1. Fundamentals of Cost Accounting, 4th edition Lanen/Anderson/Maher
© 2014 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.  This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 

2. Additional Topics in Variance Analysis
Chapter 17
Chapter 17: Additional Topics in Variance Analysis
In this chapter, we discuss additional variances to illustrate some of the ways the basic variance analysis model can be extended and adapted to specific circumstances. The basic principles are exactly the same as those we discussed in Chapter 16.

3. Learning Objectives
LO 17-1 Explain how to prorate variances to inventories and
cost of goods sold.
LO 17-2 Use market share variances to evaluate marketing
performance.
LO 17-3 Use sales mix and quantity variances to evaluate
marketing performance.
LO 17-4 Evaluate production performance using production
mix and yield variances.
LO 17-5 Apply the variance analysis model to nonmanufacturing
costs.
LO 17-6 Determine which variances to investigate.
After studying this chapter you should be able to: Explain how to prorate variances to inventories and cost of goods sold. Use market share variances to evaluate marketing performance. Use sales mix and quantity variances to evaluate marketing performance. Evaluate production performance using production mix and yield variances. Apply the variance analysis model to nonmanufacturing costs. And, determine which variances to investigate.

4. Profit Variance Analysis
LO 17-1
Profit Variance Analysis
LO 17-1 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.
If a company closes the variances to Cost of Goods Sold, Cost of Goods Sold increases due to unfavorable variances. If the variances are favorable Cost of Goods Sold decreases.

5. Profit Variance Analysis
LO 17-1
Profit Variance Analysis
Bayou Division
Profit Variance Analysis (when units produced do not equal units sold)
Actual
Mfg.
Variances
(based on
90,000 units
produced)
Marketing
and Admin.
Variances
Sales
Price
Variance
Flexible
Budget
Sales
Activity
Variance
Master
Budget
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
80,000
$840,000
332,890
68,000
$439,110
195,500
132,320
$111,290
$28,890 U
$ U
4,500 F
$24,390 U
$ 4,000 F
7,680 F
$11,680 F
$40,000 F
80,000
$800,000
304,000
72,000
$424,000
200,000
140,000
$ 84,000
$200,000 U
76,000 F
18,000 F
$106,000 U
-0-
$106,000 U
100,000
$1,000,000
380,000
90,000
$ 530,000
200,000
140,000
$ 190,000
In our analysis in Chapter 16, production and sales volume were both 80,000 units. Suppose, now, that the Bayou Division produced 90,000 units and sold 80,000. This changes our variable manufacturing costs variance. In Chapter 16 we saw that actual variable manufacturing costs were $4.121 per unit (actual variable manufacturing costs were $329,680 divided by 80,000 units equals $4.121 per unit). If 90,000 units were produced, the actual costs would be $370,890 ($4.121 per unit times 90,000 units). The production cost variance can be prorated to cost of goods sold and inventory or treated as an expense and written off to cost of goods sold in August.
Total variance from master budget = $78,710 U
Total variance from flexible
budget = $27,290 F

6. Manufacturing Variances Based on 90,000 Units Produced
LO 17-1
Manufacturing Variances Based on 90,000 Units Produced
Variable manufacturing costs:
Actual quantity produced (AP –SP)
90,000 × ($ $3.800) = $28,890 U
Fixed manufacturing costs = $4,500 F
The production cost variances can be prorated to cost of goods sold and inventory or treated as an expense and written off to cost of goods sold in August.

7. Closing Production Cost Variance to COGS
Journal entry to close production
variance to cost of goods sold:
Cost of Goods Sold ,390
Fixed Overhead Price Variance 4,500
Variable Production Cost Variance ,890
To close production cost variances to Cost of Goods Sold.
Closing production costs variances to Cost of Goods Sold is just a debit to Cost of Goods Sold for the total unfavorable variance of $24,390 (see, the variance was unfavorable and increases cost of goods sold and decreases profits), a debit to the Fixed Overhead Price Variance for $4,500 and a credit to Variable Production Cost Variances for the total of $28,890.

8. Prorating Production Cost Variances
LO 17-1
Prorating Production Cost Variances
Journal entry to prorate production variance to
cost of goods sold and finished goods inventory:
Cost of Goods Sold ,680
Fixed Overhead Price Variance 4,500
Finished Goods Inventory ,710
Variable Production Cost Variance ,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.
Prorating the variances, the fixed manufacturing variance is still closed to cost of goods sold because it is fixed and, therefore, not dependent on the number of units produced. The variable production variance is prorated 8/9 (80,000 units ÷ 90,000 units) to cost of goods sold and 1/9 (10,000 units ÷ 90,000 units) to ending finished goods inventory. Notice, the unfavorable variance increased cost of goods sold for the 80,000 units sold and increased the cost of finished goods inventory for the 10,000 units still in inventory.

9. Reconciling Variable Costing and Absorption Costing
LO 17-1
Reconciling Variable Costing and Absorption Costing
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.
Standard Full Absorption Costing
Allocation to Inventory
10,000 × $2.00 = $20,000
Amount to Expense
$195,500 – $20,000 = $175,500
Using standard full absorption costing, only $175,500 of the total fixed manufacturing overhead is expensed. This includes $160,000 of the fixed overhead in standard cost of goods sold, an unfavorable production volume variance of $20,000, and a favorable budget variance of $4,500.

10. Standard Costs for Materials
LO 17-1
Standard Costs for Materials
Standard costs:
4 pounds per $.055 per pound = $2.20 per frame
Frames produced in August ,000
Actual materials purchased and used:
328,000 $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.
Using the information regarding standard cost for materials, let’s compare the variances when there is no materials inventory and when materials inventory exists.
What are the variances?

11. Direct Materials Variance: No Materials Inventory
LO 17-1
Direct Materials Variance: No Materials Inventory
(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
× Standard quantity
(SQ = 320,000 pounds)
allowed for actual output
AP × AQ = $196,800
SP × AQ = $180,400
SP × 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
In Chapter 16, we calculated the materials variance. Bayou purchased and used 328,000 pounds of direct material. But what if Bayou purchased some material that remains in inventory?

12. Direct Materials Variance: Materials Inventory
LO 17-1
Direct Materials Variance: Materials Inventory
(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 = $210,000
SP × AQ = $192,500
Price variance:
$210,000– $192,500
= $17,500 U
Purchase
Computations
Suppose that 350,000 (rather than 328,000) pounds were purchased during August and inventory August 1 was zero. The price variance is the difference between the actual price and the standard price for the actual number of units PURCHASED. The efficiency variance is the difference between the actual quantity USED and the standard quantity. Actual quantity refers to quantity purchased for the price variance and actual quantity used for the efficiency variance. Of course, for labor and overhead, you purchase and use the same quantity but materials can be carried in inventory.
SP × SQ
Usage
Computations
$0.55 × 328,000
pounds used = $180,400
$0.55 × 320,000
pounds allowed = $176,000
Efficiency variance:
$180,400 – $176,000 = $4,400 U

13. Materials: Standard Costing System
LO 17-1
Materials: Standard Costing System
Materials Inventory ,500
Material Price Variance ,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 Inventory ,000
Material Efficiency Variance ,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:
In a standard costing system, costs are recorded at the standard. Purchasing 350,000 pounds of material for $210,000 ($0.60 per pound) results in an accounts payable of $210,000. However, materials are recorded in inventory at the standard price of $0.55 per pound or $192,500 (350,000 pounds at $0.55 per pound). The $17,500 price variance is recorded in the variance account. And when materials are put into production, the standard material charge (remember from Chapter 16, the standard cost of materials is $2.20, 4 pounds of material at $ 0.55 a pound) is recorded in work-in-process and the variance is recorded in the material efficiency variance account. Standard material cost for 80,000 units is $176,000. Recording costs at standard and recording the variances allows managers to see the variances sooner than if costs were recorded at actual.

