Post on 23-Dec-2015
Fundamentals of Variance Analysis
Chapter 16
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Using Budgets forPerformance Evaluation
L.O. 1 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, thecash budget and the budgeted balance sheet
• Variance:Difference between planned result and actual outcome
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Profit VarianceLO1
Bayou DivisionBudget and Actual Results
August
Sales (units)Sales revenueLess: Variable costs
Variable mfg. costsVariable selling and administrative
Total variable costsContribution marginFixed costs:
Fixed manufacturing overheadFixed selling and administrative costs
Total fixed costsProfit
80,000$840,000
329,680 68,000$397,680$442,320
195,500 132,320$327,820$114,500
20,000 U$160,000 U
50,320 F 22,000 F$ 72,320 F$ 87,680 U
4,500 F 7,680 F$ 12,180 F$ 75,500 U
100,000a
$1,000,000
380,000b
90,000c
$ 470,000$ 530,000
200,000 140,000$ 340,000$ 190,000
Actual VarianceMasterBudget
a $10.00 per unit b $3.80 per unit c $0.90 per unit
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Flexible Budgeting
L.O. 2 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
L.O. 3 Compute and interpret the sales activity variance.
• Sales activity 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 Analysis
L.O. 4 Prepare and use a profit variance analysis.
• Profit variance analysis:Analysis of the causes of differences betweenbudgeted 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
Sales (units)Sales revenueLess: Variable costs
Variable manufacturing costsa
Variable selling and administrativeContribution marginFixed costs:
Fixed manufacturing overheadFixed selling and administrative costs
Profit
$25,680 U $25.680 U
4,500 F $21,180 U
Mfg.Variances
$ 4,000 F$ 4,000 F
7,680 F$11,680 F
Marketingand Admin.VariancesActual
80,000$840,000
329,680 68,000$442,320
195,500 132,320$114,500
$40,000 F
$40,000 F
$40,000 F
SalesPrice
Variance
80,000$800,000
304,000 72,000$424,000
200,000 140,000$ 84,000
FlexibleBudget
$200,000 U
76,000 F 18,000 F$106,000 U
-0- -0-
$106,000 U
SalesActivityVariance
100,000$1,000,000
380,000 90,000$ 530,000
200,000 140,000$ 190,000
MasterBudget
Bayou DivisionProfit Variance Analysis
August
Total variance from flexiblebudget = $30,500 F
Total variance from master budget = $75,500 U
LO4
a The $25,680 manufacturing variance is explained in detail in L.O. 5.
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Variable Production CostsLO4
• Standard cost sheet:A form providing the standard quantities ofeach input required to produce a unit ofoutput and the standard price for each input.
Direct materialDirect laborVariable overheadTotal variable manufacturing costs
4 pounds0.05 hours0.05 hours
$0.55 per pound$20 per hour$12 per hour
$2.20 1.00 0.60$3.80
StandardQuantity of Input
per Unit of Output
Standard InputPrice or Rate
per Unit of Input
Standard Costper Unit of
Output (frame)
Bayou DivisionStandard Cost Sheet – Variable Manufacturing Costs
August
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Variable Cost Variance AnalysisL.O. 5 Compute and use variable cost variances.
(1)
Actual
(AP × AQ)
(2)Actual Inputs atStandard Prices
(SP × AQ)
(3)Flexible Production
Budget
(SP × SQ)
Total variance(1) – (3)
Actual input price (AP)times actual quantity
(AQ) of input
Standard input price (SP)times actual quantity
(AQ) of input
Standard input price (SP)times standard quantity(SQ) of input allowed for
actual good output
Price variance(1) – (2)
Efficiency variance(2) – (3)
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Direct Materials VarianceLO5
(1)
Actual
(2)Actual Inputs atStandard Prices
(3)Flexible Production
Budget
Actual materials price(AP = $0.60)
× Actual quantity(AQ = 328,000 pounds)
of direct materials
Standard materials price(SP = $0.55)
× Actual quantity(AQ = 328,000 pounds)
of direct materials
Standard materials price(SP = $0.55)
× Standard quantity(SQ = 320,000 pounds)
of direct materialsallowed for actual output
AP × AQ = $196,800 SP × AQ = $180,400 SP × SQ = $176,000
Total variance= $16,400 + $4,400 = $20,800 U
Price variance$196,800 – $180,400
= $16,400 U
Efficiency variance$180,400 – $176,000
= $4,400 U
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Direct Labor VarianceLO5
(1)
Actual
(2)Actual Inputs atStandard Prices
(3)Flexible Production
Budget
Actual labor price(AP = $18)
× Actual quantity(AQ = 4,400 hours)
of direct labor
Standard labor price(SP = $20)
× Actual quantity(AQ = 4,400 hours)
of direct labor
Standard labor price(SP = $20)
× Standard quantity(SQ = 4,000 hours)
of direct laborallowed for actual output
AP × AQ = $79,200 SP × AQ = $88,000 SP × SQ = $80,000
Total variance= $8,800 – $8,000 = $800 F
Price variance$79,200 – $88,000
= $8,800 F
Efficiency variance$88,000 – $80,000
= $8,000 U
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Variable Overhead VarianceLO5
(1)
Actual
(2)Actual Inputs atStandard Prices
(3)Flexible Production
Budget
Sum of actualvariable
manufacturingoverhead costs
Standard variableoverhead price
(SP = $12)× Actual quantity
(AQ = 4,400 hours)of the overhead base
Standard variableoverhead price (SP = $12)
× Standard quantity(SQ = 4,000 hours)
of the overhead base allowedfor actual output produced
AP × AQ = $53,680 SP × AQ = $52,800 SP × SQ = $48,000
Total variance= $880 + $4,800 = $5,680 U
Price variance$53,680– $52,800
= $880 U
Efficiency variance$52,800– $48,000
= $4,800 U
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Variable ManufacturingCost Variance Summary
LO5
Direct materialsDirect laborVariable overheadTotal variable manufacturing
cost variance
$16,400 U$ 8,800 F$ 880 U
$4,400 U$8,000 U$4,800 U
$20,800 U$ 800 F$ 5,680 U
$25,680 U
Price Efficiency Total
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Fixed Cost VariancesL.O. 6 Compute and use fixed cost variances.
• Spending (or budget) variance
• Price variance for fixed overhead
• The difference between budgetedand actual fixed overhead
• $195,500 actual – $200,000 budget = $4,500 F
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Fixed Cost VariancesLO6
• The difference between budgeted andapplied fixed overhead
• Variance that arises because the volumeused to apply fixed overhead differs fromthe estimated volume used to estimatefixed 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 × $2 per unit = $160,000 applied
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Appendix: Recording Costsin a Standard Cost SystemL.O. 7 (Appendix) Understand how to record
costs in a standard costing system.
• Work-in-process inventory is debited when directmaterials and direct labor are used at standard.
• Work-in-process inventory is debited whenmanufacturing overhead is applied at standard.
• When the units are finished, work-in-processinventory is credited and finished goodsinventory is debited.
• Variances are usually closed to cost of goods sold.
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