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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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End of Chapter 16
Copyright © 2011 by The McGraw-Hill Companies, Inc. ll rights reser!e". McGraw-Hill#Irwin
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