Accounting 4310

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Accounting 4310. Chapter 17 – Additional Topics in Variance Analysis. Profit Variance Analysis. Comparison of actual results to budgeted results Actual results vary based on production - PowerPoint PPT Presentation

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  • Accounting 4310Chapter 17 Additional Topics in Variance Analysis

  • Profit Variance AnalysisComparison of actual results to budgeted resultsActual results vary based on productionWhen company produces more than sold, there is no effect on the sales activity variance BUT the profit variance is affectedVariable production costs need to be adjusted

  • Profit Variance AnalysisVariable production cost variance:Actual variable cost estimated variable cost XActual units producedActual variable production costs = flexible budget variable production costs +/- variable production cost variancesCan be treated as a period cost or it can be prorated between units sold and inventory

  • Absorption costing vs. Variable CostingAbsorption costing All manufacturing costs DM, DL, Variable and fixed OH included in unit inventory costVariable costingOnly variable manufacturing costs DM, DL, Var. OH included in unit inventory costFixed OH expensed in period incurredProduction volume variance will be an adjustment when reconciling absorption and variable costing incomes

  • Direct Material Variances When Purchases Do Not Equal Use

    Price VariancePurchase price variance (when purchased)Quantity (Efficiency) Variance based on useBy computing price variance when purchased, variance is reported earlier

  • Direct Material Variances

    AP x AQ SP x AQ pur. |__________________| Price Variance SP x AQ used SP x SQ |______________| Quantity Variance

  • Marketing VariancesFor revenues, the opposite holds true.FAVORABLE: Actual > StandardUNFAVORABLE: Actual < StandardMarketing VariancesPrice variance (Difference in sales prices)Quantity variance (Difference in sales volumes)Sales mix variance (Results from selling a different proportion of products than planned)Sales volume (Difference in volume sold)

  • Marketing VariancesPrice Result of this variance lets management know how successful their price strategy wasDid they have to lower their price to sell products? Or were customers willing to pay a price premium?Person who sets prices is responsible

  • Marketing VariancesQuantity Mix details consumer preferences for products, especially when the products are substitutesFavorable (unfavorable) if consumers shift to a higher (lower) priced (CM) productMust evaluate why customers chose one product over anotherMarketing probably responsible

  • Marketing VariancesQuantity:Sales (volume) Variance:This variance tells us whether we sold more units than planned.Favorable variance results if we sold more volume than planned.Person responsible for generating demand for overall product is responsible (probably marketing)

  • Marketing VariancesAP x AQ SP x AQ SP x SQ|__________________| |_____________| Price Variance Quantity Variance|_________________________________| Total Marketing Variance

  • Sales Volume VarianceSales volume variance can be broken down into:Change in market share due to industry volume:Tells us how much of our increased (decreased) sales is due to a bigger (smaller) overall market for our productsOur managers generally cannot control the overall industry volume.Change in market share due to market share:Tells us how much of our change in profits is due to increases or decreases in our hold on the marketOur managers should be able to control this variance.

  • Marketing VariancesQuantity Variance:Sales mix variance = (Actual quantity sold quantity that would have been sold at the standard mix) x Standard CMSales quantity variance = (Quantity that would have been sold at the standard mix budgeted sales quantity) x Standard CM

  • Production Mix and Yield VariancesDirect materials or direct labor efficiency variances can be broken down into:Mix varianceArises from a change in the inputs (different materials or labor used)Standard price x (actual quantity x actual input at the standard mix)Yield varianceArises from the difference in expected results and actual results Standard price x (actual input used at the standard mix standard input allowed)

  • Variance Analysis in Nonmanufacturing IndustriesMeasures used: professional staff hours, room nights, seat miles, patient daysGoal control labor and occupancy costs per sales dollarEfficiency must have a reliable measure of output activity that is linked to inputRoutine tasks are better suited to variance analysis

  • Management of Variance AnalysisVariances will vary by company and industryImpact of variance should be highControllability of variance should be consideredManagement by exception can be practiced

  • Management of Variance AnalysisManagement by exception allows managers to focus only on those variances which are truly out of the ordinaryManagement by exception allows managers to focus on certain areasMaximizes return on managementVariance analysis should be performed often in order to make corrections as early as possible at least every month if possible

  • Uses of Variance AnalysisCalculation of variances do not explain causesVariances should be investigatedOften reasons for variances are explained beside the calculated varianceFavorable variances are not always goodUnfavorable variances are not always badIt is not good to net variancesNetting of variances may cancel out large favorable variances against large unfavorable variances

  • Three Conditions Necessary to Use Standard CostsThere must be a way to measure outputs.A predetermined standard of performance must exist.There must be an ability to use variance information as feedback to make corrections and improvements.

  • Variance Analysis Cycle

  • Limitations on StandardsDont hold people accountable for too many variances.Make sure you determine the cause of the variances; do not just mindlessly calculate them.Any variance is only as good as the standards or planned activity to which actual is compared!!!!!!Changing conditions may warrant changing the standards.Variances should always be used for feedback and continuous improvement.