Accounting 4310

1. Accounting 4310 Chapter 17 – Additional Topics in Variance Analysis

2. Profit Variance Analysis • Comparison of actual results to budgeted results • Actual results vary based on production • When company produces more than sold, there is no effect on the sales activity variance BUT the profit variance is affected • Variable production costs need to be adjusted

3. Profit Variance Analysis • Variable production cost variance: • Actual variable cost – estimated variable cost X • Actual units produced • Actual variable production costs = flexible budget variable production costs +/- variable production cost variances • Can be treated as a period cost or it can be prorated between units sold and inventory

4. Absorption costing vs. Variable Costing • Absorption costing • All manufacturing costs – DM, DL, Variable and fixed OH included in unit inventory cost • Variable costing • Only variable manufacturing costs – DM, DL, Var. OH included in unit inventory cost • Fixed OH expensed in period incurred • Production volume variance will be an adjustment when reconciling absorption and variable costing incomes

5. Direct Material Variances –When Purchases Do Not Equal Use • Price Variance • Purchase price variance (when purchased) • Quantity (Efficiency) Variance – based on use • By computing price variance when purchased, variance is reported earlier

6. Direct Material Variances • AP x AQ SP x AQ pur. • |__________________| • Price Variance • SP x AQ used SP x SQ • |______________| • Quantity Variance

7. Marketing Variances • For revenues, the opposite holds true. • FAVORABLE: Actual > Standard • UNFAVORABLE: Actual < Standard • Marketing Variances • Price variance (Difference in sales prices) • Quantity variance (Difference in sales volumes) • Sales mix variance (Results from selling a different proportion of products than planned) • Sales volume (Difference in volume sold)

8. Marketing Variances • Price – • Result of this variance lets management know how successful their price strategy was • Did they have to lower their price to sell products? Or were customers willing to pay a price premium? • Person who sets prices is responsible

9. Marketing Variances • Quantity – • Mix – details consumer preferences for products, especially when the products are substitutes • Favorable (unfavorable) if consumers shift to a higher (lower) priced (CM) product • Must evaluate why customers chose one product over another • Marketing probably responsible

10. Marketing Variances • Quantity: • Sales (volume) Variance: • This variance tells us whether we sold more units than planned. • Favorable variance results if we sold more volume than planned. • Person responsible for generating demand for overall product is responsible (probably marketing)

11. Marketing Variances • AP x AQ SP x AQ SP x SQ • |__________________| |_____________| • Price Variance Quantity Variance • |_________________________________| • Total Marketing Variance

12. Sales Volume Variance • Sales volume variance can be broken down into: • Change in market share due to industry volume: • Tells us how much of our increased (decreased) sales is due to a bigger (smaller) overall market for our products • Our managers generally cannot control the overall industry volume. • Change in market share due to market share: • Tells us how much of our change in profits is due to increases or decreases in our hold on the market • Our managers should be able to control this variance.

13. Marketing Variances • Quantity Variance: • Sales mix variance = (Actual quantity sold – quantity that would have been sold at the standard mix) x Standard CM • Sales quantity variance = (Quantity that would have been sold at the standard mix – budgeted sales quantity) x Standard CM

14. Production Mix and Yield Variances • Direct materials or direct labor efficiency variances can be broken down into: • Mix variance • Arises from a change in the inputs (different materials or labor used) • Standard price x (actual quantity x actual input at the standard mix) • Yield variance • Arises from the difference in expected results and actual results • Standard price x (actual input used at the standard mix – standard input allowed)

15. Variance Analysis in Nonmanufacturing Industries • Measures used: professional staff hours, room nights, seat miles, patient days • Goal – control labor and occupancy costs per sales dollar • Efficiency – must have a reliable measure of output activity that is linked to input • Routine tasks are better suited to variance analysis

16. Management of Variance Analysis • Variances will vary by company and industry • Impact of variance should be high • Controllability of variance should be considered • Management by exception can be practiced

17. Management of Variance Analysis • Management by exception – allows managers to focus only on those variances which are truly out of the ordinary • Management by exception allows managers to focus on certain areas • Maximizes return on management • Variance analysis should be performed often in order to make corrections as early as possible – at least every month if possible

18. Uses of Variance Analysis • Calculation of variances do not explain causes • Variances should be investigated • Often reasons for variances are explained beside the calculated variance • Favorable variances are not always good • Unfavorable variances are not always bad • It is not good to net variances • Netting of variances may cancel out large favorable variances against large unfavorable variances

19. Three Conditions Necessary to Use Standard Costs • There must be a way to measure outputs. • A predetermined standard of performance must exist. • There must be an ability to use variance information as feedback to make corrections and improvements.

20. Variance Analysis Cycle

21. Limitations on Standards • Don’t hold people accountable for too many variances. • Make sure you determine the cause of the variances; do not just mindlessly calculate them. • Any variance is only as good as the standards or planned activity to which actual is compared!!!!!! • Changing conditions may warrant changing the standards. • Variances should always be used for feedback and continuous improvement.