1. Calculate Volume and Performance Variances
Principles of Cost Analysis and Management
Show Slide #1: Calculate Volume and Performance Variances
References: FM 1-06, Slides, Handouts, Excel Spreadsheets
Facilitator Material: Each primary facilitator should possess a lesson plan, slide deck, course handouts, and practical exercise, and FM All required references and technical manuals will be provided by the School House
Learner Material: Learners should possess standard classroom supplies, course handouts, practical exercises, FM All required references and technical manuals will be provided by the School House.
Facilitator Actions: None
Testing Requirements/Assessment: Learners will take the Principles of Cost Analysis and Management 3 Exam at the end of Week Three. learners must score 80% or higher and International officers must score 70% or higher.

2. Better than last score or worse? Disappointed or elated?
What Does it Mean??
Best in class
or worst?
37 out of 100? or
37 out of 37? 37
Better than last score or worse?
Show Slide #2: Concrete Experience (What does it mean)
Facilitator’s Note: (Concrete Experience 10 minutes) Present learners the slide questions Ask learners what their thoughts are on the questions.
Facilitator’s Note: (Publish and Process 10 minutes) The critical portion of this part of the ELM process is to force the learners to reflect. Ask a series of thought influencing questions, for example:
Q1: Best in class…or worst?
Q2: 37/100 or 37/37?
Q3: Disappointed or Elated?
Q4: Better than last score or worse?
Numbers have very little meaning without context. In this lesson we will learn how to place the results of our activities into meaningful context using variance analysis.
Disappointed or elated?

3. Terminal Learning Objective
Action: Calculate Volume and Performance Variances
Condition: FM Leaders in a classroom environment working as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: With at least 80% accuracy (70% for international learners) you must:
Determine the Purpose for Variance Analysis
Calculate the Flex Forecast and Volume Variance
Show Slide #3: TLO
Action: Calculate Volume and Performance Variances
Conditions: FM Leaders in a classroom environment working as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: With at least 80% accuracy (70% for international learners) you must:
Determine the Purpose for Variance Analysis
Calculate the Flex Forecast and Volume Variance
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. Calculate Volume and Performance Variances is a lesson designed to better understand the purpose for increasing cost effectiveness; terminology, and best practices response to threat. Also to understand the purpose of this Course and be familiar with the asymmetrical threat of lack of resources.

4. Determine the Purpose for Variance Analysis
Giving context to numbers creates their value
Starting by creating an expectation
Variance is difference between reality and expectation
Volume Variance isolates ‘effect’ due to volume change
All other variance to expectation is due to some sort of performance change
Show Slide #4: Purpose for Variance Analysis
Learning Step/Activity #1 Determine the Purpose for Variance Analysis
Method of Instruction: DSL (large or small group discussion)
Facilitator to learner Ratio: 2:25
Time of Instruction: 30 Minutes
Media: Power Point Presentation, Printed Reference Materials
Facilitator's Note: Before facilitating this lesson, ask the learners which of the 21st Century Soldier Competency do they think pertain to this lesson? Facilitate a discussion on the answers given and at the end of the lesson revisit it and see if the learners still believe their choice are the same.
Note: For this lesson these competencies should be talked about.
Communication and Engagement (Oral, written, and negotiation)
Critical thinking, intergovernmental, and multinational competence
Tactical and Technical Competence
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Giving context to numbers creates their value.
Starting by creating an expectation. What did we expect to achieve in the first place? This is the standard to which the measurement will be compared. That gives the measurement context.
Variance is difference between reality and expectation.
The difference between actual and expected may tell us “more cost” or “less cost” but it doesn’t tell us “why”. Variance analysis breaks that single number down into its components so we can identify the cause of the variance.
Volume Variance isolates ‘effect’ due to volume change. If we output more or less than was expected, we can expect our costs to change. Volume variance isolates the difference or variance due to changes in output. For example, consider fuel consumption on a road trip. If we drive more miles than we expected to drive, we can expect our fuel costs to be more than planned.
All other variance to expectation is due to some sort of performance change. If we drove the expected number of miles on the trip but our fuel cost was different than planned, we can attribute that to something else: difference in gas mileage, or maybe a change in gas prices from what was expected. That reflects performance.

