1. Additional Topics in Variance Analysis Chapter 17 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. Profit Variance Analysis L.O. 1 Explain how to prorate variances to inventories and cost of goods sold. Most companies close variances to Cost of Goods Sold. Other companies prorate the variances. 17 - 2

3. Profit Variance Analysis Sales (units) Sales revenue Less: Variable costs Variable manufacturing costs Variable selling and administrative Contribution margin Fixed costs: Fixed manufacturing overhead Fixed selling and administrative costs Profit $28,890 U $28.890 U 4,500 F $24,390 U Mfg. Variances (based on 90,000 units produced) $ 4,000 F 7,680 F $11,680 F Marketing and Admin. VariancesActual 80,000 $840,000 332,890 68,000 $439,110 195,500 132,320 $111,290 $40,000 F $40,000 F $40,000 F Sales Price Variance 80,000 $800,000 304,000 72,000 $424,000 200,000 140,000 $ 84,000 Flexible Budget $200,000 U 76,000 F 18,000 F $106,000 U -0- $106,000 U Sales Activity Variance 100,000 $1,000,000 380,000 90,000 $ 530,000 200,000 140,000 $ 190,000 Master Budget Bayou Division Profit Variance Analysis (when units produced do not equal units sold) Total variance from flexible budget = $27,290 F Total variance from master budget = $78,710 U LO1 17 - 3

4. Manufacturing Variances Based on 90,000 Units Produced LO1 Variable manufacturing costs: Actual quantity produced (AP –SP) 90,000 × ($4.121 - $3.800) = $28,890 U Fixed manufacturing costs = $4,500 F 17 - 4

5. Closing Production Cost Variance to COGS LO1 Cost of Goods Sold24,390 Fixed Overhead Price Variance 4,500 Variable Production Cost Variance28,890 To close production cost variances to Cost of Goods Sold. Journal entry to close production variance to cost of goods sold: 17 - 5

6. Prorating Production Cost Variances LO1 Cost of Goods Sold21,680 Fixed Overhead Price Variance 4,500 Finished Goods Inventory 2,710 Variable Production Cost Variance28,890 To close production cost variances to Finished Goods and Cost of Goods Sold. $21,680 (8/9 of the variance) is closed to Cost of Goods Sold and $2,710 (1/9 of the variance) is closed to Finished Goods Inventory. Journal entry to prorate production variance to cost of goods sold and finished goods inventory: 17 - 6

7. Reconciling Variable Costing and Absorption Costing LO1 Using variable costing, the entire fixed production cost of $195,500 is expensed. Using standard full absorption costing, a portion of the fixed overhead remains with the 10,000 units in inventory. 10,000 × $2.00 = $20,000 $195,500 – $20,000 = $175,500 17 - 7

8. Standard Costs for Materials LO1 Standard costs: 4 pounds per frame @ $.055 per pound= $2.20 per frame Frames produced in August 80,000 Actual materials purchased and used: 328,000 pounds @ $0.60 per pound= $196,800 In addition, assume instead that 350,000 pounds were purchased in August at $0.60 per pound and 328,000 pounds were used. What are the variances? 17 - 8

9. Direct Materials Variance: No Materials Inventory LO1 (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 17 - 9

10. Direct Materials Variance: Materials Inventory LO1 (1) Actual (2) Actual Inputs at Standard Prices (3) Flexible Production Budget Actual materials price (AP = $0.60) × Actual quantity (AQ = 350,000 pounds) of direct materials Standard materials price (SP = $0.55) × Actual quantity (AQ = 350,000 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 = $210,000SP × AQ = $192,500 $0.55 × 320,000 pounds allowed = $176,000 Efficiency variance: $180,400 – $176,000 = $4,400 U Price variance: $210,000– $192,500 = $17,500 U $0.55 × 328,000 pounds used = $180,400 SP × SQ Purchase Computations Usage Computations 17 - 10

11. Materials: Standard Costing System LO1 Materials Inventory192,500 Material Price Variance 17,500 Accounts Payable$210,000 To record the purchase of 350,000 pounds of material with an actual price of $0.60 per pound and a standard price of $0.55 per pound. Journal entry to record purchase of materials: Work-in-Process Inventory176,000 Material Efficiency Variance 4,800 Materials Inventory$180,400 To record the use of 328,000 pounds of material with a standard price of $0.55 per pound. Standard use is 320,000 pounds. Journal entry to record materials used: 17 - 11

12. Market Share Variance and Industry Volume Variance L.O. 2 Use market share variances to evaluate marketing performance. Industry volume variance: Portion of the sales activity variance due to changes in industry volume Market share variance: Portion of the activity variance due to changes in the company’s proportion of sales in the markets in which the company operates 17 - 12

13. Sales Activity Variances L.O. 3 Use sales mix and quantity variances to evaluate marketing performance. Sales mix variance: Variance arising from the relative proportion of different products sold Sales quantity variance: Variance occurring in multiproduct companies from the change in volume of sales, independent of any change in sales mix 17 - 13

14. Production Mix and Yield Variances L.O. 4 Evaluate production performance using production mix and yield variances. Product mix variance: Variance that arises from a change in the relative proportion of inputs (a materials or labor mix variance) Production yield variance: Difference between expected output from a given level of inputs and the actual outputobtained from those inputs 17 - 14

15. Variance Analysis in Nonmanufacturing Settings L.O. 5 Apply the variance analysis model to nonmanufacturing costs. Output Measures in Service Organizations Organization Public accounting, legal, and consulting firmsProfessional staff hours HotelRoom-nights, guests AirlineSeat-miles, revenue-miles HospitalPatient-days 17 - 15

16. Variance and Standards L.O. 6 Determine which variances to investigate. Management by exception: Approach to management requiring that reports emphasize the deviation from an accepted base point, such as a standard, a budget, an industry average, or a prior period experience. 17 - 16

17. End of Chapter 17 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin