Variance Analysis
Performance report usually means a comparison of actual results with some Budget/Standard
Variance is a deviation of an actual amount from the expected or budgeted amount.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Variance Analysis - Objective •
Identify the causes of the variances of financial performance and
•
Identify Organizational Unit/Activity/Person responsible for it.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Analytical Framework used for
Variance Analysis - Identify the key causal factors that affect profits. - Break down the overall profit variance by these causal factors. - Estimate the degree of impact of each factor on the profit. - Try to calculate the specific, separable impact of each causal factor by varying only that factor, holding all other factors constant. - Add complexity sequentially, one layer at a time.(peel the onion) - Stop the process digging dip when the further digging is not justified ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Variance Analysis Total Variance
Non Mfg Costs Variance Admn.
Mktg.
Materia l
R&D
Direct Labor
Mfg Costs Variance Variabl e Cost
Variabl e O/H
Sales Variance Fixed Cost
Volume
Market Share
Selling Price
Industr y Volume
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Favorable or Unfavorable Variance? • To determine whether a variance is favorable or unfavorable, use logic rather than memorizing a formula.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Sales Variance
ariance + SPV = Actual Qty. Sold * (Budgeted Price – Actual Price)
geted Qty. Sold S Mix V = Budgeted Price* (Budgeted Mix of Actual Qty. - Actual Mix of Actual Qty.) ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Cost Variance :– Material
Price Variance
MPV = Material Price Variance = Actual Usage * (Budgeted Price – Actual Price)
M Mix V = Budgeted Price * (Budgeted Mix of Actual Usage - Actual Mix of Actual Usage) ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Cost Variance :– Labor
e Variance +
Labor Rate Variance = Actual Usage * (Budgeted Rate – Actual Rate)
te * Labor Idle Time variance = Idle Time * Budgeted Rate Labor Efficiency Variance = Budgeted Rate * (Standard –Actual Input) ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Input Horngren/Sundem/Stratton
Cost Variance :– Overhead Fixed Overhead Fixed Overhead Variance = (Actual Output * Standard Fixed O/H per unit) - Actual F O/H incurred Standard F O/H per unit = Total Standard Fixed O/H output
/ Budgeted
Variable Overhead
ual Output * ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Standard V
Reasons for Variance • There are basically two reasons why actual results might differ from the standard.
activity and fixed costs per peri
vities were
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
n
Thanks ………
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton