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

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Profit VariancesProfit Variances

Variance that, taken alone, increases operating profit

Favorable Variance

Variance that, taken alone, reduces operating profit

Unfavorable Variance

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

?