St Chap016

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Fundamentals of Variance

Analysis

Chapter 16

Copyright © 2011 by The McGraw-Hill Companies, Inc. ll rights reser!e". McGraw-Hill#Irwin

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Using Budgets for

Performance 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 Variance

LO

1

Bayou DiisionBudget and !ctual "esults

!ugust

#ales $units%

#ales reenue&ess: Variable costsVariable mfg' costsVariable selling and administratie

(otal ariable costs)ontribution margin

Fixed costs:Fixed manufacturing oerheadFixed selling and administratie costs

(otal fixed costs*rofit

+,

-+.,

/01,2+ 2+,-/13,2+-..0,/0

415,5 4/0,/0-/03,+0-44.,5

0, 6

-42, 6

5,/0 F 00, F- 30,/0 F- +3,2+ 6

.,5 F 3,2+ F- 40,4+ F- 35,5 6

4,a

-4,,

/+,b

1,c

- .3,- 5/,

0, 4.,- /.,- 41,

!ctual Variance7aster Budget

a $10.00 per unit b $3.80 per unit c $0.90 per unit

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Flexile Budgeting

L.O. 2 Develop and use exible budgets.

• #tatic budget:Budget for a single actiity leel;usually the master budget

• Flexible budget:Budget that indicates reenues, costs,

and profits for different leels of actiity

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!ales Activity Variance

L.O. 3 Compute and interpret the sales activity variance.

• #ales actiity ariance:(he 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 *repare and use a profit ariance analysis'

• *rofit ariance analysis: !nalysis of the causes of differences between

budgeted profits and the actual profits earned

#ales price ariance

Fixed production cost ariances

Variable production cost ariances

7ar8eting and administratie cost ariances

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Profit Variance Analysis

Sales (units)Sales revenue

Less !ariable c"sts!ariable #anuacturin% c"stsa

!ariable sellin% an& a&#inistrative'"ntributi"n #ar%inie& c"sts

ie& #anuacturin% "ver*ea&ie& sellin% an& a&#inistrative c"sts

+r"it

$25,680 $25.680

4,500 $21,180

%.!ariances

$ 4,000 $ 4,000

/,680 $11,680

aretin%an& &#in.!ariancesctual

80,000$840,000

329,680 68,000$442,320

195,500 132,320$114,500

$40,000

$40,000

$40,000

Sales+rice

!ariance

80,000$800,000

304,000 /2,000$424,000

200,000 140,000$ 84,000

leibleu&%et

$200,000

/6,000 18,000 $106,000

-0--0-

$106,000

Salesctivit!ariance

100,000$1,000,000

380,000 90,000$ 530,000

200,000 140,000$ 190,000

aster u&%et

Bayou Diision

*rofit Variance !nalysis !ugust

"tal variance r"# leiblebu&%et $30,500

"tal variance r"# #aster bu&%et $/5,500

LO

4

a *e $25,680 #anuacturin% variance is eplaine& in &etail in L.O. 5.

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Variale Production Costs

LO

4

• #tandard cost sheet: ! form proiding the standard 9uantities of each input re9uired to produce a unit of output and the standard price for each input'

Direct materialDirect labor Variable oerhead(otal ariable manufacturing costs

. pounds'5 hours'5 hours

-'55 per pound-0 per hour -40 per hour

-0'0 4' '2-/'+

Stan&ar&uantit " 7nput

per nit " Output

Stan&ar& 7nput+rice "r ate

per nit " 7nput

Stan&ar& '"stper nit "

Output (ra#e)

Bayou Diision#tandard )ost #heet Variable 7anufacturing )osts

!ugust

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Variale Cost Variance Analysis

L.O. 5 )ompute and use ariable cost ariances'$4%

!ctual

$ AP AQ%

$0% !ctual <nputs at#tandard *rices

$SP AQ%

$/%Flexible *roduction

Budget

$SP SQ%

(otal ariance$4% $/%

!ctual input price $ AP %

times actual 9uantity$ AQ% of input

#tandard input price $SP %

times actual 9uantity$ AQ% of input

#tandard input price $SP %

times standard 9uantity$SQ% of input allowed for

actual good output

*rice ariance$4% $0%

=fficiency ariance$0% $/%

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"irect #aterials Variance

LO

5

(1)

ctual

(2)ctual 7nputs atStan&ar& +rices

(3)leible +r"&ucti"n

u&%et

ctual #aterials price( AP $0.60)

ctual :uantit( AQ 328,000 p"un&s)

" &irect #aterials

Stan&ar& #aterials price(SP $0.55)

ctual :uantit( AQ 328,000 p"un&s)

" &irect #aterials

Stan&ar& #aterials price(SP $0.55)

Stan&ar& :uantit(SQ 320,000 p"un&s)

" &irect #aterialsall";e& "r actual "utput

AP AQ $196,800 SP AQ $180,400 SP SQ $1/6,000

"tal variance $16,400 < $4,400 $20,800

+rice variance

$196,800 = $180,400 $16,400

>icienc variance

$180,400 = $1/6,000 $4,400

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"irect $aor Variance

LO

5

(1)

ctual

(2)

ctual 7nputs atStan&ar& +rices

(3)

leible +r"&ucti"nu&%et

ctual lab"r price( AP $18)

ctual :uantit( AQ 4,400 *"urs)

" &irect lab"r

Stan&ar& lab"r price(SP $20)

ctual :uantit( AQ 4,400 *"urs)

" &irect lab"r

Stan&ar& lab"r price(SP $20)

Stan&ar& :uantit(SQ 4,000 *"urs)

" &irect lab"r all";e& "r actual "utput

AP AQ $/9,200 SP AQ $88,000 SP SQ $80,000

"tal variance $8,800 = $8,000 $800

+rice variance

$/9,200 = $88,000 $8,800

>icienc variance

$88,000 = $80,000 $8,000

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Variale %verhead Variance

LO

5

(1)

ctual

(2)

ctual 7nputs atStan&ar& +rices

(3)

leible +r"&ucti"nu&%et

Su# " actualvariable

#anuacturin%"ver*ea& c"sts

Stan&ar& variable"ver*ea& price

(SP $12) ctual :uantit

( AQ 4,400 *"urs)" t*e "ver*ea& base

Stan&ar& variable"ver*ea& price (SP $12)

Stan&ar& :uantit(SQ 4,000 *"urs)

" t*e "ver*ea& base all";e&"r actual "utput pr"&uce&

AP AQ $53,680 SP AQ $52,800 SP SQ $48,000

"tal variance $880 < $4,800 $5,680

+rice variance

$53,680= $52,800 $880

>icienc variance

$52,800= $48,000 $4,800

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Variale #anufacturing

Cost Variance !ummary

LO

5

Direct materialsDirect labor

Variable oerhead(otal ariable manufacturing

cost ariance

-42,. 6- +,+ F

- ++ 6

-.,. 6-+, 6

-.,+ 6

-0,+ 6- + F

- 5,2+ 6

-05,2+ 6

*rice =fficiency (otal

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Fixed Cost Variances

L.O. 6 )ompute and use fixed cost ariances'

• #pending $or budget% ariance

• *rice ariance for fixed oerhead

• (he difference between budgetedand actual fixed oerhead

• -415,5 actual -0, budget > -.,5 F

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Fixed Cost Variances

LO

6

• (he difference between budgeted andapplied fixed oerhead

• Variance that arises because the olumeused to apply fixed oerhead differs from

the estimated olume used to estimatefixed cost per unit'

-0, budget -42, applied > -., 6

-0, budget ? 4, budgeted units > -0 per unit

+, units -0 per unit > -42, applied

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Appendix& 'ecording Costs

in a !tandard Cost !ystem

L.O. / $!ppendix% 6nderstand how to recordcosts in a standard costing system'

• @or8AinAprocess inentory is debited when directmaterials and direct labor are used at standard'

• @or8AinAprocess inentory is debited whenmanufacturing oerhead is applied at standard'

• @hen the units are finished, wor8AinAprocess

inentory is credited and finished goodsinentory is debited'

• Variances are usually closed to cost of goods sold'

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