1. Managerial Accounting
Name
Date

2. Introduction Variance is disparity between standard and real cost
Variance affect performance
Variances relate to revenues and cost
Types of variances
Favorable Unfavorable Materials Labor Overheads (Church, 1995)
In management accounting, variance refers to the differences between standard (planned or budgeted) costs and the real (actual) costs that are sold or incurred.
The differences affect organizations' or businesses’ performances.
Variances calculated for revenues as well as costs.
When the real results outweigh the expected ones, the variance is said to be favorable. When the expected results outweigh the actual, the variance is said to be unfavorable.
Variances are also categorized according to user needs: variable or invariable
Variable cost variables relate to materials and labor while fixed cost variables relate to overheads.

3. Budget Variance Differences between baseline and real amounts
Favorable variance
real revenue outweigh budgeted revenue
budgeted expense outweigh real expense
Variance caused by bad assumptions or budgeting
Variances are controllable or uncontrollable
Strictly controllable - discretionary expenses
Budget variances are the differences between baseline (budgeted) revenues or expenses and their real (actual) amounts.
Favorable budget variance is when real revenue outweigh budgeted revenue or budgeted expense outweigh real expense.
At times, budget variances are the differences between budgeted and real liabilities as well as assets.
Budget variance stem from poor assumptions or inappropriate budgeting.
Some budget variances are controllable while others are uncontrollable.
Strictly controllable budget variances are those relating to discertionary expenses.

4. Variance Analysis and Budget Process
Analysis focuses on budgeted versus real amounts
Connect cost management to budgeting
Analysis identifies
Weaknesses
Areas and processes requiring improvements
Focus on variances with significant impacts on performance
Variance analysis refers to the examination of the differences between budgeted amounts and the real amounts.
The best avenue of incorporating variance analysis into the process of budgeting is connecting cost management to the process strategically.
Variance analysis is used in identifying weaknesses by managers to make out areas and processes that require adjustments or improvements.
Managers should zero in on variances whose impacts on performance are significant.
Focusing on variances with insignificant impacts bogs budgeting down in inconsequential detail.

5. Labor vs. Material Variances
Both are price variances
Direct labor rate variance
Actual labor cost vs. budgeted amount
Direct material price rate variance
Actual raw material cost vs. budgeted amount
Both are either unfavorable or favorable
Both are price variances
Direct labor rate variance means the disparity between what a business actually pays for labor and the amount it has budgeted for labor
Direct material price rate variance means the disparity between what a business actually pays for raw materials and the amount it has budgeted for labor
Both variances are either unfavorable or favorable

6. Labor vs. Material Variances cont…
Same formula
variance = (actual price – standard price) * real input quantity
Real input quantity
real quantity of bought materials or
real amount of procured labor
Both are calculated in the same way.
variance = (actual price – standard price) * real input quantity
With regard to direct material variance, the real input quantity is the real quantity of bought materials while in the case of direct labor variance the real input quantity is the real amount of procured labor.
Direct Materials Price Variance = (Actual Price – Standard Price) * Quantity Purchased
Direct Labor Price Variance = (Actual Price – Standard Price) * (Actual Hours Used)

7. Quantity vs. Rate Variance
Businesses should use materials and time efficiently
Quantity and rate variances compared over time
Quantity variances relate to either
direct materials' utilization
direct labor's efficiencies (Church, 1995)
Quantity and rate have incomparable formulas
Businesses should use materials and time efficiently.
Quantity and rate variances are analyzed and compared over time.
Quantity variances relate to either direct materials' utilization or direct labor's efficiencies.
Quantity variances are the products of the differences between the input amounts used and ones budgeted for as regards given manufacturing durations prices and actual input amounts.
Rate variances are the products of the differences between the prices actually paid for given items or acts or efforts and the budgeted prices and actual amounts of items or acts or efforts (Church, 1995).