5. Numbers Are Meaningless (without context)
Numbers without context are “Gee Whiz” Numbers:
All you can say is “Gee whiz, I got a grade of 37, that’s interesting.”
You have no idea of what a 37 means in relation to class average, your expectation, your instructor’s expectation, your past performance, etc
Managerial costing seeks to distill information or intelligence value from “Gee Whiz” data
Variance analysis does this by creating a foundation to convey intelligence in a disciplined manner
Show Slide #5: Describe Variances
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Numbers without context are “Gee Whiz” Numbers:
All you can say is “Gee whiz, I got a grade of 37, that’s interesting.”
You have know idea of what a 37 means in relation to class average, your expectation, your instructor’s expectation, your past performance, etc
Managerial costing seeks to distill information or intelligence value from “Gee Whiz” data. Note we are emphasizing the difference between information and data. Data lacks the formatting, context, and interpretation that makes up information.
Variance analysis converts data into information by creating a foundation to convey intelligence in a disciplined manner. It gives us a framework for analyzing the data and helps us to understand the differences between actual and expectation.

6. Favorable and Unfavorable Variances
Variances report information in comparison to an expectation
Let’s assume that the expectation is performance at the class average
If class average was 20, your 37 grade represents a “favorable variance of 17”
If class average was 87, your 37 grade represents an “unfavorable variance of 50”
Show Slide #6: Describe Variances (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Variances report information in comparison to an expectation.
Let’s assume that the expectation is performance at the class average.
If class average was 20, your 37 grade represents a “favorable variance of 17”
If class average was 87, your 37 grade represents an “unfavorable variance of 50”
Note that the variance conveys much more than the score. It not only tells us whether the number is favorable or unfavorable in relation to the expectation, but it also gives us some idea of the magnitude of the favorability or un-favorability. The 17 favorable variance is very large in relation to the score of 31. The (50) unfavorable variance is HUGE in relation to the score of 37.
(unfavorable variances are always bracketed) Unfavorable variances should always be displayed in brackets. This distinguishes them from negative numbers, which should be displayed with a minus sign for managerial reporting.
Note that the variance conveys much more than the score
Average
Score
Variance 20 37 17 87
(50)
(unfavorable variances are always bracketed)

7. Creating Expectations
Variance is the difference to a predetermined expectation
This is a powerful and meaningful measure
Since the expectation is predetermined, the variance is a measure of accountable performance
Expectations can be customized based on mission
Common expectations might be based on average, standard, prior period, plan, or forecast
Other expectations can also be used
Show Slide #7: Describe Variances (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Variance is the difference to a predetermined expectation.
This is a powerful and meaningful measure
Since the expectation is predetermined, the variance is a measure of accountable performance. Expectations should be clearly communicated in advance. Responsibility for meeting expectations should be clearly assigned. Who takes the credit for a favorable variance? Who takes the responsibility for an unfavorable variance? This is the essence of accountability.
Expectations can be customized based on mission. I would go farther to say they SHOULD be customized based on mission. What is a reasonable expectation for one area of responsibility might not even be applicable to another. Expectations and goals should represent a challenge (not too easy) but should be reasonable (not so difficult that people feel it is ridiculous to even try to meet the expectation.)
Common expectations might be based on average, standard, prior period, plan, or forecast
Other expectations can also be used. What might be a reasonable or useful expectation for your department/unit? (some goal for future performance, for example?)

8. Cost Variance
Consider an organization that spent $600K last month – what does this mean?
Consider a variance report with comparison to a number of different expectations:
Expectation
Variance
Interpretation
Plan
500
(100)
Spent more than committed to
Last Month
650 50
Spent less than last month – cost went down
Target
600 -
Met the target
Last Year
400
(200)
Spent a lot more than last year
Show Slide #8: Describe Variances (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Consider an organization that spent $600K last month – what does this mean? Without context, it’s difficult to know what it means.
Consider a variance report with comparison to a number of different expectations. The first column describes the type of expectation against which our actual performance of $600K will be compared. The second column reflects the cost for that expectation, against which we compare our actual performance of $600K. The Variance column reflects the difference between the expectation and our actual cost of $600K.
If the plan was to spend 500, then this represents an unfavorable variance of 100 because they spent $100K more than they planned. MORE COST IS BAD.
Compared to last month, this is a favorable variance of 50 because they spent less than the last month.
If the target was 600 there is no variance. They met the target.
Compared to last year, this is a 200 unfavorable variance, because they spent not just more but a LOT more than last year (50% more).
So you can see that the evaluation of the performance is dependent upon the context in which it is placed.

9. Revenue Variance
Consider an organization that had revenue of $600K last month – what does this mean?
Note that the reporting and interpretation of variance has changed since more revenue is favorable while more cost is unfavorable
Expectation
Variance
Interpretation
Plan
500
100
Sold more than committed to
Last Month
650
(50)
Sold less than last month – sales went down
Target
600 -
Met the target
Last Year
400
200
Sold a lot more than last year
Show Slide #9: Describe Variances (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Consider an organization that had revenue of $600K last month – what does this mean? Again the number itself have little meaning without context.
Note that the reporting and interpretation of variance has changed since more revenue is favorable while more cost is unfavorable.
If the plan was for 500, this is a favorable variance of 100, because MORE REVENUE IS GOOD.
Compared to last month they sold less, which is an unfavorable variance. Notice that the unfavorable variance is reported in brackets.
Compared to last year, they sold more. This is a favorable variance. Again, more revenue is good.

10. Digging Deeper into Root Causes
Revenue is a simple calculation of:
quantity * price per unit
Therefore there are only two root causes of a Revenue Variance
Price Changes –and– Volume Changes
Volume changes occur very frequently since there is much about volume that is subject to uncertainty
Volume changes also have significant cost impact since all variable cost is:
quantity * variable cost per unit
Show Slide #10: Describe Variances (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Revenue is a simple calculation of:
quantity * price per unit
We know this from the lesson on breakeven analysis.
Therefore there are only two root causes of a Revenue Variance
Price Changes –and– Volume Changes
An increase in price will increase revenue, and an increase in volume will increase revenue.
Volume changes occur very frequently since there is much about volume that is subject to uncertainty. While we do our best to estimate demand or volume of output, frequently it is out of our control.
Volume changes also have significant cost impact since all variable cost is:
quantity * variable cost per unit
Again, increases in volume will increase total variably cost, or increases in variable cost per unit will increase total unit cost.

11. LSA #1 Check on Learning
Q1. What is a variance? A1. Difference between reality and expectation Q2. If revenue is greater than expectation how is the variance described? A2. Favorable Q3. If cost is greater than expectation how is the variance described? A3. Unfavorable
Show Slide #11: LSA #1 Check on Learning
Facilitator’s Note: Ask check on learning question, facilitate discussion on answer given.
Q. What is a variance?
A. Difference between reality and expectation
Q. If revenue is greater than expectation how is the variance described?
A. Favorable
Q. If cost is greater than expectation how is the variance described?
A. Unfavorable

12. LSA #1 Summary
In this block, we discussed the purpose for variance analysis and that it is a pre-determined expectation that could be either favorable or un-favorable. We also discussed cost and revenue variances and some of the root causes.
Show Slide #12: LSA #1 Summary
Facilitator’s Note: In this block, we discussed the purpose for variance analysis and that it is a pre-determined expectation that could be either favorable or un-favorable. We also discussed cost and revenue variances and some of the root causes.

13. The Flexible Forecast Adjusts the forecast for changes in sales volume
Uses the same unit price and unit cost assumptions used in the forecast
Think of these as “what ifs”
“What” would the forecast have been “if” volume were different than planned
Show Slide #13: Calculate the Flex Forecast and Volume Variance
2. Learning Step/Activity #2 Calculate the Flex Forecast and Volume Variance
Method of Instruction: DSL (large or small group discussion)
Facilitator to learner Ratio: 2:25
Time of Instruction: 35 minutes
Media: Power Point Presentation, Printed Reference Materials
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
This adjusts the forecast for changes in sales volume
Uses the same unit price and unit cost assumptions used in the forecast
Think of these as “what ifs”
“What” would the forecast have been “if” volume were different than planned. Remember the lesson on flexible forecasting. Variable costs are expected to change as volume changes. Fixed costs should not change.

14. Flexible Forecast Example
Assumptions:
Price per Unit = $100
Fixed Cost = $10,000
Variable Cost per Unit = $50
Note that fixed cost doesn’t change
Units Sold
300
400
500
Revenue
$30,000
$40,000
$50,000
Fixed Cost
10,000
Var. Cost
15,000
20,000
25,000
Profit
$5,000
$10,000
$15,000
Show Slide #14: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Here are the assumptions:
Price per Unit = $100
Fixed Cost = $10,000
Variable Cost per Unit = $50
Note that fixed cost (by definition) doesn’t change as volume changes –

15. Flexible Forecast Example
Assumptions:
Price per Unit = $100
Fixed Cost = $10,000
Variable Cost per Unit = $50
Contribution margin change “falls through” to profit
Unit CM = $100 - $50 = $50
Units Sold
300
400
500
Revenue
$30,000
$40,000
$50,000
Fixed Cost
10,000
Var. Cost
15,000
20,000
25,000
Profit
$5,000
$10,000
$15,000
When units sold increases by 100,
profit increases by
100 * $50 unit CM = $5,000
Show Slide #15: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Further breakdown; Show formula
Assumptions:
Price per Unit = $100
Fixed Cost = $10,000
Variable Cost per Unit = $50
Unit CM = $100 - $50 = $50
Contribution margin change “falls through” to profit
When units sold increases by 100, profit increases by
100 * $50 unit CM = $5,000

16. So What???
Flexible forecasting helps us dig deeper into the root causes of change from expectation
Consider an organization where cost went up 20% but output went up 30%
Cost increased, but it increased less that we might have expected
How should we evaluate the compound effects of the volume change?
This approach is called Volume Variance Analysis
Show Slide #16: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Flexible forecasting helps us dig deeper into the root causes of change from expectation
Consider an organization where cost went up 20% but output went up 30%
Cost increased, but it increased less that we might have expected. The increase in cost is generally seen as unfavorable, but the cost increased less than it could have or should have given the increase in output.
How should we evaluate the compound effects of the volume change? What portion of this cost change is due to volume and what portion is due to performance or efficiency?
This approach is called Volume Variance Analysis. Volume variance analysis gives us the ability to isolate the changes due to volume and the changes due to performance.

17. Volume Variance Analysis
Step 1:
Calculate the “what if” for a flexible forecast at the actual volume
Step 2:
Compare the flexible forecast to forecast
This comparison isolates the impact of volume change
Step 3:
Compare the flexible forecast to actual results
This comparison isolates the impact of everything else which we will call performance variance
Show Slide #17: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Explain steps to learners;
Step 1:
Calculate the “what if” for a flexible forecast at the actual volume
Step 2:
Compare the flexible forecast to forecast
This comparison isolates the impact of volume change
Step 3:
Compare the flexible forecast to actual results
This comparison isolates the impact of everything else which we will call performance variance

18. Step 1: Calculate Flexible Forecast
Consider the organization with 30% volume increase where planned units were 100, variable cost per unit was 5, and there was no fixed cost
This means that given our plan assumptions that we would expect cost to have increased to 650 solely due to the fact that we produced more
Plan
Flexible Fcst
Units sold
100
130
Variable cost
500
650
Show Slide #18: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Consider the organization with 30% volume increase where planned units were 100, variable cost per unit was 5, and there was no fixed cost.
This means that given our plan assumptions that we would expect cost to have increased to 650 solely due to the fact that we produced more

19. Step 2: Compare to Plan
The variance (non dollar) in units sold is favorable since more output is logically favorable
The variance in variable cost is unfavorable since more cost is logically unfavorable
This means that given our plan assumptions that we would expect cost to have increased to 650 solely due to the fact that we produced more
Plan
Flexible Fcst
Volume Variance
Units sold
100
130 30
Variable cost
500
650
(150)
Show Slide #19: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
The variance (non dollar) in units sold is favorable since more output is logically favorable
The variance in variable cost is unfavorable since more cost is logically unfavorable
Given our assumptions we would expect cost to have increased to 650 solely due to the fact that we produced more. The additional cost, while unfavorable, is to be expected because of the change in volume

20. Step 3: Compare to Actual Results
Moved the volume variance column to the left of the flexible forecast to allow room
Now also show the variance between flexible forecast and actual between their columns
This means that actual variable costs were less than the level we would have expected at the volume actually produced
Plan
Volume Variance
Flexible Fcst
Performance Variance
Actual
Units sold
100 30
130 -
Variable cost
500
(150)
650 50
600
Show Slide #20: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Notice that the table has been rearranged: Moved the volume variance column to the left of the flexible forecast to allow room for another variance
Now also show the variance between flexible forecast and actual between their columns. The volume variance is displayed between the plan and the flexible forecast because any difference between these two numbers is due to volume changes. The performance variance is displayed between the flexible forecast and the actual, because any difference between these two numbers is due to some performance issue.
This means that actual variable costs were less than the level we would have expected at the volume actually produced. When the variable costs were normalized for the actual quantity of output (in the flexible forecast) we see that when output is 130, we would expect to spend $650. Instead we spent only $600. This $50 favorable!

21. Volume Variance Analysis
This analysis now presents a much more meaningful insight into what happened
Even though cost went up by 20% this analysis shows that there is a lot of good news here
The volume variance of (150) is very understandable and predictable
The performance variance indicates good work
Plan
Volume Variance
Flexible Fcst
Performance Variance
Actual
Units sold
100 30
130 -
Variable cost
500
(150)
650 50
600
Show Slide #21: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
This analysis now presents a much more meaningful insight into what happened
Even though cost went up by 20% this analysis shows that there is a lot of good news here
The volume variance of (150) is very understandable and predictable
The performance variance indicates good work controlling costs even though output was produced.

22. Fixed Cost Impact
Expand the example to include planned fixed at 80 and actual fixed cost at 90
Note: fixed cost never has a volume variance
Note: the sum of volume and performance variance nets to the total variance between plan and actual
Plan
Volume Variance
Flexible Fcst
Performance Variance
Actual
Units sold
100 30
130 -
Variable cost
500
(150)
650 50
600
Fixed cost 80
(10) 90
Total cost
580
730 40
690
Show Slide #22: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Expand the example to include planned fixed at 80 and actual fixed cost at 90
We’ll go line by line to make sure we understand every item in the table.
The planned volume was 100 units and the planned variable cost per unit was $5, so the plan was to spend $500
The actual volume was 130 units. In the flex forecast we prepare the forecast as if everything went as planned except for the number of units. So, we use our planned VC/unit of $5:
130 units * planned VC/unit $5 = 650
Comparing the flex forecast to the original plan gives an unfavorable variance of 150 because MORE COST IS BAD. Unfavorable variances are shown in brackets.
Now we compare the flex forecast to the actual. The actual cost for the 130 units was $600. We don’t need to know what the actual VC/unit was, but clearly it was less than $5. This is a favorable performance variance, which means that we did something that caused the cost increase to be less than it could have been.

23. Fixed Cost Impact
Expand the example to include planned fixed at 80 and actual fixed cost at 90
Note: fixed cost never has a volume variance
Note: the sum of volume and performance variance nets to the total variance between plan and actual
Plan
Volume Variance
Flexible Fcst
Performance Variance
Actual
Units sold
100 30
130 -
Variable cost
500
(150)
650 50
600
Fixed cost 80
(10) 90
Total cost
580
730 40
690
Show Slide #23: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Now let’s look at the fixed cost. The plan for fixed cost was 80. When preparing the flex forecast, we also use 80 because if everything had gone as planned except for the number of units sold, fixed cost would not have changed at all. Fixed cost, by definition, does not change as number of units changes. Fixed cost should never have a volume variance.
However, when we compare flex forecast to actual, we see an unfavorable variance of 10. Our actual fixed cost was 90. That means that the actual cost of things that are fixed in nature (rent, taxes, etc.) was greater than planned.

24. Fixed Cost Impact
Expand the example to include planned fixed at 80 and actual fixed cost at 90
Note: fixed cost never has a volume variance
Note: the sum of volume and performance variance nets to the total variance between plan and actual
Plan
Volume Variance
Flexible Fcst
Performance Variance
Actual
Units sold
100 30
130 -
Variable cost
500
(150)
650 50
600
Fixed cost 80
(10) 90
Total cost
580
730 40
690
Show Slide #24: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Let’s look at the total cost. Notice that the sum of the volume and performance variance nets to the total variance between plan and actual
The difference between the plan of 580 and the actual of 690 is (110) unfavorable.
The SUM of the variances also equals (110). (150) unfavorable volume variance + 40 favorable performance variance = (110)
Thus we have explained the total variance.

25. Fixed Cost Impact
Expand the example to include planned fixed at 80 and actual fixed cost at 90
Note: fixed cost never has a volume variance
Note: the sum of volume and performance variance nets to the total variance between plan and actual
Plan
Volume Variance
Flexible Fcst
Performance Variance
Actual
Units sold
100 30
130 -
Variable cost
500
(150)
650 50
600
Fixed cost 80
(10) 90
Total cost
580
730 40
690
Show Slide #25: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
We can also see that just as variable cost and fixed cost add together to equal total cost, the volume variance for variable cost, plus the non-existent volume variance for fixed cost equal the volume variance for total cost.
The same can be said for the performance variance. The 50 favorable variance for variable cost + (10) unfavorable variance for fixed cost sum to equal our 40 favorable performance variance for total cost.

26. Revenue (and Profit) Case
Expand the example to include planned price of 10 and actual price of 8
Make sure you know where every number came from
Note: revenue and costs variances net to profit variance
Plan
Volume Variance
Flexible Fcst
Performance Variance
Actual
Units sold
100 30
130 -
Revenue
1000
300
1300
(260)
1040
Variable cost
500
(150)
650 50
600
Fixed cost 80
(10) 90
Total cost
580
730 40
690
Profit
420
150
570
(220)
350
Show Slide #26: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Expand the example to include planned price of 10 and actual price of 8
Our plan was for 100 units sold for $10 each, giving us revenue of Total cost at this volume would be 580 (same as prior example) and profit is $420.
What actually happened was 130 units were sold for $8 each, total costs were $690 (same as prior example) and profit was $350.
We will go through each line again so you WILL know where every number came from.

27. Revenue (and Profit) Case
Expand the example to include planned price of 10 and actual price of 8
Make sure you know where every number came from
Note: revenue and costs variances net to profit variance
Plan
Volume Variance
Flexible Fcst
Performance Variance
Actual
Units sold
100 30
130 -
Revenue
1000
300
1300
(260)
1040
Variable cost
500
(150)
650 50
600
Fixed cost 80
(10) 90
Total cost
580
730 40
690
Profit
420
150
570
(220)
350
Show Slide #27: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Expand the example to include planned price of 10 and actual price of 8
Let’s look at Revenue. The plan was for 100 units at $10/unit for a total of $1000
The flex forecast reflects what would have happened if everything went as planned except for number of units sold units were sold, and we use the planned price of $10/unit to get flex revenue of $1300.
Actually, however, we only sold the units for $8 each. The drop in price might explain the increase in number of units sold! Total revenue was 130 * $8.
Compare the flex to the plan, we see that if all had gone according to plan except for number of units sold, our revenue would have increased $300. This is a favorable volume variance. More revenue is good.
Comparing the flex to the actual, we see that our revenue did increase because of the additional units sold, but not to the extent that it should have. The drop in price reduced our revenue by an unfavorable (260)
Make sure you know where every number came from
Note: revenue and costs variances net to profit variance

28. Revenue (and Profit) Case
Expand the example to include planned price of 10 and actual price of 8
Make sure you know where every number came from
Note: revenue and costs variances net to profit variance
Plan
Volume Variance
Flexible Fcst
Performance Variance
Actual
Units sold
100 30
130 -
Revenue
1000
300
1300
(260)
1040
Variable cost
500
(150)
650 50
600
Fixed cost 80
(10) 90
Total cost
580
730 40
690
Profit
420
150
570
(220)
350
Show Slide #28: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Total cost is the sum of fixed and variable. These are the same numbers from the prior example.

29. Revenue (and Profit) Case
Expand the example to include planned price of 10 and actual price of 8
Make sure you know where every number came from
Note: revenue and costs variances net to profit variance
Plan
Volume Variance
Flexible Fcst
Performance Variance
Actual
Units sold
100 30
130 -
Revenue
1000
300
1300
(260)
1040
Variable cost
500
(150)
650 50
600
Fixed cost 80
(10) 90
Total cost
580
730 40
690
Profit
420
150
570
(220)
350
Show Slide #29: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Profit is revenue minus total cost.
If we had sold 100 units as planned, our revenue would have been 1000, variable cost 500 and fixed cost 80, leaving profit of 420.
In the Flex forecast, if everything had gone as planned except for the number of units sold, we would have revenue of 1300, variable cost 650 and fixed cost 80, leaving profit of 570.
The difference between the planned profit and the flex profit is the volume variance for profit, which is 150 favorable. This represents the planned unit contribution margin of the additional units sold: 30 units * ($10 - $5) = $150
The difference between the flex forecast and the actual is the performance variance. It is (220) unfavorable. This is due to the unfavorable revenue variance of (260), and the favorable total cost variance of 40.

