Variance Analysis Agenda Motivate the need for variance
- Slides: 16
Variance Analysis
Agenda • • • Motivate the need for variance analysis Describe the organizational use of variances Discuss the mechanics of variance analysis Example: Ross Parts Takeaway
Management Accounting Systems Cost Accounting Systems Budgeting Systems Variance Analysis Transfer Pricing Performance Measurement Systems
Variance Analysis • Organizations that have a budget typically compare the actual results to the budget at the end of the period. • Variance: Difference between actual and budgeted results: Actual Revenue: Budget Variance $1, 150 $1, 000 $150 F Direct Material: $450 $400 $50 U Direct Labor: $425 $450 $25 F Overheard: $100 $0 Profit $175 $50 $125 F
Labeling Convention – Variance that implies a higher profit: favorable (F) • Actual revenue is higher than budgeted • Actual costs are lower than budgeted – Variance that implies a lower profit: unfavorable (U) • Actual revenue is lower than budgeted • Actual costs are higher than budgeted
Goal of Variance Analysis Quantify the impact of the individual factors on the total variances Actual Budget Variance $1, 150 $1, 000 $150 F Sales volume, sales price Direct Material: $450 $400 $50 U Sales volume, material costs, material usage Direct Labor: $425 $450 $25 F Sales volume, labor costs, labor usage Overheard: $100 $0 Sales volume, resource costs, resource usage Profit $175 $50 $125 F - All of the above - Sales: Possible reasons for the variance
Purpose of Variance Analysis • Performance evaluation: • Who is responsible for the overall results? – How well did our sales/ marketing people do? – How efficiently did our production dept. use the resources? – How well did our sourcing dept. negotiate with suppliers? • Planning: • Should we change our product mix? • Should we change our suppliers?
Mechanics of Variance Analysis • We can quantify the impact of the individual factors by decomposing the variances: • The decomposition uses a common unit of measure, namely $ – It is difficult to compare #units, kg, $/unit, etc. , across products
Variance Analysis - Mechanics • We can quantify the impact of the individual factors by decomposing the variances: • Sales variance: Actual Sales (AV x AP) Flexible Budget (AV x EP) Output Price Variance (Master) Budget (EV x EP) Sales Volume Variance • Cost variances: Actual Costs (AO x AI x AP) (AO x AI x EP) Input Price Variance Flexible Budget (AO x EI x EP) Efficiency Variance (Master) Budget (EO x EI x EP) Production Volume Variance
Example: Ross Parts • Ross Parts produces the RP-24 • Budget for 2011: Per Unit Sales: Total: 100, 000 Units $20 $2, 000 Costs: Direct materials: 2 kg @ $3 = $6 $ 600, 000 Direct labor: 0. 2 hrs. @ $25 = $5 $500, 000 Overhead : Profit: $300, 000 $600, 000
Example: Ross Parts • Actual results for 2011: Total Sales: 100, 000 units @ $20. 50 $2, 050, 000 194, 000 kg @ $3. 50/kg $ 679, 000 21, 000 hrs. @ $23/hr. $483, 000 Costs: Direct materials: Direct labor: Overhead : Profit: $300, 000 $588, 000 Actual Direct Material usage per unit: 194, 000 kg/ 100, 000 units = 1. 94 kg/ unit Actual Direct Labor usage per unit: 21, 000 hrs. / 100, 000 units = 0. 21 hrs.
Example: Ross Parts • Sales variance (Volume is Sales Volume): Flexible Budget (AV x EP) Actual Sales (AV x AP) Price Variance 100, 000 x $20. 50 = $2, 050, 000 (Master) Budget (EV x EP) Volume Variance 100, 000 x $20 = $2, 000 Output Price Variance: $50, 000 F 100, 000 x $20 = $2, 000 Volume Variance: $0
• Cost variances (Volume is Production Volume): Actual Costs (AO x AI x AP) (AO x AI x EP) Input Price Variance Flexible Budget (AO x EI x EP) Efficiency Variance (Master) Budget (EO x EI x EP) Volume Variance Direct Material 100, 000 x 1. 94 x $3. 50 100, 000 x 1. 94 x $3 100, 000 x 2 x $3 = $679, 000 = $582, 000 = $600, 000 $97, 000 U $18, 000 F 0 100, 000 x 2 x $3 = $600, 000 Direct Labor 100, 000 x 0. 21 x $23 100, 000 x 0. 21 x $25 100, 000 x 0. 2 x $25 = $483, 000 = $525, 000 = $500, 000 $42, 000 F $25, 000 U 0 100, 000 x 0. 2 x $25 = $500, 000 Overhead $300, 000 “Spending Variance” $300, 000
Variance Decomposition Summary Sales variances Price variance Volume variance $50, 000 F $0 $50, 000 F Direct material variances Price variance 97, 000 U Efficiency variance 18, 000 F Volume variance $0 79, 000 U Direct labor variances Price variance 42, 000 F Efficiency variance 25, 000 U Volume variance Overhead Variance Profit Variance $0 17, 000 F $0 $12, 000 U Q: Why is this summary useful to management?
Takeaway • Variance: Difference between actual results and budget. • Variance Analysis: Quantitative decomposition of total variances into individual components (volume variance, price variance, cost variance, efficiency variance). • Purpose of variance analysis: – Performance evaluation: Who is responsible for the overall results? – Planning
Variance Analysis - Worksheet • We can quantify the impact of the individual factors by decomposing the variances: • Sales variance: Actual Sales (AV x AP) Flexible Budget (AV x EP) Output Price Variance (Master) Budget (EV x EP) Sales Volume Variance • Cost variances: Actual Costs (AO x AI x AP) (AO x AI x EP) Input Price Variance Flexible Budget (AO x EI x EP) Efficiency Variance (Master) Budget (EO x EI x EP) Production Volume Variance
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