of goods sold, and supporting
budgets
Financial Budgets
Budgets of financial resources; for example, the cash
budget and the budgeted balance sheet
Variance
Difference between planned result and actual
outcome
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Profit Variances
Favorable Variance
Variance that, taken
alone, increases
operating profit
Unfavorable Variance
Variance that, taken
alone, reduces
operating profit
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Example: Budgets
Bayou Division
Budget and Actual Results
August
Master
Actual
Sales (units)
Sales revenue
Budget
80,000
100,000
$ 840,000
$ 1,000,000
a
329,680
380,000
b
68,000
90,000
c
Less
Variable costs
Variable manufacturing
Variable selling and administrative
Total variable costs
Contribution margin
$ 397,680
$
470,000
$ 442,320
$
530,000
Fixed costs
Fixed manufacturing overhead
195,500
200,000
Fixed selling and administrative costs
132,320
140,000
Total fixed costs
Operating profit
a
100,000 units at $10.00 per unit
b
100,000 units at $3.80 per unit
c
100,000 units at $0.90 per unit
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$ 327,820
$
340,000
$ 114,500
$
190,000
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Example: Budgets, Continued. . .
Bayou Division
Budget and Actual Results
August
Master
Actual
Sales (units)
Sales revenue
Variance
Budget
80,000
20,000
U
100,000
$ 840,000
$ 160,000
U
$ 1,000,000
329,680
50,320
F
380,000
68,000
22,000
F
90,000
Less
Variable costs
Variable manufacturing costs
Variable selling and administrative
Total variable costs
Contribution margin
$ 397,680
$
72,320
F
$
470,000
$ 442,320
$
87,680
U
$
530,000
Fixed costs
Fixed manufacturing overhead
195,500
4,500
F
200,000
Fixed selling and administrative costs
132,320
7,680
F
140,000
Total fixed costs
Operating profit
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$ 327,820
$
12,180
F
$
340,000
$ 114,500
$
75,500
U
$
190,000
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Flexible Budgeting
LO2 Develop and use flexible budgets.
Static Budget
Budget for a single
activity level; usually
the master budget
Flexible Budget
Budget that indicates
revenues, costs, and
profits for different
levels of activity
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Sales Activity Variance
LO3 Compute and interpret the sales activity variance.
Sales volume variance:
The difference between operating profit in
the master budget and operating profit in
the flexible budget that arises because the
actual number of units sold is different from
the budgeted number.
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Profit Variance
LO4 Prepare and use a profit variance analysis.
Profit Variance Analysis
Analysis of the causes of differences between
budgeted profits and the actual profits
earned.
Sales price variance
Fixed production cost variances
Variable production cost variances
Marketing and administrative cost variances
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Profit Variance Analysis
Bayou Division
Profit Variance Analysis
August
Actual
Flexible
(based on
Budget (based
actual
on actual
activity of
Sales revenue
Marketing and
activity of
Master Budget
80,000 units
Manufacturing
Administrative
Sales Price
80,000 units
Sales Activity
(based on 100,000
sold)
Variances
Variances
Variance
sold)
Variance
units planned)
$
840,000
$
40,000
F
$
800,000
$
200,000
U
304,000
76,000
F
72,000
18,000
F
106,000
U
$
1,000,000
Less
Variable costs
Variable manufacturing cost
329,680
Variable sell & admin costs
Contribution margin
25,680
U
68,000
$
442,320
25,680
U
Fixed manufacturing costs
195,500
4,500
F
Fixed sell and admin costs
132,320
4,000
F
4,000
F
7,680
F
11,680
F
$
40,000
F
$
424,000
$
380,000
90,000
$
530,000
Less
Profit
$
114,500
$
21,180
U
$
$
40,000
F
Total variance from flexible
budget = $30,500 F
$
200,000
-0-
200,000
140,000
-0-
140,000
84,000
$
106,000
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$
Sales activity
variance
Total variance from master
budget = $75,500 U
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U
190,000
Sales Price Variance
Sales Price *
Variance
$
40,000
F
$
40,000
F
$
40,000
Sales Price Variance
Difference between the actual
selling price and budgeted selling
price multiplied by the actual
number of units sold.
