1. Calculate Spending and Efficiency Variances
Intermediate Cost Analysis
and Management
Show Slide #1: Calculate Spending and Efficiency Variances
Title: Calculate Spending and Efficiency Variances
References: Handouts, Excel Spreadsheets
Facilitator Material and Student Material: Dry erase markers, white boards, access to Excel spreadsheets, case-studies
Facilitator Material: Each primary facilitator should possess a lesson plan, slide deck, course handouts, practical exercises, access to Excel spreadsheets, case-studies All required references and technical manuals will be provided by the local Command.
Student Material: Students should possess course handouts, practical exercises, access to Excel spreadsheets, case-studies and standard classroom supplies.
The 21st Century Soldier Competencies are essential to ensure Soldiers and leaders are fully prepared to prevail in complex, uncertain environments. This lesson reinforces the following 21st Century Soldier Competencies:
Communication and Engagement (Oral, written, and negotiation)
Critical thinking, intergovernmental, and multinational competence
Tactical and Technical Competence
Throughout the lesson discussion seek opportunities to link the competencies with the lesson content through the student’s experiences.
7.4

2. Why So Much? Show Slide #2: Concrete Experience (Why so much?)
Facilitator’s Note: (Concrete Experience 10 minutes) Present students the slide statements Ask students what their thoughts are on “Fuel Prices…or prices in General”
Facilitator’s Note: (Publish and Process 10 minutes) The critical portion of this part of the ELM process is to force the students to reflect. Ask a series of thought influencing questions.
Introduction: The total at the gas pump is only one example of how sometimes the cost of a resource might be different than expected. Sometimes we are pleasantly surprised, sometimes not so much. But the important factor is to be able to understand why the difference. That is what we address in this module.

3. 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
Show Slide #3: TLO
Action: Calculate Spending and Efficiency Variances
Conditions: 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
Safety Requirements: In a training environment, leaders must perform a risk assessment in accordance with DA PAM , Risk Management. Leaders will complete a DD Form 2977 DELIBERATE RISK ASSESSMENT WORKSHEET during the planning and completion of each task and sub-task by assessing mission, enemy, terrain and weather, troops and support available-time available and civil considerations (METT-TC). Local policies and procedures must be followed during times of increased heat category in order to avoid heat related injury. Consider the work/rest cycles and water replacement guidelines IAW TRADOC Regulation
Environmental Considerations: Environmental protection is not just the law but the right thing to do. It is a continual process and starts with deliberate planning. Always be alert to ways to protect our environment during training and missions. In doing so, you will contribute to the sustainment of our training resources while protecting people and the environment from harmful effects. Refer to FM Environmental Considerations and GTA ENVIRONMENTAL-RELATED RISK ASSESSMENT.
INSTRUCTIONAL LEAD-IN.

4. 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
Show Slide #4: Introduction
Facilitator Note: 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 did deeper into the root cause of variable cost changes

5. 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
Show Slide #5: Describe Spending and Efficiency Variances
Learning Step/Activity #1 Describe spending and efficiency variances
Method of Instruction: DSL (large or small group discussion)
Facilitator to Student Ratio:
Time of Instruction: 2.0 (Total)
Media: Power Point Presentation, Printed Reference Materials
Facilitator’s Note: Imagine that in a normal week of driving you expect to use 20 gallons and you planned on spending $4 per gallon.
The resource that we are concerned with is gallons of gasoline.
The level of this resource that we should use in the week is 20 gallons
The price we expect to pay is $4/gallon.
Therefore the Projected Cost is 20 gallons * $4/gallon = $80

6. 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
Show Slide #6: Describe Spending and Efficiency Variances (Cont.)
Facilitator Note: You cut down on driving last week and the pump registered only 18 gallons, but the cost per gallon went up to $5
The actual cost is the product of the Actual Resource Usage (18 gallons) * the Actual Price $5 = $90
Note that your total variance is $10 unfavorable. You planned on paying $80 and you actually paid $90. More cost is bad

7. 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
Show Slide #7: Describe Spending and Efficiency Variances (Cont.)
Facilitator Note: What if No Price Change?
The first variance we will examine has to do with efficiency.
If the price were still $4 per gallon your more efficient driving would have spent $72. We keep the price the same but adjust for the Actual resource usage.
That is, 18 gallons * $4/gallon = $72
This is an Efficiency Variance of $8 favorable. . If not for the price change we would have saved $8.

8. 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
Show Slide #8: Describe Spending and Efficiency Variances (Cont.)
Facilitator Note: However, instead you paid $5 per gallon more for the 18 gallons: a total of $18 more than you would have spent if the price was only $4 per gallon.
This is a Spending Variance of $18 Unfavorable
While we were more efficient, the increased price more than wiped out our savings from efficiency.

9. 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
Show Slide #9: Describe Spending and Efficiency Variances (Cont.)
Facilitator Note: The efficiency and the spending variances can be combined in this template. The intermediate product takes the quantity from the actual side and the price from the “should have” side.
Note that the net of efficiency and spending variance equals the total variance
That is, the $8 favorable efficiency variance + the ($18) unfavorable spending variance equals the ($10) unfavorable overall variance.
note that the net of efficiency and spending variance equals the total variance

10. 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
Show Slide #10: Describe Spending and Efficiency Variances (Cont.)
Facilitator Note: Efficiency and Spending Variances are going one level deeper in trying to understand the root cause of the variable cost change
All of the resources that make up variable cost: labor, materials, etc. can be broken down into the spending and efficiency variances. The combined effect of each makes up the performance variance for variable cost in the volume variance template.
Efficiency and Spending Variances are going one level deeper in trying to understand the root cause of the variable cost change

11. 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
Show Slide #11: Describe Spending and Efficiency Variances (Cont.)
Facilitator Note: There are many, many application of spending and efficiency variances. In any of these cases either the usage may differ from plan (efficiency variance) or cost per unit of resource may vary from plan (spending variance.)
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
Can you think of any resources used in your area of responsibility?

