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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