Chapter 15 Fundamentals of Variance Analysis. 15-2 Learning Objectives 4.Prepare and use a profit...
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Transcript of Chapter 15 Fundamentals of Variance Analysis. 15-2 Learning Objectives 4.Prepare and use a profit...
Chapter Chapter 1515
Fundamentals of Variance Fundamentals of Variance AnalysisAnalysis
15-2
Learning ObjectivesLearning Objectives
4.Prepare and use a profit variance analysis.
2.Develop and use flexible budgets.
3.Compute and interpret the sales activity variance.
5.Compute and use variable cost variances.
1.Use budgets for performance evaluation.
6.Compute and use fixed cost variances.
7.(Appendix A) Understand how to record costs in a standard costing system.
15-3
Budgets and Performance Budgets and Performance EvaluationsEvaluations
L.O. 1 Use budgets for performance evaluation.
Budgeted income statement, production budget, budgeted cost of goods sold, and supporting budgets
Operating Budgets
Budgets of financial resources; for example, the cash budget and the budgeted balance sheet
Financial Budgets
Difference between planned result and actual outcome
Variance
15-4
Profit VariancesProfit Variances
Variance that, taken alone, increases operating profit
Favorable Variance
Variance that, taken alone, reduces operating profit
Unfavorable Variance
15-5
Budgets: An ExampleBudgets: An Example
ActualMaster Budget
Sales (units) 80,000 100,000
Sales revenue 840,000$ 1,000,000$ a
Less
Variable costs
Variable manufacturing 329,680 380,000 b
Variable selling and administrative 68,000 90,000 c
Total variable costs 397,680$ 470,000$
Contribution margin 442,320$ 530,000$ Fixed costs
Fixed manufacturing overhead 195,000 200,000 Fixed selling and administrative costs 132,320 140,000
Total fixed costs 327,320$ 340,000$
Operating profit 115,000$ 190,000$
a 100,000 units at $10.00 per unitb 100,000 units at $3.80 per unitc 100,000 units at $0.90 per unit
Bayou DivisionBudget and Actual
ResultsAugust
15-6Budgets: An Example Budgets: An Example ContinuedContinued
Actual VarianceMaster Budget
Sales (units) 80,000 20,000 U 100,000
Sales revenue 840,000$ 160,000$ U 1,000,000$
Less
Variable costs
Variable manufacturing costs 329,680 50,320 F 380,000
Variable selling and administrative 68,000 22,000 F 90,000
Total variable costs 397,680$ 72,320$ F 470,000$
Contribution margin 442,320$ 87,680$ U 530,000$ Fixed costs
Fixed manufacturing overhead 195,000 5,000 F 200,000 Fixed selling and administrative costs 132,320 7,680 F 140,000
Total fixed costs 327,320$ 12,680$ F 340,000$
Operating profit 115,000$ 75,000$ U 190,000$
Bayou DivisionBudget and Actual
ResultsAugust
15-7
Flexible BudgetingFlexible BudgetingL.O. 2 Develop and use flexible
budgets.
Budget for a single activity level; usually the master budget
Static Budget
Budget that indicates revenues, costs, and profits for different levels of activity
Flexible Budget
15-8
Sales Activity VarianceSales Activity VarianceL.O. 3 Compute and interpret the sales activity
variance.
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; also known as sales volume variance
15-9
Profit VarianceProfit VarianceL.O. 4 Prepare and use a profit variance
analysis.
Analysis of the causes of differences between budgeted profits and actual profits
Profit Variance Analysis
Sales price variance
Production cost variances
Marketing and administrative cost variances
15-10
Profit Variance AnalysisProfit Variance AnalysisBayou Division
Profit Variance AnalysisAugust
Total variance from master budget = $75,000 U
Total variance from flexible budget = $31,000 F
Actual (based on
actual activity of
80,000 units sold)
Manufacturing
Variances
Marketing and Administrative
Variances
Sales Price Variance
FlexibleBudget (based
on actual activity of
80,000 units sold)
Sales Activity
Variance
Master Budget
(based on 100,000 units planned)
Sales revenue 840,000$ 40,000$ F 800,000$ 200,000$ U 1,000,000$ Less
Variable costsVariable manufacturing cost 329,680 25,680 U 304,000 76,000 F 380,000 Variable mkt and admin costs 68,000 - 4,000 F - 72,000 18,000 F 90,000
Contribution margin 442,320$ 25,680 U 4,000 F 40,000$ F 424,000$ 106,000$ U 530,000$ Less
Fixed manufacturing costs 195,000 5,000 F 200,000 - 200,000 Fixed mkt and admin costs 132,320 - 7,680 F - 140,000 - 140,000
Profit 115,000$ 20,680$ U 11,680$ F 40,000$ F 84,000$ 106,000$ U 190,000$
Sales activity variance
15-11
Sales Price VarianceSales Price Variance
Sales Price Variance
40,000$ F
-
40,000$ F
-
40,000$ F
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
*
* From the profit variance analysis
Sales Price Variance
15-12
Variable Production CostsVariable Production Costs
Provides the quantities of each input required to produce a unit of output and the budgeted unit price for each input
Standard Cost Sheet
(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)
Direct material 4 pounds $0.55 per pound 2.20$ Direct labor 0.05 hours $20.00 per hour 1.00$ Variable overhead 0.05 hours $12.00 per hour 0.60$
Total variable manufacturing costs 3.80$
Input
15-13
Production Cost VarianceProduction Cost Variance
ActualActual Inputs at Standard Prices
Flexible Production
BudgetActual 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
AP x AQ SP x AQ SP x SQ
Total variance(1) minus 3)
Price variance (1) minus (2)
Efficiency variance (1) minus (3)
L.O. 5 Compute and use variable cost variances.
(1) (2) (3)
15-14Production Cost Variance Production Cost Variance ContinuedContinued
Price Variance
Difference between actual price and budgeted price
Multiply this difference by the actual quantity purchased
AQ AP - SP
15-15Production Cost Variance Production Cost Variance ContinuedContinued
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
15-16
Direct Materials VarianceDirect Materials VarianceFrames produced in August 80,000
Direct materials
Actual materials cost328,000 lbs @ $.60/lb $196,80
0Price varianceAQ AP - SP
328,000 $.60 - $.55
= $16,400 U
Efficiency variance SP AQ - SQ
$.55 328,000 – 320,000
= $4,400 U80,000 x 4
lbs
$16,400 U
$4,400 U
$20,800 U
Total material variance
15-17
Direct Labor VarianceDirect Labor VarianceDirect labor
Actual direct labor cost4,400 hours @
$18/hr$79,200
Price variance
4,400 $18 - $20= $8,800 F
AQ AP - SPEfficiency variance
$20 4,400 – 4,000= $8,000 U
SP AQ - SQ
80,000 x .05
Total direct labor variance
$800 F
$8,800 F $8,000 U
15-18
Variable Overhead VarianceVariable Overhead VarianceVariable overheadActual variable overhead cost $53,680
Actual overhead - Actual inputs @ standard price or POHR
Total variable overhead variance
$5,680 U
$53,680 - $12 4,400= $880 U
Price variance
= $4,800 U
Efficiency variance
$12 4,400 – 4,000
$4,800 U
$880 U
15-19
Total Variable Manufacturing Cost Total Variable Manufacturing Cost VarianceVariance
Materials
Price Efficiency
$20,800 U
16,400 U
8,000 U
$800 F 8,800 F 8,000 UDirect Labor
Variable Overhead
$5,680 U 880 U 4,800 U
$25,680 U
Total variable manufacturing cost variance
Total
15-20
Fixed Cost VarianceFixed Cost VarianceL.O. 6 Compute and use fixed cost
variances.
Spending (or budget) Variance
Price variance for fixed overhead
The difference between budgeted and actual fixed overhead
$195,000 – $200,000 = $5,000 F
15-21Production Volume Production Volume VarianceVariance
Arises because actual production differs from budgeted production.
The difference between budgeted and applied fixed overhead
$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
15-22
Chapter 15Chapter 15
Is this Favorable or Unfavorable
?