8. Quantity vs. Rate Variance cont…
Quantity variance formula
Actual price x Actual quantity = Quantity variance
Rate variance formula
Standard price x Actual quantity = Rate variance
Rate variance usually relates to labor rate variance
Quantity variance formula
Actual price x Actual quantity = Quantity variance
Rate variance formula
(Standard price) x Actual quantity = Rate variance
Rate variance usually relates to labor rate variance

9. Fixed Overhead Subcomponents
FOVV has various subcomponents
FOH volume efficiency variance
FOH volume capacity variance
FOVV happens when real production volume is dissimilar to the budgeted production
FOVV is either unfavorable or favorable
Fixed Overhead Volume Variance (FOVV) has various subcomponents: fixed overhead (FOH) volume efficiency variance along with FOH volume capacity variance.
FOVV refers to the disparity between fixed expenses relating to good units made in a given duration and the total set expenses budgeted for the same duration.
FOVV happens when real production volume is dissimilar to the budgeted production.
FOVV is either unfavorable or favorable.
FOVV = (Actual Activity – Normal Activity) × Fixed Overhead Application Rate

10. Variable Overhead Subcomponents
VOH are manufacturing expenses differing approximately with production output changes
VOHs in a business
production supplies -equipment utilities etc
Types of VOH variances
VOH efficiency variance
VOH spending variance
Variable overheads (VOH) are manufacturing expenses, or costs, that differ approximately with respect to production output changes.
The VOH model is used in modeling businesses’ future levels of expenditure and determining the Lowest Possible Prices (LPPs) at which goods ought to be sold.
There are various VOHs in a business: production supplies, equipment utilities, and wages for handling materials.
There are two types of VOH variances: VOH efficiency variance and VOH spending variance.

11. Variable Overhead Subcomponents cont…
VOH efficiency variance - disparity between the budgeted and real hours worked that are then set hourly overhead rate
VOH spending variance - disparity between the preset spending rate and real spending on VOH
VOH is too applied in business administration
Most administrative costs are actually fixed
VOH efficiency variance refers to the disparity between the budgeted and real hours worked that are then set hourly overhead rate.
VOH spending variance refers to the disparity between the preset spending rate and real spending on VOH.
Commonly, the VOH is as well applied in business administration
In business administration, VOH refers to administrative expenses varying with business activity level.
Notably most administrative costs are actually fixed.

12. Lowest Possible Price The VOH model is used in determining LPPs
LPP is the least probable price for a product
Unit LPP = direct material cost per unit + direct labor cost per unit + variable overhead ` per cost + fixed overhead per unit
The LPP per unit is $2,200
The VOH model is used in modeling businesses’ future levels of expenditure and determining the Lowest Possible Prices (LPPs) at which goods ought to be sold.
A product’s LPP is the least probable price for which it can be sold.
In the present case, the LPP per unit is the sum of the direct material cost per unit, direct labor cost per unit, variable overhead per cost, and fixed overhead per unit.
LPP = direct material cost per unit + direct labor cost per unit + variable overhead per cost + fixed overhead per unit =
The LPP per unit is $2,200

13. Capacity and Poor LPP Decision
With regard to capacity, there are particular conditions in which the offering of given LPPs is a poor decision.
The conditions include:
When capacity determination zeroes in on the realizable volume rather than realizable output.
With regard to capacity, there are particular conditions in which the offering of given LPPs is a poor decision.
The conditions include:
When capacity determination zeroes in on the realizable volume rather than realizable output.

14. Capacity and Poor LPP Decision cont…
When planning capacity utilization is focused on fleeting sales goals rather than lasting sales needs.
When businesses are not running optimally.
When businesses have underused or unused capacities (McNair, 1994)
The conditions include:
When planning capacity utilization is focused on fleeting sales goals rather than lasting sales needs.
When businesses are not running optimally.
When businesses have underused or unused capacities (McNair, 1994).

15. Automation Investment and LPP
Technology advancement cost per unit will be $20 Technology will increase the LPP per unit by $20
New labor cost per unit will be 0.5*400 = 200 per unit
New labor cost per unit will reduce the LPP per unit by $200
New LPP per unit will be 2, = $2,020
In the present case, the technology advancement cost per unit will be the cost of the technology divided by the number of units
100,000/ 5,000 = $20 per unit
The technology will increase the LPP per unit by $20.
The new labor cost per unit will be 0.5 of the initial labor cost per unit
0.5*400 = $200 per unit
The new labor cost per unit will reduce the LPP per unit by $200
The new LPP per unit will be
$2,200 + $20 -$200 = $2,020

16. References
Church, A. H. (1995). Overhead: The cost of production preparedness. Journal of Cost Management, 1, McNair, C. J. (1994). The hidden costs of capacity. Journal of Cost Management, 23, 12-24

17. Thank you