14. Market Share Variance and Industry Volume Variance
LO 17-2
Market Share Variance and Industry Volume Variance
LO 17-2 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
Recall from Chapter 16, the sales activity variance was $160,000 unfavorable. Organizations need to evaluate the sales activity variance in terms of market performance. The industry volume variance is the portion of the sales activity variance due to changes in industry volume and the market share variance is the portion of the activity variance due to changes in the company’s proportion of sales in the market in which the company operates. This variance is very useful for performance evaluation. Why did the Bayou Division sell 20,000 frames fewer than budgeted?

15. Market Share Variance (500,000 – 400,000) × 25%
LO 17-2
Market Share Variance
(500,000 – 400,000) × 25%
= 25,000 additional frames
(16% – 25%) × 500,000
= 45,000 fewer frames
Difference between
actual and
budgeted sales volume
= 20,000 fewer frames
Industry
volume
Market
share
If estimated sales volume of 100,000 frames was based on an estimate of a total of 400,000 frames being sold in the market and Bayou historically having 25% of the market, and only 80,000 frames were sold, what happened? First, if 500,000 total frames were actually sold in the market in August, Bayou should have increased sales by 25,000 (25% of the additional 100,000 frames sold in the market). In fact, Bayou’s market share fell to 16% (80,000 of the 500,000 frames sold). The 9% decrease in market share resulted in 45,000 fewer frames being sold. Let’s take a good look at the net 20,000 decrease in number of frames sold.

16. Sales Activity Variance
LO 17-2
Sales Activity Variance
Industry volume variance
Market share variance
Sales activity variance
($10.00 – $4.70) × 25,000 F
($10.00 – $4.70) × 45,000 U
($10.00 – $4.70) × 20,000 U
$132,500 F
238,500 U
$106,000 U
Bayou Division
Sales Activity Variance
August
The standard, or budgeted, contribution margin of $5.30 per unit ($10 sales price less $4.70 in variable costs) multiplied by the 25,000 unit increase in Bayou’s share of the industry sales is a $132,500 favorable industry volume variance. However, the 45,000 units that Bayou Division lost in market share times the standard contribution margin of $5.30 per unit is a $238,500 unfavorable market share variance. The result is a $106,000 unfavorable total sales activity variance.

17. Sales Activity Variances
LO 17-3
Sales Activity Variances
LO 17-3 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
The sales mix variance measures the impact of selling one product rather than another. The sales quantity variance occurs in multiproduct companies from the change in volume of sales, independent of any change in sales mix. Let’s continue with our analysis of Custom Electronics. Custom Electronics budgeted a sales mix of 20% industrial, 80% standard, but had a sales mix of 23% industrial, 77% standard. Budgeted sales were 50,000 units and actual sales were 40,000 units.

18. Sales Mix and Sales Quantity
LO 17-3
Sales Mix and Sales Quantity
Custom Electronics
Sales Mix and Sales Quantity Variances
February
Standard selling price
Standard variable costs
Standard contribution margin per unit
Budgeted sales quantity
Budgeted sales mix
Budgeted contribution margin
Actual sales mix
Actual sales quantity
Budgeted contribution margin at actual quantities
Sales activity variance $
8.00 $
10,000
20%
$70,000
23%
9,200
$64,400a $
2.00 $
40,000
80%
$120,000
77%
30,800
$ 92,400b
50,000
$190,000
$156,800
$ 33,200 Uc
Industrial
Standard
Total
a $7 per unit × 9,200 units b $3 per unit × 30,800 units c $156,800 – $190,000
When a company sells more than one product, the sales mix variance is also very important. Suppose Custom Electronics sells two models of electrical switches, the industrial and the standard. Budgeted sales is 50,000 units with a sales mix of 20% industrial and 80% standard. Industrial has a budgeted contribution margin of $7.00 per unit for a total contribution margin of $70,000. Standard has a budgeted contribution margin of $3.00 per unit for a total contribution margin of $120,000. Budgeted contribution margin for Custom Electronics is $190,000 ($70,000 plus $120,000). Data on the two models for February shows that the actual sales were 40,000 units with a sales mix of 23% industrial and 77% standard. Actual contribution margin for industrial was $64,400 (9,200 units at $7 per unit) and for standard was $92,400 (30,800 units at $3 per unit). This resulted in an unfavorable sales activity variance of $33,200.

