1. Chapter 17 – Additional Topics in Variance Analysis
Accounting 4310
Chapter 17 – Additional Topics in Variance Analysis

2. Profit Variance Analysis
Comparison of actual results to budgeted results
Actual results vary based on production
When company produces more than sold, there is no effect on the sales activity variance BUT the profit variance is affected
Variable production costs need to be adjusted

3. Profit Variance Analysis
Variable production cost variance:
Actual variable cost – estimated variable cost X
Actual units produced
Actual variable production costs = flexible budget variable production costs +/- variable production cost variances
Can be treated as a period cost or it can be prorated between units sold and inventory

4. Absorption costing vs. Variable Costing
All manufacturing costs – DM, DL, Variable and fixed OH included in unit inventory cost
Variable costing
Only variable manufacturing costs – DM, DL, Var. OH included in unit inventory cost
Fixed OH expensed in period incurred
Production volume variance will be an adjustment when reconciling absorption and variable costing incomes

5. Direct Material Variances –When Purchases Do Not Equal Use
Price Variance
Purchase price variance (when purchased)
Quantity (Efficiency) Variance – based on use
By computing price variance when purchased, variance is reported earlier 8

6. Direct Material Variances
AP x AQ SP x AQ pur.
|__________________|
Price Variance
SP x AQ used SP x SQ
|______________|
Quantity Variance 9

7. Marketing Variances Marketing Variances
For revenues, the opposite holds true.
FAVORABLE: Actual > Standard
UNFAVORABLE: Actual < Standard
Marketing Variances
Price variance (Difference in sales prices)
Quantity variance (Difference in sales volumes)
Sales mix variance (Results from selling a different proportion of products than planned)
Sales volume (Difference in volume sold) 7

8. Marketing Variances Price –
Result of this variance lets management know how successful their price strategy was
Did they have to lower their price to sell products? Or were customers willing to pay a price premium?
Person who sets prices is responsible

9. Marketing Variances Quantity –
Mix – details consumer preferences for products, especially when the products are substitutes
Favorable (unfavorable) if consumers shift to a higher (lower) priced (CM) product
Must evaluate why customers chose one product over another
Marketing probably responsible

10. Marketing Variances Quantity: Sales (volume) Variance:
This variance tells us whether we sold more units than planned.
Favorable variance results if we sold more volume than planned.
Person responsible for generating demand for overall product is responsible (probably marketing)

11. Marketing Variances AP x AQ SP x AQ SP x SQ
|__________________| |_____________|
Price Variance Quantity Variance
|_________________________________|
Total Marketing Variance 12

12. Sales Volume Variance Sales volume variance can be broken down into:
Change in market share due to industry volume:
Tells us how much of our increased (decreased) sales is due to a bigger (smaller) overall market for our products
Our managers generally cannot control the overall industry volume.
Change in market share due to market share:
Tells us how much of our change in profits is due to increases or decreases in our hold on the market
Our managers should be able to control this variance.

13. Marketing Variances Quantity Variance:
Sales mix variance = (Actual quantity sold – quantity that would have been sold at the standard mix) x Standard CM
Sales quantity variance = (Quantity that would have been sold at the standard mix – budgeted sales quantity) x Standard CM

14. Production Mix and Yield Variances
Direct materials or direct labor efficiency variances can be broken down into:
Mix variance
Arises from a change in the inputs (different materials or labor used)
Standard price x (actual quantity x actual input at the standard mix)
Yield variance
Arises from the difference in expected results and actual results
Standard price x (actual input used at the standard mix – standard input allowed)

15. Variance Analysis in Nonmanufacturing Industries
Measures used: professional staff hours, room nights, seat miles, patient days
Goal – control labor and occupancy costs per sales dollar
Efficiency – must have a reliable measure of output activity that is linked to input
Routine tasks are better suited to variance analysis

16. Management of Variance Analysis
Variances will vary by company and industry
Impact of variance should be high
Controllability of variance should be considered
Management by exception can be practiced

17. Management of Variance Analysis
Management by exception – allows managers to focus only on those variances which are truly out of the ordinary
Management by exception allows managers to focus on certain areas
Maximizes return on management
Variance analysis should be performed often in order to make corrections as early as possible – at least every month if possible

18. Uses of Variance Analysis
Calculation of variances do not explain causes
Variances should be investigated
Often reasons for variances are explained beside the calculated variance
Favorable variances are not always good
Unfavorable variances are not always bad
It is not good to net variances
Netting of variances may cancel out large favorable variances against large unfavorable variances

19. Three Conditions Necessary to Use Standard Costs
There must be a way to measure outputs.
A predetermined standard of performance must exist.
There must be an ability to use variance information as feedback to make corrections and improvements.

20. Variance Analysis Cycle

21. Limitations on Standards
Don’t hold people accountable for too many variances.
Make sure you determine the cause of the variances; do not just mindlessly calculate them.
Any variance is only as good as the standards or planned activity to which actual is compared!!!!!!
Changing conditions may warrant changing the standards.
Variances should always be used for feedback and continuous improvement.