Xl260 Variance Removed

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

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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

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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

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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

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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

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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

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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

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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 * 8 (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 9

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

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Analysis of Cost data and variance Analysis – Profits

Total Variance

Non Mfg Costs Variance Admn.

Mktg.

Material

Mfg Costs Variance R&D

Direct Labor

Variable Cost

Variable O/H

Sales Variance

Fixed Cost

Volume

Market Share

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

Selling Price

Industry Volume

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