19. Sales Mix and Sales Quantity
LO 17-3
Sales Mix and Sales Quantity
Sales Activity Variance
Flexible Budget
(SCM × AQ)
(SCM × ASQ)
Master Budget
(SCM × SQ)
Mix Variance
Quantity Variance
Industrial
$7 × 9,200
= $64,400
$7 × (0.2 × 40,000)
$56,000
$7 × 10,000
= $70,000
Activity variance = $5,600 U
$8,400 F
$14,000 U
Standard
$3 × 30,800
= $92,400
$3 × (0.8 × 40,000)
$96,000
$3 × 40,000
= $120,000
Activity variance = $27,600 U
$3,600 U
$24,000 U
Let’s break the $33,200 unfavorable sales activity variance down into the mix and quantity variances. The mix variance isolates the difference between the actual quantity sold and the quantity of units that would have been sold at the standard mix, given the actual sales quantity. For industrial, the actual units sold were 9,200. If total units sold was 40,000 and the standard or budgeted sales mix for the industrial switch is 20% the standard quantity mix would have been sales of 8,000 units. So the difference of 1,200 units times the standard contribution margin equals a mix variance for the industrial switch of $8,400 favorable. The quantity variance is the difference between the quantity of units that would have been sold at the standard mix given the actual total sales quantity and the standard or budgeted quantity (the difference between the 8,000 standard units of the industrial switch if sales quantity was only 40,000 units and the budgeted quantity of 10,000 units). Multiplying this difference of 2,000 units by the standard contribution margin calculates the quantity variance for the industrial switch of $14,000 unfavorable. Total activity variance for the industrial switch is $5,600 unfavorable ($8,400 favorable mix variance and $14,000 unfavorable quantity variance). Doing the same variance calculations for the standard switch results in a $3,600 unfavorable mix variance and a $24,000 unfavorable quantity variance for a total unfavorable activity variance of $27,600. We now have the breakdown of the $33,200 unfavorable activity variance. $4,800 total favorable mix variance and $38,000 unfavorable quantity variance. This should be intuitive. The total mix variance was favorable because Custom Electronics sold more industrial switches and fewer standard switches than planned. And the industrial switches have a higher contribution margin. But, Custom Electronics also sold fewer total units than budgeted resulting in an unfavorable quantity variance.
Total
$156,800
$152,000
= $190,000
Activity variance = $33,200 U
$4,800 F
$38,000 U
SCM = Standard contribution margin per unit.
ASQ = Quantity of units that would have been sold at the standard mix.

20. Production Mix and Yield Variances
LO 17-4
Production Mix and Yield Variances
LO 17-4 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 output obtained from those inputs
Now, let’s move to production. The production mix variances arise from a change in the relative proportion of inputs to the product. The production yield variance is the difference between expected output from a given level of inputs and the actual output obtained from those inputs. We will review Jersey Chemicals and analyze the production mix and yield variances.

21. Production Mix and Yield Variances
LO 17-4
Production Mix and Yield Variances
Jersey Chemicals makes EZ-Foam which
requires two chemicals.
C-30….
D-12….
$ 5
$15
0.6
0.4
1.0
Direct
Materials
Standard Price
per Gallon
Standard Number of
Gallons of Chemical per
Gallon of Finished Product
Suppose Jersey Chemicals makes EZ-Foam, which requires two chemicals, C-30 and D-12. Each gallon of EZ-Foam requires 0.6 a gallon of C-30 and 0.4 a gallon of D-12. A gallon of C-30 costs $5 and a gallon of D-12 costs $15. Standard cost of a gallon of EZ-Foam is $9 comprised of $3 of C-30 and $6 of D-12.
The standard cost per unit of finished product is as follows:
C-30: 0.6 $ 5 = $3
D-12: 0.4 $15 = 6 $9

22. Production Mix and Yield Variances
LO 17-4
Production Mix and Yield Variances
Jersey Chemicals
September Production
Units produced ,000 gallons of finished product
Materials purchased and used:
C ,000 $ 5.20
D ,000 $14.00
104,000 gallons
Now suppose that Jersey Chemicals used 104,000 gallons of input, 55,000 gallons of C-30 and 49,000 gallons of D-12, to produce 100,000 gallons of EZ-Foam. Already we see there is a production yield variance. It took 104,000 gallons of chemical to produce 100,000 gallons of EZ-Foam.

23. Production Mix and Yield Variances
LO 17-4
Production Mix and Yield Variances
Jersey Chemicals
September Production
C × 104,000 = 62,400 gallons
D × 104,000 = 41,600 gallons
104,000 gallons
Remember, the standard mix is 0.6 gallons of C-30 and 0.4 gallons of D-12. If 104,000 gallons of chemicals were used in production, the standard would have been 62,400 gallons of C-30 and 41,600 gallons of D-12. Now we see there is a production mix variance. Let’s calculate the variances.

24. Production Mix and Yield Variances
LO 17-4
Production Mix and Yield Variances
Efficiency Variance
Actual
(AP × AQ)
(SP × AQ)
(SP × ASQ)
Flexible
Production
Budget
(SP × SQ)
Purchase
Price
Variance
Mix
Variance
Yield
Variance
$5.20 × 55,000
= $286,000
$5 × (0.6 × 104,000)
$312,000
$5 × 60,000
= $300,000
Efficiency variance = $25,000 F
$11,000 U
$37,000 F
$5 × 55,000
= $275,000
$12,000 U
C-30
Calculate the price variance the same way you did in Chapter 16. The price variance is the difference between the actual price and the standard price for the actual quantity purchased. For C-30, actual price of $5.20 minus a standard price of $5 multiplied by the 55,000 gallons purchased gives an unfavorable price variance of $11,000. The next step is to breakdown the efficiency variance into a mix and a yield variance. The mix variance is the difference between the quantity of units used in the mix and the quantity of units that would have been used given the total quantity used. The yield variance is the difference between the quantity of units that would have been used given the total quantity used and the standard quantity for the level of production.
$14 × 49,000
= $686,000
$15 × (0.4 × 104,000)
$624,000
$15 × 40,000
= $600,000
Efficiency variance = $135,000 U
$49,000 F
$111,000 U
$15 × 49,000
= $735,000
$24,000 U
D-12
= $972,000
$936,000
= $900,000
Efficiency variance = $110,000 U
$38,000 F
$74,000 U
= $1,010,000
$36,000 U
Total

