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2. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Fundamentals of Variance Analysis Chapter 16

3. 16-3 Using Budgets for Performance Evaluation LO 16-1 Use budgets for performance evaluation. Operating Budgets Budgeted income statement, production budget, budgeted cost of goods sold, and supporting budgets Financial Budgets Budgets of financial resources; for example, the cash budget and the budgeted balance sheet Variance Difference between planned result and actual outcome LO 16-1

4. 16-4 Profit Variance Bayou Division Budget and Actual Results August Sales (units) Sales revenue Less: Variable costs Variable mfg. costs Variable selling and administrative Total variable costs Contribution margin Fixed costs: Fixed manufacturing overhead Fixed selling and administrative costs Total fixed costs Profit 80,000 $840,000 329,680 68,000 $397,680 $442,320 195,500 132,320 $327,820 $114,500 20,000 U $160,000 U 50,320 F 22,000 F $ 72,320 F $ 87,680 U 4,500 F 7,680 F $ 12,180 F $ 75,500 U 100,000 a $1,000,000 380,000 b 90,000 c $ 470,000 $ 530,000 200,000 140,000 $ 340,000 $ 190,000 ActualVariance Master Budget a $10.00 per unit b $3.80 per unit c $0.90 per unit LO 16-1

5. 16-5 Flexible Budgeting LO 16-2 Develop and use flexible budgets. Static Budget Budget for a single activity level; usually the master budget Flexible Budget Budget that indicates revenues, costs, and profits for different levels of activity LO 16-2

6. 16-6 Sales Activity Variance LO 16-3 Compute and interpret the sales activity variance. Sales Activity Variance The difference between operating profit in the master budget and operating profit in the flexible budget that arises because the actual number of units sold is different from the budgeted number LO 16-3

7. 16-7 Sales Activity Variance Bayou Division Flexible and Master Budget August Sales (units) Sales revenue (@ $10.00 per unit) Less: Variable costs Variable mfg. costs (@ $3.80 per unit) Variable selling and admin. (@ $0.90 per unit) Total variable costs Contribution margin Fixed costs: Fixed manufacturing overhead Fixed selling and administrative costs Total fixed costs Profit 80,000 $800,000 304,000 72,000 $376,000 $424,000 200,000 140,000 $340,000 $ 84,000 20,000 U $200,000 U 76,000 F 18,000 F $ 94,000 F $106,000 U -0- $106,000 U 100,000 $1,000,000 380,000 90,000 $ 470,000 $ 530,000 200,000 140,000 $ 340,000 $ 190,000 Flexible Budget Sales-Activity Variance Master Budget LO 16-3

8. 16-8 Profit Variance Analysis LO 16-4 Prepare and use a profit variance analysis. Profit Variance Analysis Analysis of the causes of differences between budgeted profits and the actual profits earned Sales price variance Fixed production cost variances Variable production cost variances Marketing and administrative cost variances LO 16-4

9. 16-9 Sales Price Variance Difference between the actual selling price and budgeted selling price multiplied by the actual number of units sold ($10.50 - $10) x 80,000 units = $40,000 F LO 16-4

10. 16-10 Variable Cost Variance Analysis LO 16-5 Compute and use variable cost variances. (1) Actual (AP × AQ) (2) Actual Inputs at Standard Prices (SP × AQ) (3) Flexible Production Budget (SP × SQ) Total variance (1) – (3) Actual input price (AP) times actual quantity (AQ) of input Standard input price (SP) times actual quantity (AQ) of input Standard input price (SP) times standard quantity (SQ) of input allowed for actual good output Price variance (1) – (2) Efficiency variance (2) – (3) LO 16-5

11. 16-11 Production Cost Variance Price Variance Difference between actual price and budgeted price Multiply this difference by the actual quantity purchased. Price variance=(AP × AQ) – (SP × AQ) =AQ(AP – SP) LO 16-5

12. 16-12 Production Efficiency Variance Efficiency Variance Difference between the actual quantity used and the budgeted quantity for the actual level of activity. Multiply this difference by the budgeted price per unit. Price variance=(SP × AQ) – (SP × SQ) =SP(AQ – SQ) LO 16-5

13. 16-13 Direct Materials Variance (1) Actual (2) Actual Inputs at Standard 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 materials allowed for actual output AP × AQ = $196,800SP × AQ = $180,400SP × 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 LO 16-5

14. 16-14 Direct Labor Variance (1) Actual (2) Actual Inputs at Standard Prices (3) Flexible Production Budget Actual labor price (AP = $18) × Actual quantity (AQ = 4,400 hours) of direct labor Standard labor price (SP = $20) × Actual quantity (AQ = 4,400 hours) of direct labor Standard labor price (SP = $20) × Standard quantity (SQ = 4,000 hours) of direct labor allowed for actual output AP × AQ = $79,200SP × AQ = $88,000SP × SQ = $80,000 Total variance = $8,800 – $8,000 = $800 F Price variance $79,200 – $88,000 = $8,800 F Efficiency variance $88,000 – $80,000 = $8,000 U LO 16-5

15. 16-15 Variable Overhead Variance (1) Actual (2) Actual Inputs at Standard Prices (3) Flexible Production Budget Sum of actual variable manufacturing overhead costs Standard variable overhead price (SP = $12) × Actual quantity (AQ = 4,400 hours) of the overhead base Standard variable overhead price (SP = $12) × Standard quantity (SQ = 4,000 hours) of the overhead base allowed for actual output produced AP × AQ = $53,680SP × AQ = $52,800SP × SQ = $48,000 Total variance = $880 + $4,800 = $5,680 U Price variance $53,680– $52,800 = $880 U Efficiency variance $52,800– $48,000 = $4,800 U LO 16-5

16. 16-16 Fixed Cost Variances LO 16-6 Compute and use fixed cost variances. Spending (or budget) variance Price variance for fixed overhead The difference between budgeted and actual fixed overhead $195,500 actual – $200,000 budget = $4,500 F LO 16-6

17. 16-17 End of Chapter 16