ACC 202
Daphne Sanchez
Lois Andersson
 About:
Who, What, When, Where, Why &
How
 Identifying
 Cost Variance Computation
 Materials
Cost Variance
 Labor Cost Variance
 Overhead Cost Variance
 Sales
Variance
Who: Can be used internally by all, though not always
the preferred method.
What: Preset costs for delivering a product/service
under normal conditions.
When: Establishing a budget.
Where: Within the organization in every department.
Why: It is especially useful when directed at
controllable items, enabling top management to affect
the actions of lower managers responsible for the
company's revenue and cost.
How: Used to base against Actual Costs.
A
comparison of standard costs to actual
costs should help management identify
unexpected differences. In order to
accomplish this, a Fixed Budget (aka
Standard) must first be created. Managers
will then be able to assess the variance
between the standard costs and the actual
costs. This is necessary in order to seek out
explanations as to why actual cost varied
from the standard.
Cost Variance Computation- Simply stated, Cost Variance
(CV) is the difference between Actual Cost (AC) and Standard
Costs (SC).
Fixed and Variable costs need to be identified at the
beginning of the process.


Favorable: When compared to the budget, the actual cost
or revenue contributes to a higher income; actual revenue
is higher than budgeted revenue, or actual cost is lower
than budgeted cost.
Unfavorable: When compared to the budget the actual cost
or revenue contributes to a lower income; actual revenue is
lower than budgeted revenue, or actual cost is higher than
budgeted cost.
AC = AQ x AP
SC = SQ x SP
CV = AC – SC
COW CREAM COMPANY
Fixed (Standard) Budget Report
For Year Ended December 31, 2010
Sales (15,000 gallons ice cream)
$
$ 200.00
3,000,000.00
Cost of goods sold
Direct materials
975,000.00
V
225,000.00
V
60,000.00
V
Depreciation-Plant equipment
300,000.00
F
Utilities ($45,000 is variable)
195,000.00 V/F
Plant management salaries
200,000.00
Direct labor
Machinery repairs (variable cost)
$
1,955,000.00
F
Gross profit
1,045,000.00
Selling expenses
Packaging
75,000.00
V
Shipping
105,000.00
V
Sales salary (fixed annual amount)
250,000.00
F
Advertising expense
125,000.00
F
Salaries
241,000.00
F
90,000.00
F
430,000.00
General and administrative expense
Entertainment expense
Income from operations
456,000.00
$
159,000.00
Direct Materials: $975,000/15,000 Units = $65.00
Direct Labors: $225,000/15,000 Units = $15.00
Machinery Repairs: $60,000/15,000 Units = $4.00
Utilities: $45,000/15,000 Units = $3.00
Packaging: $75,000/15,000 Units = $5.00
Shipping: $105,000/15,000 Units = $7.00
Total Variable Cost: $99.00
Contribution* Margin= $101.00
(*amount being contributed toward fixed costs)
($200.00/unit cost (less) total variable cost $99.00)
Price Variances- difference
between actual and budgeted revenue or costs
caused by the difference
between the actual price per unit and the
budgeted price per unit. (PV)=(AQ x AP) - (AQ
x SP)
Quantity Variance- difference between actual
and budgeted revenue or costs caused by the
difference between the actual number of units
and the budgeted number of units. (QV) = (AQ
x SP) - ( SQ x SP)
Prepare flexible budgets
(see Exhibit 28.2) for the
company at sales volumes
of 14,000 and 16,000 units.
COW CREAM COMPANY
Fixed Budget Report
For Year Ended December 31, 2010
Flexible Budget
Variable
Amount/Gallon
Fixed Amount
Flexible Budgets For Unit Sales of :
14,000
16,000
200.00
$ 2,800,000.00
$ 3,200,000.00
Direct materials
65.00
910,000.00
1,040,000.00
Direct Labor
15.00
210,000.00
240,000.00
Machinery repairs (Variable Cost)
4.00
56,000.00
64,000.00
Utilities ($45,000 is variable)
3.00
42,000.00
48,000.00
Packaging
5.00
70,000.00
80,000.00
Shipping
7.00
98,000.00
112,000.00
99.00
1,386,000.00
1,584,000.00
101.00
$ 1,414,000.00
$ 1,616,000.00
Sales (15,000 Gallons)
Cost of Goods Sold
Variable Costs
$
Total Variable Costs
Contribution Margian
Fixed Variables
$
Depreciation-Plant Equipment
300,000.00
300,000.00
300,000.00
Plant Management Salaries
200,000.00
200,000.00
200,000.00
Sales Salary (Fixed annual amount)
250,000.00
250,000.00
250,000.00
Utilities ($45,000 is variable)
150,000.00
150,000.00
150,000.00
Advertising Expense
125,000.00
125,000.00
125,000.00
Salaries
241,000.00
241,000.00
241,000.00
90,000.00
90,000.00
90,000.00
Entertainment Expense
Total Fixed Costs
Income from Operations
$
1,356,000.00
$
$
1,356,000.00
58,000.00
$
$
1,356,000.00
260,000.00
The company’s business conditions are
improving. One possible result is a sales
volume of approximately 18,000 units. The
company president is confident that this
volume is within the relevant range of existing
capacity. How much would operating income
increase over the 2010 budgeted amount of
$159,000 if this level is reached without
increasing capacity?