($10.50 - $10) x 80,000 units = $40,000 F
F
* From the profit
variance analysis
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Variable Production Cost Variances
Standard Cost Sheet
A form providing the standard quantities of
each input required to produce a unit of
output and the standard price for each input.
Input
Direct material
Direct labor
Variable overhead
(1)
Standard
Quantify of Input
per Unit of Output
(2)
Standard Input
Price or Rate
per Unit of Input
(3)
Standard Cost per
Unit of Output
(frame)
4 pounds
0.05 hours
0.05 hours
$0.55 per pound
$20.00 per hour
$12.00 per hour
$
$
$
2.20
1.00
0.60
$
3.80
Total variable manufacturing costs
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Production Cost Variance
LO5 Compute and use variable cost variances.
Actual
Actual Inputs at
Standard Prices
Actual input price (AP)
times actual quantity
(AQ) of input
Standard input price
(SP) times actual
quantity (AQ) of input
(1)
(2)
AP x AQ
SP x AQ
Price variance
(1) minus (2)
Standard input price
(SP) times standard
quantity (SQ) of input
allowed for actual
good output
(3)
SP x SQ
Efficiency variance
(2) minus (3)
Total variance
(1) minus (3)
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Flexible Production
Budget
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Production Cost Variance, Continued. . .
Price Variance
Difference between actual price
and budgeted price
Multiply this difference
by the actual quantity
purchased
AP - SP AQ
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Production Cost Variance, Continued. . .
Efficiency Variance
Difference between the actual quantity
used and the budgeted quantity for the
actual level of activity.
Multiply this difference
by the budgeted
price per unit.
SP AQ - SQ
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Direct Materials Variance
Frames produced in August
80,000
Direct materials
Actual materials cost
328,000 lbs @ $0.60/lb
$196,800
Efficiency variance
Price variance
SP AQ - SQ
AQ AP - SP
328,000 $.60 - $.55 = $16,400 U
$.55 328,000 – 320,000 = $4,400 U
80,000 x 4 lbs
$16,400 U
$4,400 U
Total material variance
$20,800 U
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Direct Labor Variance
Direct labor
Actual direct labor cost
4,400 hours @ $18/hr
Price variance
AQ AP - SP
4,400 $18 - $20
= $8,800 F
$79,200
Efficiency variance
SP AQ - SQ
$20 4,400 – 4,000
= $8,000 U
80,000 x 0.05
$8,000 U
$8,800 F
Total direct labor variance
$800 F
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Variable Overhead Variance
Variable overhead
Actual variable overhead cost
$53,680
Actual inputs @ standard
- price or POHR
Actual overhead
Price variance
$53,680 - $12 4,400
= $880 U
Efficiency variance
$12 4,400 – 4,000
= $4,800 U
$880 U
$4,800 U
Total variable overhead variance
$5,680 U
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Total Variable Manufacturing Cost Variance
Direct
Materials
Direct
Labor
Variable
Overhead
Total variable
manufacturing
cost variance
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Total
Price
$20,800 U
16,400 U
4,400 U
$800 F
8,800 F
8,000 U
$5,680 U
880 U
4,800 U
$25,680 U
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Efficiency
Fixed Cost Variance
LO6 Compute and use fixed cost variances.
Spending (or budget) Variance
Price variance for fixed overhead
The difference between budgeted and
actual fixed overhead
$195,500 – $200,000 = $4,500 F
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Production Volume Variance
The difference
between
budgeted and
applied fixed
overhead
Variance that arises because
the volume used to apply
fixed overhead differs from the
estimated volume used to
estimate fixed cost per unit.
$200,000 budget – $160,000 applied = $40,000 U
$200,000 budget
100,000 budgeted units
= 2 per unit
80,000 units x $2 = $160,000 applied
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Chapter 16: END!
McGraw-Hill/Irwin
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Companies, Inc. All rights reserved.