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Accounting 4310
Chapter 17 – Additional Topics in Variance Analysis
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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
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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
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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
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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
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Direct Material Variances
• AP x AQ SP x AQ pur.
• |__________________|
• Price Variance
• SP x AQ used SP x SQ
• |______________|
• Quantity Variance
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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)
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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
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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
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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)
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Marketing Variances
• AP x AQ SP x AQ SP x SQ
• |__________________| |_____________|
• Price Variance Quantity Variance
• |_________________________________|
• Total Marketing Variance
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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.
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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
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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)
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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
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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
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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
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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
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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.
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Variance Analysis Cycle
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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.