Variance Analysis

Imparano, Inc MMVII

Required:

Assume the role of Carl Holitzner and provide an explanation for FFL's
lower than budgeted profit for the fiscal year ended May 31, 2002. Support your
p
explanation with a detailed variance analysis.
y

Reconcile the Budget / Forecast to the Actual results.

Imparano, Inc MMVII

Sales Volume Variance

Sales Quantity Variance
Market size
ACCT 422
Market share
Sales Mix Variance
Sales Price Variance
Variable Cost Variances
Materials Variance
Materials Price
Materials Usage
Materials Yield
ACCT 422
Materials Mix
Labor Variance
Labor Rate
Labor Efficiency
Labor Yield ACCT 422
Labor Mix
Variable O/H Variance
Variable OH Rate
Variable OH Efficiency

Fixed Cost Spending Variance

Total Variance
Imparano, Inc MMVII

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 Variance Analysis
requires and understanding of:

Product flow assumptions.

Standard costing systems.
systems
Cost - Volume - Profit.
Absorption and Direct costing.

Imparano, Inc MMVII

Product Flow

Materials Work in
Raw Finished
Material g
Progress Goods

Labor

Overhead

Imparano, Inc MMVII

Product Flow

Materials Work in
Raw Finished
Material g
Progress Goods

Conversion Costs

Imparano, Inc MMVII

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 VariableVariable
/ Direct Costing
Costing

Materials Work in
Raw Finished
Material g
Progress Goods

Labor

Variable Overhead

Fixed Overhead

Imparano, Inc MMVII

Absorption Costing
Absorption Costing

Materials Work in
Raw Finished
Material g
Progress Goods

Labor

Variable Overhead
Fixed Overhead

Imparano, Inc MMVII

Product Flow

Materials Work in
Raw Finished
Material Progress Goods

Labour

Overhead

V irtua l Corp or atio n, 20 00

Imparano, Inc MMVII

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 Product Flow PROBLEM:

Materials Work in
Cost accountants
Raw Finished
Material Progress Goods required an effective
Labour
way to cost product
Overhead

on a timely basis.
V irtua l Corp or atio n, 20 00

SOLUTION:

Standard cost systems

Imparano, Inc MMVII

Standard Cost Systems:

z Represent per unit budgets, targets &/or

engineered amounts
z Determine unit costs in advance (usually annual)
z Used to measure income / financial performance

Imparano, Inc MMVII

Standard Cost Card

Standard cost of a widget:
Materials (5 kg @ $6.00 per) $ 30.00
Labor (2 hours @ $20.00 per) 40.00
V factory O/H 20.00
F factory O/H 15.00
Total cost@Standard $ 105.00

Imparano, Inc MMVII

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 Standard Cost Card
Standard cost of a widget:
Materials (5 kg @ $6.00 per) $ 30.00
Labor (2 hours @ $20.00 per) 40.00
V factory O/H 20.00
F factory O/H 15.00
Total cost@Standard $ 105.00
Number of input
units per output unit
Imparano, Inc MMVII

Standard Cost Card

Standard cost of a widget:
Materials (5 kg @ $6.00 per) $ 30.00
Labor (2 hours @ $20.00 per) 40.00
V factory O/H 20.00
F factory O/H 15.00
Total cost@Standard $ 105.00
Cost per unit of input

Imparano, Inc MMVII

Standard Cost - G/L Accts

Labor incurred Labor applied

V F O/H incurred V F O/H applied
F F O/H incurred F F O/H applied

Imparano, Inc MMVII

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 Standard Cost - G/L Accts
Labor incurred Labor applied

42.00 40.00

1.6 hours @ $26.25 1 unit @ std.

Imparano, Inc MMVII

Standard Cost - G/L Accts

Labor incurred Labor applied

42.00 40.00

The $2.00 DR
difference is the
variance

Imparano, Inc MMVII

Standard Cost - G/L Accts

Labor incurred Labor applied

42.00 40.00

Efficiency (2.0 hours - 1.6 hours) * $20.00/hr = $8.00 Fav (or CR)
Price/Rate ($20.00/hr - 26.25/hr)* 1.6 hours = $10 Unfav (DR)

Imparano, Inc MMVII

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 Variance Analysis
Actual Budget
Units Units
OBJECTIVE:
Sales Sales
g to
Reconcile Budget
VC Actual VC
CM CM
FC FC
Profit Profit

Imparano, Inc MMVII

Variance Analysis
Actual Budget
Units Units
First Step
Sales Sales
VC VC
CM CM
FC FC
Profit Change in Profit Profit