25. Production Mix and Yield Variances
LO 17-4
Production Mix and Yield Variances
Decrease in C-30: (55,000 – 62,400) = 7,400 $ 5 = $ 37,000 decrease
Increase in D-12: (49,000 – 41,600) = 7,400 $15 = $111,000 increase
Net effect in gallons
Net effect in dollars $ 74,000 increase
Mix variance
Material C-30: (62,400 – 60,000) = 2,400 $ 5 = $12,000 Unfavorable
Material D-12: (41,600 – 40,000) = 1,600 $15 = 24,000 Unfavorable
Total $36,000 Unfavorable
Yield Variance
If 104,000 gallons of mix were used, 62,400 (or 60%) should have been C-30, yet, only 55,000 gallons of C-30 were used. The difference of 7,400 gallons at a standard price of $5 per gallon is $37,000 favorable. Likewise, 7,400 gallons more of D-12 was used than the standard. At a price of $15 per gallon the mix variance for D-12 is $111,000 unfavorable. Total mix variance is $74,000 unfavorable. Now let’s calculate the yield variance. Remember, it took 104,000 rather than 100,000 gallons of mix to produce 100,000 gallons of EZ-Foam. Of those 100,000 gallons, 60,000 (60%) should have been C-30. Subtract 60,000 from 62,400 (60% of 104,000) at $5 a gallon and the yield variance for C-30 is $12,000 unfavorable. Doing the same calculation for D-12, the difference between 41,600 (40% of 104,000 gallons) and 40,000 (40% of 100,000 gallons) at $15 a gallon gives an unfavorable yield variance of $24,000. Total unfavorable yield variance is $36,000. Total efficiency variance is $110,000 unfavorable: $74,000 unfavorable mix variance and $36,000 unfavorable yield variance.

26. Production Mix and Yield Variances
LO 17-4
Production Mix and Yield Variances
Journal Entry to record materials purchased and used:
Work-in-process inventory ,000
Material Price Variance: C ,000
Material Yield Variance: C ,000
Material Mix Variance: D ,000
Material Yield Variance: D ,000
Material Price Variance : D ,000
Material Mix Variance: C ,000
Accounts Payable ,000
Recording costs at standard results in the variances recorded at the time the materials are purchased and put into production. Of course, accounts payable must be credited for the actual amount Jersey Chemical owes the supplier and work-in-process is debited for the standard cost for producing 100,000 gallons of EZ-Foam, $900,000 (60,000 gallons of C-30 at $5 a gallon, $300,000, and 40,000 gallons of D-12 at $15 a gallon, $600,000).
To record the purchase and use of 55,000 gallons of C-30, with an actual
price of $5.20 per gallon and a standard price of $5.00 per gallon, and
49,000 gallons of D-12, with an actual price of $14 per gallon and a
standard price of $15 per gallon.
Standard usage to produce 100,000 gallons of EZ-Foam is 60,000
gallons of C-30 and 40,000 gallons of D-12.

27. Variance Analysis in Nonmanufacturing Settings
LO 17-5
Variance Analysis in Nonmanufacturing Settings
LO 17-5 Apply the variance analysis model to
nonmanufacturing costs.
Output Measures in Service Organizations
Organization Output Measures
Public accounting, legal, and consulting firms Professional staff hours
Hotel Room-nights, guests
Airline Seat-miles, revenue-miles
Hospital Patient-days
The comparison of the master budget, the flexible budget, and actual results can also be used in service and merchandising organizations. The same framework is used to evaluate output measures.

28. Variance and Standards
LO 17-6
Variance and Standards
LO 17-6 Determine which variances to investigate.
Which variances to investigate?
Cost-benefit analysis
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.
In deciding which variances to investigate, once again, it is a cost-benefit analysis. If the cost of investigation is greater than the benefit derived from the investigation, don’t investigate. Management by exception is a management approach requiring that reports emphasize the deviation from an accepted base point, such as a standard, a budget, an industry average, or experience. The underlying philosophy is investigate what is an exception and leave the rest alone.

29. Factors in Deciding How Many Variances to Calculate
LO 17-6
Mix Variances
Factors in Deciding How Many Variances to Calculate
Impact:
Likely monetary effect from
an activity (such as a variance)
Controllability:
Extent to which an item
can be managed
In deciding how many variances to calculate, it is important to note the impact and ability to control each variance. If the impact is so small that the best efforts to improve efficiency or control costs would have very little impact even if the efforts were successful, don’t bother. Sounds like a cost-benefit decision to me. And regardless of the size of the impact, if nothing can be done about the variance, don’t bother. Again, sounds like a cost-benefit decision to me.

30. End of Chapter 17
End of Chapter 17.