Variance Analysis: Control and Performance Evaluation

1. Chapter 10 Variance Analysis–A Tool for Cost Control and Performance Evaluation

2. Introduction • Variance Analysis • At the end of the an accounting period, managers use the budget as a control tool by comparing budgeted sales, budgeted production, and budgeted manufacturing costs with actual sales, production, and manufacturing costs. • Variance analysis allows managers to see whether sales, production, and manufacturing costs are higher or lower than planned, and WHY actual sales, production, and costs differ from those budgeted.

3. Introduction Management by Exception: Managers choose deviations to investigate by focusing on material or significant differences.

4. Standard Costing Standard Price: the Budgeted Price of the material, labor, or overhead for each unit. Standard Quantity: the Budgeted Quantity of the material, labor, or overhead for each unit.

5. Standard Costing Task Analysis: examines the production process in detail with an emphasis on determining what it should cost to produce a product, not what it cost last year.

6. Ideal vs. Practical Standards Ideal Standard: One that is attained only when near-perfect conditions are present. Assumes that every aspect of the production process, from purchasing through shipment, is at peak efficiency.

7. Ideal vs. Practical Standards Practical Standard: Should be attained under normal, efficient operating conditions. Takes into consideration that machines break down occasionally, that employees are not always perfect, that waste in materials does occur.

8. Flexible Budget Variance The difference between the flexible budget operating income and actual operating income is called the flexible budget variance. The flexible budget removes any differences due to volume.

9. Variance Analysis Basic Variance Analysis Model SQ x SP Flexible Budget Amount AQ x AP Actual Cost AQ x SP AQ (AP-SP) Price Variance SP (AQ - SQ) Usage Variance

10. Fixed Overhead Variances Budget Variance: the difference between the amount of fixed overhead actually incurred and the flexible budget amount. Volume Variance: the difference between the flexible budget amount and the amount of fixed overhead appliedto products.

11. Interpreting and Using Variance Analysis An unfavorable direct material usage variance generally points to a problem in production. However, further analysis might reveal that usage was high because of an unusual number of defective parts, and the large number of defective parts was a result of the purchasing manager buying materials of inferior quality.

12. Behavioral Considerations Standards Costs and Variance Analysis can provide very useful control and performance evaluations, or they can cause dysfunctional behavior among employees and management.

13. End of Chapter 10