Imparano, Inc MMVII

Total Variance = $367,600 Unfavorable

Imparano, Inc MMVII

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 Variance Analysis
Actual Budget
Units Units
Sales Sales
How much would we
VC have budgeted for, VC
had we know the
CM CM
actual volume?
FC FC
Profit Change in Profit Profit

Imparano, Inc MMVII

Variance Analysis
Actual Budget
Units Units
Sales Sales
(Re)calculate the
VC budget using actual VC
volume @ budgeted
CM CM
(ie Std) costs
FC FC
Profit Change in Profit Profit

Imparano, Inc MMVII

Imparano, Inc MMVII

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 Imparano, Inc MMVII

Imparano, Inc MMVII

Variance Analysis
Flexible Static
Actual Budget Budget
Units Units Units
Sales Sales Sales
VC VC VC
CM CM CM
FC FC FC
Profit Profit Profit

Imparano, Inc MMVII

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 Imparano, Inc MMVII

Variance Analysis
Flexible Static
Actual Budget Budget
Units Units Units
Sales Sales Sales
VC VC VC
CM CM CM
FC FC
Profit Profit

Imparano, Inc MMVII

Variance Analysis
Flexible Static
Actual Budget Budget
Units Units Units
Sales Sales Sales
VC VC VC
CM CM CM
FC Fixed Cost Spending Variance FC
Profit Change in Profit Profit

Imparano, Inc MMVII

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 Fixed Cost Spending Variance = $37,000 Unfavorable

Imparano, Inc MMVII

Variance Analysis
Flexible Static
Actual Budget Budget
Units Units Units
Sales Sales Sales
Sales Volume
VC VC VC
Variance
CM CM CM
FC Fixed Cost Spending Variance FC
Profit Change in Profit Profit

Imparano, Inc MMVII

Sales Volume Variance = $69,000 Favorable

Imparano, Inc MMVII

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 Flexible Static
Budget Budget
Units Units
Sales Sales
Sales Volume
VC VC
Variance
CM CM

Sales Volume Variance =

(Change in Vol*(Budgeted CM per unit)

Imparano, Inc MMVII

Sales Volume Variance = $69,000 Favorable

(7200-4500)80 + (4800-5500)210 = $69,000 Favorable

Imparano, Inc MMVII

Variance Analysis
Flexible Static
Actual Budget Budget
Units Units Units
Sales Sales Sales
Sales Volume
VC VC VC
Variance
CM CM CM
FC Fixed Cost Spending Variance FC
Profit Change in Profit Profit

Imparano, Inc MMVII

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 Variance Analysis
Flexible Static
Actual Budget Budget
Units Units Units
Sales Sales Sales
Sales Volume
VC Variable Cost Variances VC VC
Variance
CM CM CM
FC Fixed Cost Spending Variance FC
Profit Change in Profit Profit

Imparano, Inc MMVII

Variable Cost Flexible Budget Variances = $99,600 Unfavorable

Imparano, Inc MMVII

Variance Analysis
Flexible Static
Actual Budget Budget
Units Units Units
Sales Sales Price Variance Sales Sales
Sales Volume
VC Variable Cost Variances VC VC
Variance
CM CM CM
FC Fixed Cost Spending Variance FC
Profit Change in Profit Profit

Imparano, Inc MMVII

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 Sales Price Variance = $300,000 Unfavorable

(7200)(325 300) + (4800)(700 - 800) = $300,000 Unfavorable

Imparano, Inc MMVII

Variance Analysis
Sales Volume Variance
+ Sales Price Variance
+ Variable Cost Variances
+ Fixed Cost Spending Variance
= Total Variance

Imparano, Inc MMVII

FFL Summary of Level 0 and 1 Variances

Sales Volume $ 69,000)

Sales Price (300,000)
Variable Cost (99,600)
Fixed Cost Spending (37,000)
Total $ (367,600)

Imparano, Inc MMVII

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 Variance
Variance Analysis
Analysis
Sales Volume Variance
+ Sales Price Variance
+ Variable Cost Variances
+ Fixed Cost Spending Variance
= Total Variance

V irtua l Corpor ation, 2 0 00

Next step:
Separate variable cost and sales
volume variances in components.

Imparano, Inc MMVII

Variable Cost Variances

Flexible
Actual Budget
Materials variances
Materials Materials
Labor variances
Labor Labor
Variable O/H variances
Variable O/H Variable O/H

Imparano, Inc MMVII

Now: price & efficiency

Flexible
Actual Budget
Price Usage
Materials Materials
Rate Efficiency
Labor Labor
Rate Efficiency
Variable O/H Variable O/H

Imparano, Inc MMVII

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Variance Sales Volume Variance
+ Sales Price Variance

Analysis
+ Variable Cost Variances
+ Materials Variance
+Materials Price
+Materials Usage

+Labor Variance
+Labor Rate
+Labor Efficiency

+Variable O/H Variance

+Variable OH Rate
+Variable OH Efficiency

+ Fixed Cost Spending Variance

= Total Variance

Imparano, Inc MMVII

Now:
Now: price
price &
& efficiency
efficiency
Example:
Flexible
Actual Budget
Price Usage
Materials Materials
Rate Efficiency
Labour Labour
Rate Efficiency
Variable O/H Variable O/H

V i rtual Corpo r atio n, 2 000

Labor (master) budget:

Output units: 1,000
Hours per unit: 2.0
Total hours: 2,000
Cost per hour: $20.00
Total Labor cost $40,000
Standard cost/unit $40.00

Imparano, Inc MMVII

Now:
Now: price
price &
& efficiency
efficiency
Example:
Flexible
Actual Budget
Price Usage
Materials Materials
Rate Efficiency
Labour Labour
Rate Efficiency
Variable O/H Variable O/H

V i rtual Corpo r atio n, 2 000

Labor actual:
Output units: 1,100
Hours per unit: 2.1
Total hours: 2,310
Cost per hour: $22.00
Total Labor cost $50,820
Actual cost/unit $46.20

Imparano, Inc MMVII

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 Example:
Static
Actual Budget
Output units: 1,100 1,000
Hours per unit: 2.1 2.0
Cost per hour: $22.00 $20.00
Total Labor cost $50,820 $40,000

Total Variance $10,820 U

Variance as a result of:

Change in volume
Change in inputs (efficiency)
Change in cost/input unit (price)

Imparano, Inc MMVII

Example:
Flexible Static
Actual Hybrid Budget Budget
Output units: 1,100 1,100 1,100 1,000
Hours per unit: 2.1 2.1 2.0 2.0
Cost per hour: $22.00 $20.00 $20.00 $20.00
Total Labor cost $50,820 $46,200 $44,000 $40,000

Cost p
portion
of Vol Var
$4,000U
Flex bud Var $6,820 U

Total Variance $10,820 U

Imparano, Inc MMVII

Example:
Flexible
Actual Hybrid Budget
Output units: 1,100 1,100 1,100
Hours per unit: 2.1 2.1 2.0
Cost per hour: $22.00 $20.00 $20.00
Total Labor cost $50,820 $46,200 $44,000

Price/Rate Var
$4,620 U Effic Var $2,200 U

Flex bud Var $6,820 U

Imparano, Inc MMVII

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 Example:
Flexible
Actual Hybrid Budget
Output units: 1,100 1,100 1,100
Hours per unit: 2.1 2.1 2.0
Cost per hour: $22.00 $20.00 $20.00
Total Labor cost $50,820 $46,200 $44,000

(22-20)*(1100*2.1) (2.1-2.0)*1100*20
Price/Rate Var
$4,620 U Effic Var $2,200 U

Flex bud Var $6,820 U

Imparano, Inc MMVII

Sales Volume Variance

+ Sales Price Variance

If there are + Variable Cost Variances

multiple grades
+ Materials Variance
+Materials Price

of input: the +Materials Usage

next step is to
+Labor Variance
+Labor Rate

break +Labor Efficiency

efficiency into
+Variable O/H Variance
+Variable OH Rate

yield and mix

+Variable OH Efficiency

+ Fixed Cost Spending Variance

See ACCT 422 = Total Variance

Imparano, Inc MMVII

Variance Analysis:
Misc. Items
Purchase / usage difference
Absorption costing adds the
denominator variance

Imparano, Inc MMVII

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 Example:
Flexible
Actual Hybrid Hybrid Budget
Kg purchased/used 3,500 3,500 4,000 3,800
Cost per kg: $2.00 $2.50 2.5 $2.50
Total cost $7,000 $8,750 $10,000 $9,500

PriceVar Usage Var

Amount Amount
Purchased Used A/S
Imparano, Inc MMVII

Denominator Variance:
F O/H Spending
Variance

Budgeted
Annual O/H
Burden Rate =
Annual Volume

Production Volume
(Denominator)
Variance

Imparano, Inc MMVII

Variance Analysis
Finished!

Imparano, Inc MMVII

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