1. Managerial Accounting: An Introduction To Concepts, Methods, And Uses
Chapter 12
Cost Center
Performance Evaluation
Maher, Stickney and Weil

2. Learning Objectives (Slide 1 of 3)
Explain how variable production cost variances are calculated and why they occur.
Explain how fixed production cost variances are calculated and why they occur.
Explain the difference between price and efficiency variances.
Explain how to analyze variances using the variable cost variance model.

3. Learning Objectives (Slide 2 of 3)
Analyze overhead variances using the variable cost variance model.
Identify the relation between actual, budgeted, and applied fixed manufacturing costs.
Explain how to apply activity-based costing to variance analysis.

4. Learning Objectives (Slide 3 of 3)
Describe the impact of technology on variance analyses.
Identify tools managers use to decide when to investigate variances.
Explain how to calculate the mix variance portion of the efficiency variance.

5. Responsibility For Production Variances (Slide 1 of 2)
Purchasing Department
The materials price variance, used to evaluate the purchasing dept.'s performance, is calculated as follows:
(Actual price - Standard Price) X Quantity Purchased
Measures the difference between actual and standard prices paid for materials

6. Responsibility For Production Variances (Slide 2 of 2)
The production dept. is responsible for the following variances:
Fixed manufacturing cost variance
Remaining variable manufacturing cost variance not assigned to purchasing including:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead

7. Reasons for Variances Variances occur for a variety of reasons:
A variance is simply the difference between a predetermined norm (an expected amount) and actual results so some differences should be expected
The standards may be biased
Systematic reasons

8. Reasons for Materials Variances
Generally, materials variances are attributable to two areas:
Usage of materials
Price paid for materials
Examples:
Accounting may fail to take purchase discounts on materials
Employees may be poorly trained leading to higher waste

9. Reasons for Labor Variances
Generally, labor variances are attributable to two areas:
Usage of labor hours
Price (or wage) paid for labor
Examples:
New employee is hired for less than expected wage rate
Union contract may call for wage rate higher than forecast amount

10. Reasons for Variable Manufacturing Overhead Variances
Generally, variable manufacturing overhead variances are attributable to two areas:
Usage of allocation base (e.g., machine hours)
Price of overhead items
Example: Utility company lowers rates for electricity resulting in a favorable variance

11. Fixed Manufacturing Cost Variances
Difference between actual and budgeted fixed costs
Fixed costs do not vary with the level of activity
Managers simply investigate what caused the difference
Example: Rent on production facility was unexpectedly raised causing an unfavorable variance

12. Variable Overhead in Service Organizations
Variable overhead is often significant for service firms, governmental agencies and nonprofit groups
These types of organizations set standards, perform variance analysis and establish flexible budgets

13. Separating Variances into Price & Efficiency Components
Variable manufacturing cost variances can be spit into two components
Price variance - the difference between the budgeted (or standard) price and the actual price paid
Efficiency variance - measures the difference between the actual quantity of inputs used and those allowed at standard to make a unit of output

14. Variable Cost Variance Model (Slide 1 of 2)
Flexible Production
Budget
(SP X SQ)
(3)
Actual
(AP X AQ)
(1)
Inputs at Standard
(SP X AQ)
(2)
Price Variance
(1) - (2)
(AP - SP) X AQ
Efficiency Variance
(2) - (3)
SP X (AQ - SQ)
Total Variance
(1) - (3)

15. Variable Cost Variance Model (Slide 2 of 2)
General model can be used to calculate the following variances:
Input Price Variance Efficiency Variance
Direct Materials Price Variance Quantity Variance
Direct Labor Rate Variance Efficiency Variance
Variable Ovrhd Spending Variance Efficiency Variance

16. Reasons for Materials Price & Efficiency Variances
Materials price variances may result from:
Failure to take purchase discounts
Purchasing higher or lower quality material
Materials efficiency variances may result from:
Purchasing inferior materials
Using materials more or less efficiently

17. Reasons for Labor Price & Efficiency Variances
Labor price variances may result from:
Failure to correctly anticipate changes in wage rates
Hiring new employees at wage rates different from standard
Labor efficiency variances may result from:
Workers being poorly trained
Faulty equipment
Scheduling problems

18. Variable Overhead Price and Efficiency Variances
Price and efficiency variances for variable overhead are computed using the same method as for other variable manufacturing costs
Requires a measure of overhead input activity such as machine hours or direct labor hours
Care should be taken in interpreting these variances since the input activity base may be chosen without regard for the true cause of variable overhead costs

19. Fixed Manufacturing Cost Variances (Slide 1 of 3)
Manufacturing companies, using full absorption costing, use a predetermined overhead rate to apply fixed overhead to units produced, calculated as follows:
Estimated Fixed
Manufacturing Cost per Period
Estimated Production
Volume per Period
This rate is applied to units produced during the period

20. Fixed Manufacturing Cost Variances (Slide 2 of 3)
The production volume variance equals budgeted fixed manufacturing costs minus applied fixed manufacturing costs
Only arises when fixed costs are allocated to units using a predetermined rate and estimated production volume is different from actual production volume achieved
The production volume variance appears to have little benefit for managerial purposes

21. Fixed Manufacturing Cost Variances (Slide 3 of 3)
The price (spending) variance for fixed manufacturing costs equals the difference between actual and budgeted costs
Used for management and control of fixed manufacturing costs

22. Quality Control and Variance Investigation
Managers use a variety of methods to determine which variances should be investigated, including:
Rules of thumb such as investigate variances > 10% of standard cost
Tolerance limits - use predetermined limits within which variances may fluctuate
Variances outside these limits are investigated
Decisions models

23. Dr. Donald R. Trippeer, CPA Colorado State University-Pueblo
If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact:
Dr. Donald R. Trippeer, CPA
Colorado State University-Pueblo