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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End of Chapter 16

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin