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Chapter 15 Fundamentals of Variance Analysis

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15-2 Learning Objectives 4.Prepare and use a profit variance analysis. 2.Develop and use flexible budgets. 3.Compute and interpret the sales activity variance. 5.Compute and use variable cost variances. 1.Use budgets for performance evaluation. 6.Compute and use fixed cost variances. 7.(Appendix A) Understand how to record costs in a standard costing system.

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15-3 Budgets and Performance Evaluations L.O. 1 Use budgets for performance evaluation. Budgeted income statement, production budget, budgeted cost of goods sold, and supporting budgets Operating Budgets Budgets of financial resources; for example, the cash budget and the budgeted balance sheet Financial Budgets Difference between planned result and actual outcome Variance

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15-4 Profit Variances Variance that, taken alone, increases operating profit Favorable Variance Variance that, taken alone, reduces operating profit Unfavorable Variance

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15-5 Budgets: An Example Bayou Division Budget and Actual Results August

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15-6 Budgets: An Example Continued Bayou Division Budget and Actual Results August

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15-7 Flexible Budgeting L.O. 2 Develop and use flexible budgets. Budget for a single activity level; usually the master budget Static Budget Budget that indicates revenues, costs, and profits for different levels of activity Flexible Budget

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15-8 Sales Activity Variance L.O. 3 Compute and interpret the sales activity variance. 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; also known as sales volume variance

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15-9 Profit Variance L.O. 4 Prepare and use a profit variance analysis. Analysis of the causes of differences between budgeted profits and actual profits Profit Variance Analysis Sales price variance Production cost variances Marketing and administrative cost variances

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15-10 Profit Variance Analysis Bayou Division Profit Variance Analysis August Total variance from master budget = $75,000 U Total variance from flexible budget = $31,000 F Sales activity variance

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15-11 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 * * From the profit variance analysis Sales Price Variance

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15-12 Variable Production Costs Provides the quantities of each input required to produce a unit of output and the budgeted unit price for each input Standard Cost Sheet

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15-13 Production Cost Variance Actual Actual Inputs at Standard Prices Flexible Production Budget 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 AP x AQSP x AQSP x SQ Total variance (1) minus 3) Price variance (1) minus (2) Efficiency variance (1) minus (3) L.O. 5 Compute and use variable cost variances. (1) (2)(3)

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15-14 Production Cost Variance Continued Price Variance Difference between actual price and budgeted price Multiply this difference by the actual quantity purchased AQ AP - SP

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15-15 Production Cost Variance Continued 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 SP AQ - SQ

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15-16 Direct Materials Variance Frames produced in August80,000 Direct materials Actual materials cost 328,000 lbs @ $.60/lb $196,800 Price variance AQ AP - SP 328,000 $.60 - $.55= $16,400 U Efficiency variance SP AQ - SQ $.55 328,000 – 320,000= $4,400 U 80,000 x 4 lbs $16,400 U$4,400 U $20,800 U Total material variance

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15-17 Direct Labor Variance Direct labor Actual direct labor cost 4,400 hours @ $18/hr$79,200 Price variance 4,400 $18 - $20 = $8,800 F AQ AP - SP Efficiency variance $20 4,400 – 4,000 = $8,000 U SP AQ - SQ 80,000 x.05 Total direct labor variance $800 F $8,800 F $8,000 U

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15-18 Variable Overhead Variance Variable overhead Actual variable overhead cost$53,680 Actual overhead- Actual inputs @ standard price or POHR Total variable overhead variance $5,680 U $53,680 - $12 4,400 = $880 U Price variance = $4,800 U Efficiency variance $12 4,400 – 4,000 $4,800 U$880 U

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15-19 Total Variable Manufacturing Cost Variance Materials PriceEfficiency $20,800 U16,400 U8,000 U $800 F8,800 F8,000 U Direct Labor Variable Overhead $5,680 U880 U4,800 U $25,680 U Total variable manufacturing cost variance Total

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15-20 Fixed Cost Variance L.O. 6 Compute and use fixed cost variances. Spending (or budget) Variance Price variance for fixed overhead The difference between budgeted and actual fixed overhead $195,000 – $200,000 = $5,000 F

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15-21 Production Volume Variance Arises because actual production differs from budgeted production. The difference between budgeted and applied fixed overhead $200,000 budget – $160,000 applied = $40,000 U $200,000 budget 100,000 budgeted units = 2 per unit 80,000 units x $2 = $160,000 applied

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15-22 Chapter 15 Is this Favorable or Unfavorable ?

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Copyright © 2008 Prentice Hall All rights reserved 11-1 Flexible Budgets and Standard Costs Chapter 11.

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