Learning Objectives
1. Use budgets for performance evaluation.
2. Develop and use flexible budgets.
3. Compute and interpret the sales activity variance.
4. Prepare and use a profit variance analysis.
5. Compute and use variable cost variances.
6. Compute and use fixed cost variances.
7. (Appendix A) Understand how to record costs in a
standard costing system.
15-1
15-2
Budgets and Performance Evaluations
L.O. 1 Use budgets for performance evaluation.
Operating Budgets
Budgeted income statement, production budget,
budgeted cost of goods sold, and supporting
budgets
Financial Budgets
Budgets of financial resources; for example, the cash
budget and the budgeted balance sheet
Variance
Difference between planned result and actual
outcome
Profit Variances
Favorable Variance
Variance that, taken
alone, increases
operating profit
Unfavorable Variance
Variance that, taken
alone, reduces
operating profit
15-3
15-4
Budgets: An Example
Bayou Division
Budget and Actual Results
August
Master
Budget
Actual
Sales (units)
Sales revenue
Less
Variable costs
Variable manufacturing
Variable selling and administrative
Total variable costs
Contribution margin
Fixed costs
Fixed manufacturing overhead
Fixed selling and administrative costs
Total fixed costs
Operating profit
a
b
c
100,000 units at $10.00 per unit
100,000 units at $3.80 per unit
100,000 units at $0.90 per unit
80,000
100,000
$ 840,000
$ 1,000,000
a
329,680
68,000
380,000
90,000
b
$ 397,680
$
470,000
$ 442,320
$
530,000
195,000
132,320
200,000
140,000
$ 327,320
$
340,000
$ 115,000
$
190,000
c
15-5
Budgets: An Example Continued
Bayou Division
Budget and Actual Results
August
Actual
Sales (units)
Sales revenue
Less
Variable costs
Variable manufacturing costs
Variable selling and administrative
Total variable costs
Contribution margin
Fixed costs
Fixed manufacturing overhead
Fixed selling and administrative costs
Total fixed costs
Operating profit
Master
Budget
Variance
80,000
20,000 U
100,000
$ 840,000
$ 160,000 U
$ 1,000,000
329,680
68,000
50,320 F
22,000 F
380,000
90,000
$ 397,680
$ 72,320 F
$
470,000
$ 442,320
$ 87,680 U
$
530,000
195,000
132,320
5,000 F
7,680 F
$ 327,320
$ 12,680 F
$
340,000
$ 115,000
$ 75,000 U
$
190,000
200,000
140,000
Flexible Budgeting
L.O. 2 Develop and use flexible budgets.
Static Budget
Budget for a single
activity level; usually
the master budget
Flexible Budget
Budget that indicates
revenues, costs, and
profits for different
levels of activity
15-6
Sales Activity Variance
L.O. 3 Compute and interpret the sales activity variance.
Difference between operating profit in the
master budget and operating profit in the
flexible budget that arises because the
actual number of units sold is different from
the budgeted number; also known as sales
volume variance
15-7
Profit Variance
L.O. 4 Prepare and use a profit variance analysis.
Profit Variance Analysis
Analysis of the causes of differences between
budgeted profits and actual profits
Sales price variance
Production cost variances
Marketing and administrative cost variances
15-8
15-9
Profit Variance Analysis
Bayou Division
Profit Variance Analysis
August
Actual
(based on
actual
activity of
80,000 units
sold)
Sales revenue
Less
Variable costs
Variable manufacturing cost
Variable mkt and admin costs
$
Contribution margin
Less
Fixed manufacturing costs
Fixed mkt and admin costs
$
Profit
$
Manufacturing
Variances
Marketing and
Administrative
Variances
840,000
25,680 U
-
4,000 F
442,320
25,680 U
4,000 F
195,000
132,320
5,000 F
-
7,680 F
115,000
Sales Price
Variance
$
329,680
68,000
$
20,680 U
$
11,680 F
Flexible
Budget (based
on actual
activity of
80,000 units
sold)
40,000 F
$
40,000 F
$
40,000 F
Total variance from flexible
budget = $31,000 F
424,000
200,000 U
$
84,000
Master Budget
(based on 100,000
units planned)
$
76,000 F
18,000 F
$
106,000 U
200,000
140,000
$
$
304,000
72,000
$
800,000
Sales Activity
Variance
380,000
90,000
$
$
106,000 U
Sales activity
variance
Total variance from master
budget = $75,000 U
1,000,000
530,000
200,000
140,000
$
190,000
Sales Price Variance
Sales Price *
Variance
$
40,000
F
$
40,000
F
$
40,000
15-10
Sales Price Variance
Difference between the actual
selling price and budgeted selling
price multiplied by the actual
number of units sold
($10.50 - $10) x 80,000 units = $40,000 F
F
* From the profit
variance analysis
Variable Production Costs
15-11
Standard Cost Sheet
Provides the quantities of each input
required to produce a unit of output and the
budgeted unit price for each input
Input
Direct material
Direct labor
Variable overhead
Total variable manufacturing costs
(1)
Standard
Quantify of Input
per Unit of Output
(2)
Standard Input
Price or Rate
per Unit of Input
(3)
Standard Cost per
Unit of Output
(frame)
4 pounds
0.05 hours
0.05 hours
$0.55 per pound
$20.00 per hour
$12.00 per hour
$
$
$
2.20
1.00
0.60
$
3.80
15-12
Production Cost Variance
L.O. 5 Compute and use variable cost variances.
Actual
Actual input price (AP)
times actual quantity
(AQ) of input
Actual Inputs at
Standard Prices
Standard input price
(SP) times actual
quantity (AQ) of input
(1)
(2)
AP x AQ
SP x AQ
Price variance
(1) minus (2)
Flexible Production
Budget
Standard input price
(SP) times standard
quantity (SQ) of input
allowed for actual
good output
(3)
SP x SQ
Efficiency variance
(1) minus (3)
Total variance
(1) minus 3)
15-13
Production Cost Variance Continued
Price Variance
Difference between actual price
and budgeted price
Multiply this difference
by the actual quantity
purchased
AQ AP - SP
15-14
Production Cost Variance Continued
Efficiency Variance
Difference between the actual quantity
used and the budgeted quantity for the
actual level of activity
Multiply this difference
by the budgeted
price per unit
SP AQ - SQ
Direct Materials Variance
Frames produced in August
15-15
80,000
Direct materials
Actual materials cost
328,000 lbs @ $.60/lb
$196,800
Efficiency variance
Price variance
SP AQ - SQ
AQ AP - SP
328,000 $.60 - $.55 = $16,400 U
$.55 328,000 – 320,000 = $4,400 U
80,000 x 4 lbs
$16,400 U
$4,400 U
Total material variance
$20,800 U
15-16
Direct Labor Variance
Direct labor
Actual direct labor cost
4,400 hours @ $18/hr
Price variance
AQ AP - SP
4,400 $18 - $20
= $8,800 F
$79,200
Efficiency variance
SP AQ - SQ
$20 4,400 – 4,000
= $8,000 U
80,000 x .05
$8,000 U
$8,800 F
Total direct labor variance
$800 F
Variable Overhead Variance
Variable overhead
Actual variable overhead cost
$53,680
Actual inputs @ standard
- price or POHR
Actual overhead
Price variance
$53,680 - $12 4,400
= $880 U
Efficiency variance
$12 4,400 – 4,000
= $4,800 U
$880 U
$4,800 U
Total variable overhead variance
$5,680 U
15-17
15-18
Total Variable Manufacturing Cost Variance
Materials
Direct
Labor
Variable
Overhead
Total variable
manufacturing
cost variance
Total
Price
$20,800 U
16,400 U
8,000 U
$800 F
8,800 F
8,000 U
$5,680 U
880 U
4,800 U
$25,680 U
Efficiency
Fixed Cost Variance
L.O. 6 Compute and use fixed cost variances.
Spending (or budget) Variance
Price variance for fixed overhead
The difference between budgeted and
actual fixed overhead
$195,000 – $200,000 = $5,000 F
15-19
Production Volume Variance
15-20
The difference between budgeted and
applied fixed overhead
Arises because actual production differs from
budgeted production.
$200,000 budget – $160,000 applied = $40,000 U
$200,000 budget
100,000 budgeted units
= 2 per unit
80,000 units x $2 = $160,000 applied