Download - Variance Analysis New
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 1/21
VARIANCE ANALYSIS
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 2/21
Profit Variance Analysis
• Compare budgeted and actual results to
isolate the impact of individual input and
output factors
• Used to
– Revise plan assumptions
– Evaluate employee performance
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 3/21
The Master Budget
• Benchmark for computing variances
•As you know, the master budget specifies indetail
– Sales volumes and prices
–
Input quantities and costs• Planned efficiencies and prices
– Capacity costs
• Also termed overhead cost
• The master budget is like picking a point onthe profit line in the CVP graph
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 4/21
Volume of Activity P r o f i t o r L o s s
( $ )
Actual Profit
Budgeted Profit
P r o f i t V a
r i a n c e
Budgeted
volume
Actual
volume
(Fixed Cost)
0
Profit Line (per
CVP model)
Budgeted and Actual Results
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 5/21
Variance Conventions
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 6/21
Many Possible Sources
• Variance could be due to
– Output quantities and/or prices
– Input efficiencies and/or prices
– Errors in estimated overhead costs
• Variance analysis
–
Linear decomposition of overall profit varianceinto above factors
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 7/21
Sales Volume Variance - Concept
Total Profit Variance
Flexible Budget Variance
Sales Volume
Variance
Master budgetprofit
Actual profit
Profit in flexible
budget
Sales volume variance Flexible budget variance
Total profit variance
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 8/21
Sales Volume Variance
• Difference between income / contribution in master
and flexible budgets – units × Budgeted UCM = revenue × Budgeted CMR
• Flexible budget is at actual output quantity
– Sales volume is only change in plan assumption
– Profit difference is due to change in sales volume
• Focus on change in CM / income & not revenue
– Change in volume changes revenues and variable costs
– Fixed costs do not change if volume changes
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 9/21
Sales Volume Variance
B
C
A
Volume ofActivity
Profit ($)
Actual
Profit
MasterBudget
Profit
Budgeted
volume
Actual
volume
(Fixed Costs)
0
Profit Line (perCVP relation)
FlexibleBudget
Profit
Sales Volume
Variance
+
Flexible
Budget
Variance
=
TotalProfit
Variance
P r o f i t ( $ )
Volume of Activity
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 10/2110
Flexible Budget Variance
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 11/21
Cost Variances
• Cost in flexible budget is the right benchmark
– Activity volume the same in flexible budget and
actual operations
• Can compare line items
– Materials
– Labor
– Overhead costs
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 12/21
Cost Variances
Material cost
variance
Labour cost
variance
Price variance
Usage variance
Rate variance
Efficiency variance
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 13/21
Material Variance
• Material price variance
= (standard price – actual price)*actual quantity
• Material usage variance
= (Standard quantity – actual quantity)* standard
price
= (Standard quantity for actual production –
actualquantity production) * standard price
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 14/21
Labour Variance
• Labour rate variance
= (standard price – actual price)*actual quantity
•
Labour efficiency variance= (standard quantity – actual quantity)*standard
price
= Standard quantity for actual production – actual
quantity used) * standard price
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 15/21
Variable-Overhead Spending
and Efficiency Variances
A variable-overhead efficiency variance occurs when
actual cost-driver activity differs from the standard
amount allowed for the actual output achieved.
A variable-overhead spending variance occurs when
the difference between the actual variable overheadand the amount of variable overhead budgeted
for the actual level of cost-driver activity.
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 16/21
Variable-Overhead Variances
= -Variable
overhead
variance
Standard
variable
overhead
Actual
variable
overhead
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 17/21
Variable-Overhead Variances
With details of input quantities of variable overheads (e.g. hours)
variable overhead variance can be further analyzed as :
• Variable overhead spending variance
• Variable overhead efficiency variance
= -Budgeted
variable
overhead for
actual hours
Actual
variable
overhead
Variable
overhead
spending
variance
= -Standard
variable
overhead rate
per hour
Actual
variable
overhead
rate per
hour
x Actual hours
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 18/21
Variable-Overhead Variances
= -Standard
hours for
actual output
Actual
hours
Variable
overhead
efficiency
variance
xStandard
variable
overhead per
hour
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 19/21
Fixed Overhead Variance
Fixed overhead spending variance = Budgeted fixed
overheads - Actual fixed overheads
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 20/21
Sales Price Variance
Sales Price variance = Actual quantity of sales x
(Actual price – Budgeted price)
8/10/2019 Variance Analysis New
http://slidepdf.com/reader/full/variance-analysis-new 21/21
Interpreting Variances
• Investigate all significant variances
– Large variance shows poor plan / execution
• Examine trends
– Consistent sign may be related to planassumptions
• Consider the total picture
– Variances ignore interactions
– Price-quantity, input substitution