COW CREAM COMPANY
Fixed Budget Report
For Year Ended December 31, 2010
Flexible Budgets
Gallons for sale
of:
Actual Result
Variances
18000
15000
3000
200.00
$ 3,600,000.00
$ 3,000,000.00
Direct materials
65.00
1,170,000.00
975,000.00
F
195,000.00
Direct Labor
15.00
270,000.00
225,000.00
F
45,000.00
Machinery repairs (Variable Cost)
4.00
72,000.00
60,000.00
F
12,000.00
Utilities ($45,000 is variable)
3.00
54,000.00
45,000.00
F
9,000.00
Packaging
5.00
90,000.00
75,000.00
F
15,000.00
Shipping
7.00
126,000.00
105,000.00
F
21,000.00
99.00
1,782,000.00
1,485,000.00
F
297,000.00
101.00
$ 1,818,000.00
$ 1,515,000.00
F
Flexible Budget
Variable
Amount/Gallon
Sales (18,000 Gallons)
Cost of Goods Sold
Variable Costs
$
Total Variable Costs
Contribution Margian
$
Fixed Amount
F $
$
600,000.00
303,000.00
Fixed Variables
Depreciation-Plant Equipment
300,000.00
300,000.00
300,000.00
-
Plant Management Salaries
200,000.00
200,000.00
200,000.00
-
Sales Salary (Fixed annual amount)
250,000.00
250,000.00
250,000.00
-
Utilities ($45,000 is variable)
150,000.00
150,000.00
150,000.00
-
Advertising Expense
125,000.00
125,000.00
125,000.00
-
Salaries
241,000.00
241,000.00
241,000.00
-
90,000.00
90,000.00
90,000.00
-
$ 1,356,000.00
$ 1,356,000.00
$ 1,356,000.00
-
Entertaiment Expense
Total Fixed Costs
Income from Operations
$
less: income from operations 2010
Increase in contribution margin
462,000.00
(159,000.00)
$
303,000.00
$
159,000.00
$
303,000.00
An Unfavorable change in
business is remotely possible; in
this case, production and sales
volume for 2010 could fall to
12,000 units. How much income
(or loss) from operations would
occur if sales volume falls to this
level?
COW CREAM COMPANY
Fixed Budget Report
For Year Ended December 31, 2010
Variable Amount/Gallon
Sales
(12,000 Gallons)
Flexible Budgets Units for
sale of:
Flexible Budget
$
12,000
Fixed Amount
200.00
$
2,400,000.00
Cost of Goods Sold
Variable Costs
Direct materials
65.00
780,000.00
Direct Labor
15.00
180,000.00
Machinery repairs (Variable Cost)
4.00
48,000.00
Utilities ($45,000 is variable)
3.00
36,000.00
Packaging
5.00
60,000.00
Shipping
7.00
84,000.00
99.00
1,188,000.00
Total Variable Costs
Contribution Margian
$
101.00
$
1,212,000.00
Fixed Variables
Depreciation-Plant Equipment
300,000.00
300,000.00
Plant Management Salaries
200,000.00
200,000.00
Sales Salary (Fixed annual amount)
250,000.00
250,000.00
Utilities ($45,000 is variable)
150,000.00
150,000.00
Advertising Expense
125,000.00
125,000.00
Salaries
241,000.00
241,000.00
90,000.00
90,000.00
Entertaiment Expense
Total Fixed Costs
Income from Operations
$
1,356,000.00
$
1,356,000.00
$
(144,000.00)
Overhead Cost Variance- difference between
the total overhead cost applied to products
and the total overhead cost actually incurred.
Applied manufacturing overhead (ApMO)
= Direct labor hours x rate per hour
Actual manufacturing overhead AcMO) = fixed
costs + variable costs
Overhead Cost Variance= ApMO - AcMO
A debit balance in a variance account is always unfavorable—it
shows that the total of actual costs is higher than the total of
the expected standard costs. In other words, your company's
profit will be $50 less than planned unless you take some
action.
A credit to the variance account indicates that the actual
cost is less than the standard cost. A price variance
account with a credit balance is always Favorable.
 Ice
cream parlor
 Hair Stylist
 Motorcycle Shops
 Any manufacturing company
 All individuals who want to budget
 http://cowcream.weebly.com/