30. Revenue (and Profit) Case
Expand the example to include planned price of 10 and actual price of 8
Make sure you know where every number came from
Note: revenue and costs variances net to profit variance
Plan
Volume Variance
Flexible Fcst
Performance Variance
Actual
Units sold
100 30
130 -
Revenue
1000
300
1300
(260)
1040
Variable cost
500
(150)
650 50
600
Fixed cost 80
(10) 90
Total cost
580
730 40
690
Profit
420
150
570
(220)
350
Show Slide #30: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Notice that the net of the revenue and total cost variances are equal to the profit variances.
Volume variance: (150) = 150
Performance variance: (260) + 40 = (220)

31. Volume Variance Template
Plan
Flex Fcst
Actual
Revenue
Planned Units *
Planned Price
Actual Units *
Actual Price
Variable Cost
Planned Unit Cost
Actual Unit Cost
Fixed Cost
Planned
Planned Fixed Cost
Actual Fixed Cost
Profit
Planned Revenue – Planned Costs
Adjusted Revenue – Adjusted Costs
Actual Revenue – Actual Costs
Volume Variances
Performance Variances
Show Slide #31: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
This template is useful for remembering what goes where in volume variance analysis.
The rows on the table correspond to the Profit equation: Revenue – Variable Cost – Fixed cost = profit
The column headings reflect the chronology:
First we plan, then we perform.
We prepare our flex forecast to account for the difference in volume.

32. Volume Variance Template
Plan
Flex Fcst
Actual
Revenue
Planned Units *
Planned Price
Actual Units *
Actual Price
Variable Cost
Planned Unit Cost
Actual Unit Cost
Fixed Cost
Planned
Planned Fixed Cost
Actual Fixed Cost
Profit
Planned Revenue – Planned Costs
Adjusted Revenue – Adjusted Costs
Actual Revenue – Actual Costs
Volume Variances
Performance Variances
Show Slide #32: Calculate the Flex Forecast and Volume Variance (Cont.)
Facilitator’s Note: (Facilitator read and facilitate discussion using the slide)
Notice that the plan uses “planned number of units” and “planned price per unit” and “planned variable cost per unit” (all highlighted in yellow). This make sense, since this is the plan.
The actual, on the other hand, uses “actual number of units” and “actual price per unit” and “actual variable cost per unit” (all highlighted in green). This also make sense, since this is the actual.
The flex forecast uses the same assumptions about cost and price as in the plan, but the actual number of units.
Notice that the difference or variance between the Plan and the Flex forecast is solely due to volume or number of units.
Since the flex forecast and the actual both use the same number of units, any difference or variance between them is due to causes other than volume.

33. LSA #2 Check on Learning
Q1. How should we expect an increase in the number of units sold to affect variable cost? A1. It should cause an unfavorable volume variance, because variable cost should increase. Q2. The sum of the performance variances for revenue and total cost should be equal to what? A2. The performance variance for profit.
Show Slide #33: LSA #2 Check on Learning
Facilitator’s Note: Ask check on learning question, facilitate discussion on answer given.
Q. How should we expect an increase in the number of units sold to affect variable cost?
A. It should cause an unfavorable volume variance, because variable cost should increase.
Q. The sum of the performance variances for revenue and total cost should be equal to what?
A. The performance variance for profit.

34. LSA #2 Summary
During this lesson, we discussed calculating the Flex Forecast and Volume Variance and provided an in-depth example from beginning to end.
Show Slide #34: LSA #2 Summary
Facilitator Note: During this lesson, we discussed calculating the Flex Forecast and Volume Variance and provided an in-depth example from beginning to end.

35. Practical Exercise Show Slide #35: Practical Exercise Completion
Facilitator’s Note: At this time have learners log onto Black board and use the excel spreadsheet to record all their work.

36. TLO Summary Action: Calculate Volume and Performance Variances
Condition: FM Leaders in a classroom environment working as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: With at least 80% accuracy (70% for international learners) you must:
Determine the Purpose for Variance Analysis
Calculate the Flex Forecast and Volume Variance
Show Slide #36: TLO Summary
Facilitator’s Note: Restate the TLO
Action: Calculate Volume and Performance Variances
Conditions: FM Leaders in a classroom environment working as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: With at least 80% accuracy (70% for international learners) you must:
Determine the Purpose for Variance Analysis
Calculate the Flex Forecast and Volume Variance
“Or”
Facilitator 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.