12. LSA #1 Learning Check 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.
Show Slide #12: LSA #1 Check on Learning
Facilitator Note: Ask the following Questions. Facilitate the answers given.
Q. What does the efficiency variance reveal?
A. It reveals the dollar amount that can be attributed to a change in usage of the resource.
Q. The spending variance is favorable but the efficiency variance is unfavorable. How would you describe the situation?
A. 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.

13. LSA #1 Summary
During this lesson, we discussed Spending and Efficiency Variances, it’s impact on price and how it relates to Volume Variance.
Show Slide #13: LSA #1 Summary
Facilitator Note: Re-State the Summary; During this lesson, we discussed Spending and Efficiency Variances, it’s impact on price and how it relates to Volume Variance.

14. 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
Show Slide #14: Demonstration problems
2. Learning Step/Activity #2 Demonstration problems
Method of Instruction: DSL (large or small group discussion)
Facilitator to Student Ratio:
Time of Instruction: 2.0 (Total)
Media: Power Point Presentation, Printed Reference Materials
Facilitator’s Note: We will work a few of these together and then see if you can work the rest by yourselves.

15. 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
Show Slide #15: Demonstration problems (Cont.)
Facilitator Note: Start with the blank template. The students will have the blank slide
What is the resource?
What is the Planned Resource Usage?
What is the Planned Price?
What is the projected cost?

16. 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
Show Slide #16: Demonstration problems (Cont.)
Facilitator Note: What is the resource? Gallons of gas
What is the Planned Resource Usage? 1000 gallons
What is the Planned Price? $4/gallon
What is the projected cost? $4000

17. 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
Show Slide #17: Demonstration problems (Cont.)
Facilitator Note: Now let’s work on the actual.
What is the Actual Resource Usage? 1200 gallons
What is the Actual Price? $3.90/gallon
What is the actual cost? $4680

18. 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
Show Slide #18: Demonstration problems (Cont.)
Facilitator Note: Now, take the resource level from the actual and the price from the projected.
1200 gallons actually used * $4/gallon Actual Price gives the intermediate product of $4800.
The efficiency variance is (800) unfavorable
The spending variance is 120 favorable.
(800) = 680 total variance.

19. 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
Show Slide #19: Demonstration problems (Cont.)
Facilitator Note: Start with the blank template. The students will have the blank slide
What is the resource?
What is the Planned Resource Usage?
What is the Planned Price?
What is the projected cost?

20. 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
Show Slide #20: Demonstration problems (Cont.)
Facilitator Note:

21. 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
Show Slide #21: Demonstration problems (Cont.)
Facilitator Note: Start with the blank template. The students will have the blank slide
What is the resource?
What is the Planned Resource Usage?
What is the Planned Price?
What is the projected cost?

22. 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
Show Slide #22: Demonstration problems (Cont.)
Facilitator Note: Start with the blank template. The students will have the blank slide
What is the resource?
What is the Planned Resource Usage?
What is the Planned Price?
What is the projected cost?

23. 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
Show Slide #23: Demonstration problems (Cont.)
Facilitator Note: Start with the blank template. The students will have the blank slide
What is the resource?
What is the Planned Resource Usage?
What is the Planned Price?
What is the projected cost?

24. 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
Show Slide #24: Demonstration problems (Cont.)
Facilitator Note: Start with the blank template. The students will have the blank slide
What is the resource?
What is the Planned Resource Usage?
What is the Planned Price?
What is the projected cost?

25. 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
Show Slide #25: Demonstration problems (Cont.)
Facilitator Note: Start with the blank template. The students will have the blank slide
What is the resource?
What is the Planned Resource Usage?
What is the Planned Price?
What is the projected cost?

26. 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
Show Slide #26: Demonstration problems (Cont.)
Facilitator Note: Start with the blank template. The students will have the blank slide
What is the resource?
What is the Planned Resource Usage?
What is the Planned Price?
What is the projected cost?

27. 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
Show Slide #27: Demonstration problems (Cont.)
Facilitator Note: Start with the blank template. The students will have the blank slide
What is the resource?
What is the Planned Resource Usage?
What is the Planned Price?
What is the projected cost?

28. 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
Show Slide #28: Demonstration problems (Cont.)
Facilitator Note: Start with the blank template. The students will have the blank slide
What is the resource?
What is the Planned Resource Usage?
What is the Planned Price?
What is the projected cost?

29. 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
Show Slide #29: Demonstration problems (Cont.)
Facilitator Note: Start with the blank template. The students will have the blank slide
What is the resource?
What is the Planned Resource Usage?
What is the Planned Price?
What is the projected cost?

30. 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
Show Slide #30: Demonstration problems (Cont.)
Facilitator Note: Start with the blank template. The students will have the blank slide
What is the resource?
What is the Planned Resource Usage?
What is the Planned Price?
What is the projected cost?

31. Spreadsheet Exercises
Show Slide #31: Demonstration problems (Cont.)
Facilitator Note: Students conduct Practical Exercise.

32. 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
Show Slide #32: TLO Summary
Facilitator’s Notes: Restate the TLO
Action: Calculate Spending and Efficiency Variances
Conditions: 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
“Or”
Facilitator's at this time, have one learner from each group to explain the most important take away to them from this lesson. Facilitate a discussion on each answer.