1. Variance Analysis

2. What is it?  The term variance refers to the difference between the budgeted figure and the actual outcome.  If there is a variance (a difference), managers need to figure out why. This is called budget control, and the following formula is used: Variance = Actual outcome – Budgeted Outcome

3. Types of variances  Favourable: the difference (discrepancy) works in favour of the organisation. e.g. The business budgeted $150 000 for production costs, but the actual costs were only $120 000. Therefore, the favourable variance is $30 000.

4. Types of variances  Unfavorable: the difference (discrepancy) works against the organisation; simply put, enough money wasn’t budgeted, the organisation overspent, or revenue was not enough.  Unfavorable variances are called adverse.

5. Variances must never, ever, ever be called positive or negative. Okay????

6. How does it look?  When highlighting a variance, write an (F) if the variance is favourable, or an (A) if the variance is unfavorable.  Page 243 – Complete the ‘Worked Example’. Careful!

7. Time to practice!  Complete the Question 3.18 on page 245 of your textbook.

8. Answers  Variance  Material costs – increase, unfavourable  Direct labour cost – decrease, favourable  Radio sales – increase, favourable  Pod Sales – decrease, unfavourable  Ad costs – increase, unfavourable

9. Questions 2 and 3  2- cost of materials rose above what was planned. Could be due to bad estimation or unexpected price increases. Could be due to currency exchange fluctuations  3- Total the revenues 46 to 47 000 – up  Costs 21 to 26 200 – ouch!!

10. Time to practice!  Complete the Question 3.4.4 (a,b,c) on page 385 of your old Hoang textbook.

11. Answers a) VARIABLEBUDGETACTUALVARIANCE Sales of product A250180 Sales of product B250260 Production Costs (000’s) 120150 Output per worker (units) 2022 Labour Costs100115

12. Answers b) Favourable variances are those that lead to higher than expected profits, i.e. actual revenues are higher than planned or actual costs are lower than budgeted costs. By contrast, adverse variances reduce profits. For example, whilst 115.– 100 = +15 (labour costs), this is unfavourable to the business as its actual labour costs are higher than planned. Hence, a positive difference in the actual outcome and the budgeted number does not mean that it is necessarily financially beneficial to the business.

13. Answers c) (i) Actual – Budgeted = $5,850 – $6,000 = $150 (F) c) (ii)  Budgeted: 10 x $100 = $1,000  Actual: 8 x $100 = $800  Variance = $200 (F)