Additional Topics in Variance Analysis

Chapter 17

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Profit Variance Analysis

L.O. 1 Explain how to prorate variances toinventories and cost of goods sold.

• Most companies close variances to Cost of Goods Sold.

• Other companies prorate the variances.

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Profit Variance Analysis

Sales (units)Sales revenueLess: Variable costs

Variable manufacturing costsVariable selling and administrative

Contribution marginFixed costs:

Fixed manufacturing overheadFixed selling and administrative costs

Profit

$28,890 U $28.890 U

4,500 F $24,390 U

Mfg.Variances(based on

90,000 unitsproduced)

$ 4,000 F$ 4,000 F

7,680 F$11,680 F

Marketingand Admin.VariancesActual

80,000$840,000

332,890 68,000$439,110

195,500 132,320$111,290

$40,000 F

$40,000 F

$40,000 F

SalesPrice

Variance

80,000$800,000

304,000 72,000$424,000

200,000 140,000$ 84,000

FlexibleBudget

$200,000 U

76,000 F 18,000 F$106,000 U

-0- -0-

$106,000 U

SalesActivityVariance

100,000$1,000,000

380,000 90,000$ 530,000

200,000 140,000$ 190,000

MasterBudget

Bayou DivisionProfit Variance Analysis (when units produced do not equal units sold)

Total variance from flexiblebudget = $27,290 F

Total variance from master budget = $78,710 U

LO1

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Manufacturing Variances Based on 90,000 Units Produced

LO1

• Variable manufacturing costs:Actual quantity produced (AP –SP)

• 90,000 × ($4.121 - $3.800) = $28,890 U

• Fixed manufacturing costs = $4,500 F

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Closing ProductionCost Variance to COGS

LO1

Cost of Goods Sold 24,390Fixed Overhead Price Variance 4,500

Variable Production Cost Variance 28,890To close production cost variances to Cost of Goods Sold.

• Journal entry to close productionvariance to cost of goods sold:

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Prorating ProductionCost Variances

LO1

Cost of Goods Sold 21,680Fixed Overhead Price Variance 4,500Finished Goods Inventory 2,710

Variable Production Cost Variance 28,890To close production cost variances to Finished Goods andCost of Goods Sold.$21,680 (8/9 of the variance) is closed to Cost of GoodsSold and $2,710 (1/9 of the variance) is closed to FinishedGoods Inventory.

• Journal entry to prorate production variance tocost of goods sold and finished goods inventory:

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Reconciling Variable Costing and Absorption Costing

LO1

• Using variable costing, the entire fixedproduction cost of $195,500 is expensed.

• Using standard full absorption costing, a portionof the fixed overhead remains withthe 10,000 units in inventory.

10,000 × $2.00 = $20,000

$195,500 – $20,000 = $175,500

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Standard Costs for MaterialsLO1

Standard costs:4 pounds per frame @ $.055 per pound = $2.20 per frame

Frames produced in August 80,000Actual materials purchased and used:

328,000 pounds @ $0.60 per pound = $196,800

• In addition, assume instead that 350,000 poundswere purchased in August at $0.60 per poundand 328,000 pounds were used.

• What are the variances?

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Direct Materials Variance:No Materials Inventory

LO1

(1)

Actual

(2)Actual Inputs atStandard Prices

(3)Flexible Production

Budget

Actual materials price(AP = $0.60)

× Actual quantity(AQ = 328,000 pounds)

of direct materials

Standard materials price(SP = $0.55)

× Actual quantity(AQ = 328,000 pounds)

of direct materials

Standard materials price(SP = $0.55)

× Standard quantity(SQ = 320,000 pounds)

of direct materialsallowed for actual output

AP × AQ = $196,800 SP × AQ = $180,400 SP × SQ = $176,000

Total variance= $16,400 + $4,400 = $20,800 U

Price variance$196,800 – $180,400

= $16,400 U

Efficiency variance$180,400 – $176,000

= $4,400 U

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Direct Materials Variance:Materials Inventory

LO1

(1)

Actual

(2)Actual Inputs atStandard Prices

(3)Flexible Production

Budget

Actual materials price(AP = $0.60)

× Actual quantity(AQ = 350,000 pounds)

of direct materials

Standard materials price(SP = $0.55)

× Actual quantity(AQ = 350,000 pounds)

of direct materials

Standard materials price(SP = $0.55)

× Standard quantity(SQ = 320,000 pounds)

of direct materialsallowed for actual output

AP × AQ = $210,000 SP × AQ = $192,500

$0.55 × 320,000pounds allowed = $176,000

Efficiency variance:$180,400 – $176,000 = $4,400 U

Price variance:$210,000– $192,500

= $17,500 U

$0.55 × 328,000pounds used = $180,400

SP × SQ

PurchaseComputations

UsageComputations

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Materials: Standard Costing SystemLO1

Materials Inventory 192,500Material Price Variance 17,500

Accounts Payable $210,000To record the purchase of 350,000 pounds of material with an actualprice of $0.60 per pound and a standard price of $0.55 per pound.

• Journal entry to record purchase of materials:

Work-in-Process Inventory 176,000Material Efficiency Variance 4,800

Materials Inventory $180,400To record the use of 328,000 pounds of material with a standard priceof $0.55 per pound. Standard use is 320,000 pounds.

• Journal entry to record materials used:

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Market Share Variance andIndustry Volume VarianceL.O. 2 Use market share variances to

evaluate marketing performance.

• Industry volume variance:Portion of the sales activity variance due tochanges in industry volume

• Market share variance:Portion of the activity variance due to changesin the company’s proportion of sales in themarkets in which the company operates

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Sales Activity Variances

L.O. 3 Use sales mix and quantity variancesto evaluate marketing performance.

• Sales mix variance:Variance arising from the relative proportion ofdifferent products sold

• Sales quantity variance:Variance occurring in multiproduct companies fromthe change in volume of sales, independent of anychange in sales mix

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Production Mix and Yield Variances

L.O. 4 Evaluate production performance usingproduction mix and yield variances.

• Product mix variance:Variance that arises from a change in the relativeproportion of inputs (a materials or labor mix variance)

• Production yield variance:Difference between expected output from a given levelof inputs and the actual outputobtained from those inputs

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Variance Analysis inNonmanufacturing Settings

L.O. 5 Apply the variance analysis model to nonmanufacturing costs.

Output Measures in Service OrganizationsOrganization

Public accounting, legal, and consulting firms Professional staff hoursHotel Room-nights, guestsAirline Seat-miles, revenue-milesHospital Patient-days

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Variance and Standards

L.O. 6 Determine which variances to investigate.

• Management by exception:Approach to management requiring that reportsemphasize the deviation from an accepted basepoint, such as a standard, a budget, an industryaverage, or a prior period experience.

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End of Chapter 17

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin