Calculate Spending and Efficiency Variances Intermediate Cost Analysis and Management 7.4

Why So Much?

Terminal Learning Objective Action: Calculate Spending and Efficiency Variances Condition: You are training to become an ACE with access to ICAM course handouts, readings, spreadsheet tools, and awareness of Operational Environment (OE) variables and actors Standard: With at least 80% accuracy: Identify root causes of Spending and Efficiency Variances Identify and enter relevant scenario data into macro enabled templates to calculate Spending and Efficiency Variances

number of gallons * price per gallon Why So Much? The gas pump is a calculator that charges based on number of gallons * price per gallon Higher gas bills are caused by an increase in one or both of these variables If you are using more gallons than you should be you have an unfavorable efficiency variance If you are paying more per gallon then you have an unfavorable spending variance These are common situations where we dig deeper into the root cause of variable cost changes

Getting to the Root Cause Imagine that in a normal week of driving you expect to use 20 gallons and you planned on spending $4 per gallon Projected Cost Planned Resource Usage 20 gallons * Planned Price $4/gallon $80

You Actually Spent You cut down on driving last week and the pump registered only 18 gallons, but the cost per gallon went up to $5 Note that your total variance is $10 unfavorable Actual Cost Actual Resource Usage 18 gallons * Actual Price $5/gallon $90

Planned Resource Usage What if No Price Change? If the price were still $4 per gallon your more efficient driving would have spent $72. This is an Efficiency Variance of $8 favorable Projected Cost Efficiency Variance Intermediate Product Planned Resource Usage Actual Resource Usage 20 gallons 18 gallons * Planned Price $4/gallon $80 $8 $72

How Did Price Impact? However, instead you paid $5 per gallon for the 18 gallons: a total of $18 more This is a Spending Variance of $18 Unfavorable Intermediate Product Spending Variance Actual Cost Actual Resource Usage 18 gallons Planned Price Actual Price $4/gallon $5/gallon $72 ($18) $90

Putting it All Together Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage 20 gallons 18 gallons * Planned Price Actual Price $4/gallon $5/gallon $80 $8 $72 ($18) $90 note that the net of efficiency and spending variance equals the total variance

Relating to Volume Variance plan sales volume flexible performance actual variance results units fcst = price/unit sales   variable/unit variable cost fixed cost profit flex budget efficiency intermediate spending actual results product ∆ resource quantity should have used actually used X price per resource should have paid actually paid Efficiency and Spending Variances are going one level deeper in trying to understand the root cause of the variable cost change

Other Applications There are many, many application of spending and efficiency variances People cost is hours*rate/hour Material cost is parts*cost/part Tank Maintenance is miles*cost/mile There are many other types of variance Some of which are useful in certain circumstances All of which follow the same logic you have learned here

LSA #1 Learning Check Q1. What does the efficiency variance reveal? Q2. The spending variance is favorable but the efficiency variance is unfavorable. How would you describe the situation? A2. Q1. What does the efficiency variance reveal? A1. It reveals the dollar amount that can be attributed to a change in usage of the resource. Q2. The spending variance is favorable but the efficiency variance is unfavorable. How would you describe the situation? A2. The price per unit of resource was less than planned, but the usage level of the resource was greater than planned. Possibly the quality of the less expensive resource was poor, resulting in inefficiencies. Example: new employees work at a lower wage but are likely less efficient.

LSA #1 Summary During this lesson, we discussed Spending and Efficiency Variances, it’s impact on price and how it relates to Volume Variance.

Planned Resource Usage Exercises Evaluate Efficiency and Spending Variances for each of the scenarios below: Gas Staff Maint Edits Elect Tele Food Planned Resource Usage 1000 gal 500 hrs 600 miles 200 pages 150 kw 400 min 2000 cal Planned price $4 / gal $50 / hr $20 / mile $5 / page $.3 / kw $.2 / min $.05 / cal Actual resource usage 1200 gal 400 hrs 350 pages 120 kw 550 min 2500 cal Actual price $3.9 / gal $25 / mile $6 / page $.5 / kw $.15 / min $.04 / cal

Planned Resource Usage Gasoline Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage * Planned Price Actual Price

Gasoline Example (Cont.) Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage 1000 gallons * Planned Price Actual Price $4/gallon $4000

Gasoline Example (Cont.) Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage 1000 gallons 1200 gallons * Planned Price Actual Price $4/gallon $3.9/gallon $4000 $4680

Gasoline Example (Cont.) Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage 1000 gallons 1200 gallons * Planned Price Actual Price $4/gallon $3.9/gallon $4000 ($800) $4800 $120 $4680

Planned Resource Usage Staff Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage * Planned Price Actual Price

Planned Resource Usage Staff Example (Cont.) Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage 500 400 * Planned Price Actual Price $50 $25,000 $5,000 $20,000

Planned Resource Usage Maintenance Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage * Planned Price Actual Price

Maintenance Example (Cont.) Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage 600 miles * Planned Price Actual Price $20/mile $25/mile $12,000 ($3000) $15,000

Planned Resource Usage Editing Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage * Planned Price Actual Price

Planned Resource Usage Editing Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage 200 pages 350 pages * Planned Price Actual Price $5/page $6/page $1000 ($750) $1,750 ($350) $2100

Planned Resource Usage Electricity Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage * Planned Price Actual Price

Electricity Example (Cont.) Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage 150 kw 120 kw * Planned Price Actual Price $.3/kw $.5/kw $45 $9 $36 ($24) $60

Planned Resource Usage Telephone Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage * Planned Price Actual Price

Telephone Example (Cont.) Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage 400 min 550 min * Planned Price Actual Price $.2/min $.15/min $80 ($30) $110 $27.50 $82.50

Planned Resource Usage Food Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage * Planned Price Actual Price

Planned Resource Usage Food Example (Cont.) Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Planned Resource Usage Actual Resource Usage 2000 cal 2500 cal * Planned Price Actual Price $.05/cal $.04/cal $100 ($25) $125 $25

Spreadsheet Exercises

TLO Summary Action: Calculate Spending and Efficiency Variances Condition: You are training to become an ACE with access to ICAM course handouts, readings, spreadsheet tools, and awareness of Operational Environment (OE) variables and actors Standard: With at least 80% accuracy: Identify root causes of Spending and Efficiency Variances Identify and enter relevant scenario data into macro enabled templates to calculate Spending and Efficiency Variances