VARIANCES CMA : “Performance Management” VARIANCES Isabelle MIROIR LAIR 2019 -2020 1-C1 Cost and Variance Measures The Flow of cost • INPUTS Direct Material Direct Labor Variable Overhead Fixed Overhead • OUTPUT Finished GOODS • INCOME STATEMENT COGS Cost of GOODS sold Developing a standard cost for a tennis racquet Static budget Selling price $120 Volume 30,000 units Input Input/unit of production Cost per unit of Input Cost /unit of production Direct Material 1 pound /u $60/pound $60 Direct Labour 2 DLH /u $8/DLH $16 Variable Overhead 1.2 machine-hr $10/mach-hr $12 Total Variable Cost $88 Unit Fixed Overhead $10 per unit Total Unit Cost $98 Example: assume you receive the financial data of last period compared to budget Actual results Units sold Budgeted results variances 24,000 30,000 Sales Revenue 3,000,000 3,600,000 -600,000 Direct material 1,491,840 1,800,000 -308,160 Direct labour 475,200 480,000 -4,800 Variable manuf overhead 313,200 360,000 -46,800 Contribution margin 719,760 960,000 -240,240 Fixed manufacturing costs Fixed SGA costs 294,000 390,000 300,000 390,000 -6,000 0 35,760 270,000 -234,240 EBIT You can compute variances but you can’t analyze them because they are based on various levels of activity Example: 1) to put together the various variable or fixed costs 2) to compute the flexible budget Actual results Units sold Flexible Budget Var Flexible budget Volume variance Static budget 24,000 24,000 30,000 Sales Revenue 3,000,000 2,880,000 3,600,000 Variable costs 2,280,240 2,112,000 2,640,000 Contribution margin 719,760 768,000 960,000 Fixed costs 684,000 690,000 690,000 35,760 78,000 270,000 EBIT DM + DL + Var. Overhead costs = Variable costs Fixed Manufacturing + SGA costs = Fixed costs Flexible budget = actual volume x standard unit cost or price Flexible Budget • A flexible budget is a restatement of the original budget that have been adjusted to the actual level of activity units 30 000 Static Budget flexible Budget 24 000 costs Example: Budget based on 24 000 units (instead of 30 000) Actual results Units sold Flexible Budget Var Flexible budget Volume variance Static budget 24,000 24,000 30,000 Sales Revenue 3,000,000 2,880,000 3,600,000 Variable costs 2,280,240 2,112,000 Contribution margin 719,760 768,000 960,000 Fixed costs 684,000 690,000 690,000 35,760 78,000 270,000 EBIT 26400000x24000 30000 2,640,000 Sales & variable expenses are adjusted based on the per-unit value and the actual units sold Example: normally a decrease of 6,000 units should have decreased the EBIT by $192,000 but… Actual results Units sold Flexible Budget Var Flexible budget Volume variance Static budget 24,000 24,000 -6,000 30,000 Sales Revenue 3,000,000 2,880,000 -720,000 3,600,000 Variable costs 2,280,240 2,112,000 -528,000 2,640,000 Contribution margin 719,760 768,000 -192,000 960,000 Fixed costs 684,000 690,000 0 690,000 35,760 78,000 -192,000 270,000 EBIT Volume Variance = Flexible Budget – Static Budget Example: But the change in prices and consumptions has produced another variance Actual results Flexible Budget Var 24,000 0 24,000 -6,000 30,000 Sales Revenue 3,000,000 120,000 2,880,000 -720,000 3,600,000 Variable costs 2,280,240 168,240 2,112,000 -528,000 2,640,000 Contribution margin 719,760 -48,240 768,000 -192,000 960,000 Fixed costs 684,000 -6,000 690,000 0 690,000 35,760 -42,240 78,000 -192,000 270,000 Units sold EBIT Flexible budget Flexible Budget Variance = Actual results - Flexible Budget Volume variance Static budget Example Actual results Flexible Budget Var 24,000 0 24,000 -6,000 30,000 Sales Revenue 3,000,000 120,000 2,880,000 -720,000 3,600,000 Variable costs 2,280,240 168,240 2,112,000 -528,000 2,640,000 Contribution margin 719,760 -48,240 768,000 -192,000 960,000 Fixed costs 684,000 -6,000 690,000 0 690,000 35,760 -42,240 78,000 -192,000 270,000 Units sold EBIT Flexible budget Flexible Budget Variance = -48,240 Volume variance Static budget Volume Variance = -192,000 Total Variance = 35,760 – 270,000 = -234,240 There is no need to go further with the volume variance BUT The flexible budget variance covers # variances Price Variance Quantity Variance And will be detailed per expenses Indirect costs vs Direct Costs Variable Overhead Fixed Overhead • Indirect costs: • • • • • • • • Indirect labor Supplies Tools Equipment (depreciation, ..) Rent Insurance Property tax Training & hiring • Direct costs • Direct materiel • Direct labor The flexible budget variance Framework Volume of output is the same for actual or budgeted data Flexible Budget Actual Results Actual Quantity Actual Quantity Standard Quantity × Actual Price × Standard Price × Standard Price Price Quantity Variance Variance • To analyze the variances between the flexible budget and the actual results, it is necessary to detail into quantity and price Example Volume of output is the same for actual or budgeted data Flexible Budget Actual Results 900 kg Actual Quantity 1,000 kg × €11 × Standard Price × €10 Price Quantity Variance Variance • Price variance = • Quantity variance = Example Volume of output is the same for actual or budgeted data Flexible Budget Actual Results 900 kg 900 kg 1,000 kg × €11 × €10 × €10 Price Quantity Variance Variance • Price variance = 900x11 – 900x10 = (11-10) 900 = €900 • Quantity variance = 900x10 – 1000x10 = (900 – 1,000)€10 = -€1,000 The DM Variance: Actual Results Flexible Budget Actual Qty purchased Actual Qty purchased Actual Qty used Standard Quantity × Actual Price × Standard Price × Standard Price × Standard Price Price Quantity Variance Variance DM Price Variance = (AP – SP) AQp DM Usage Variance= (AQu – SQ) SP Direct material variance Actual results Flexible Budget Var. Flexible budget Units sold 24,000 0 24,000 DM costs 1,491,840 51,840 1,440,000 Additional information: Price per pound= 1491840/19200= $77.7 per pound Usage = 19,200 pounds in the production of 24,000 units And 24,000 × $60 = $1,440,000 Price Variance = (77.7 - 60) × 19,200 = $339,840 unfavorable Quantity Variance = (19,200 – 24,000) × $60 = $288,000 favorable 51,840 The Direct Labor Variance: Actual hours = hours used Standard hours = hours allowed Actual hours Actual hours Standard hours × Actual Rate × Standard Rate × Standard Rate Rate efficiency Variance Variance RateVariance = (AR – SR) AH Efficiency Variance= (AH – SH) SR Direct Labor variance Actual results Flexible Budget Var. Flexible budget Units sold 24,000 0 24,000 DL costs 475,200 91,200 384,000 Additional information: Labor reporting records show that 52,800 DLH costed $475,200 for 24,000 units => average hour rate= $9 52,800 x $9 = $475,200 Standard hours = 24,000 x 2h = 48,000 hours 48,000 × $8 = $384,000 DL Rate Variance = (9 - 8) × 52,800 = $52,800 unfavorable DL Efficiency Variance = (52,800 – 48,000) × $8 = $38,400 unfavorable 91,200 Fixed Overhead • We haven’t any volume variance on the fixed costs because they are fixed! The Fixed Manufacturing Overhead Variance: Budgeted FOH Total Actual FOH Costs Budgeted Production Volume × Standard FOH Rate Spending Variance Spending Variance =Actual FOH costs – budgeted FOH costs Fixed Manufacturing Overhead variance Actual results Flexible Budget Var. Flexible budget Units sold 24,000 0 24,000 FOH costs 294,000 -6,000 300,000 A simple comparison of actual spending to the fixed overhead budget provides the FOH spending variance FOH spending Variance = actual FOH – budgeted FOH = 294,000 – 300,000 = - 6,000 Favorable Fixed Overhead Variance Fixed overhead variances Spending variance 350 E D 300 B 250 F 100 Budgeted FOH 150 actual FOH applied FOH 200 C A 50 0 FOH applied 0 5 10 15 20 25 30 In an absorption costing system, fixed overhead must be expressed on the basis of dollars per unit of activity, and the amount must be absorbed as product is manufactured. => the firm divides the budgeted FOH by the level of activity: 300,000/30,000 =$10 per unit For 24,000 units the amount absorbed = 240,000 = CF The production volume variance = $60,000 = budgeted FOH– applied FOH Sales Revenues and Sales Variances The Sales Variances For one product Actual volume Actual volume Expected volume × Actual Price × Standard Price × Standard Price Price Volume Variance Variance Price Variance = (AP – SP) AV Volume Variance= (AV – SV) SP Sales Variances Units sold Sales Revenue Actual results Flexible Budget Var Flexible budget Volume variance Static Budget 24,000 0 24,000 -6,000 30,000 3,000,000 120,000 2,880,000 -720,000 3,600,000 Actual Price = 3000000/24000 = 125 Standard Price = 3600000/30000 = 120 Price Variance = (AP – SP) AV = (125 – 120) 24,000 = 120,000 F Volume Variance = (AV – SV) SP = (24,000 – 30,000) 120 = -720,000 U Example 0: exo Variance 1 product The Sales Variances For several products Actual volume Actual volume × Actual Price × Standard Price Price Price variance does not change and is computed per product Variance Price Variance = (AP – SP) AV Volume Variance? Volume Variance For several products • The Sales volume variance results not only from selling more or less total volume of goods and services, but also from selling relatively more or less of one type of product versus another. • The Sales volume Variance represents how much revenue will increase due to increased sales, but it doesn't represent how much the operating profit will increase. • Because increased sales volume not only increases revenue but also increases the variable costs. the variances are computed based on contribution margin Sales Volume Variances with 2 products Based on contribution margin Actual volume × Standard CM Expected volume × Standard CM Volume Variance Actual volume × Actual Mix % × Standard P Mix and Quantity Variances are subsets of the Volume Variance Actual volume × Expected Mix % × Standard P Mix Variance Expected volume × Expected Mix % × Standard P Total Quantity Variance Example: with 2 products Sunbird Boat Company is selling two models of boat: the Classic in oak and the Deluxe in teak Actual Data Actual Volume Budgeted Data Classic Deluxe 150 50 Classic Deluxe 164 41 Standard Price $4,200 $9,400 Standard Variable cost $2,785 $6,315 Standard CM $1,415 $3,085 Expected Volume Actual Mix : 150 50 Total volume = 150 + 50 = 200; Classic = = 75% ; Deluxe = = 25% 200 200 Expected Mix : 164 41 Total volume = 164 + 41 = 205; Classic = = 80% ; Deluxe = = 20% 205 205 Sales Volume Variances with Sunbird Actual volume 150 & 50 × Standard CM 1415 & 3085 Expected volume 164 & 41 × Standard CM 1415 & 3085 Actual volume × Actual Mix % 200 x 75% & 200 x 25% × Standard CM 1415 & 3085 Actual volume × Expected Mix % 200 x 80% & 200 x 20% × Standard CM 1415 & 3085 Expected volume × Expected Mix % 205 x 80% & 205 x 20% × Standard CM 1415 & 3085 Volume variance with 2 products • Volume variance = (Actual Vol. - Expected Vol.) x Standard CM = (150-164) 1415 + (50-41) 3085 = $7,955 F • Mix variance = • Quantity variance = [Actual Vol. – (Actual vol. x Exp.Mix)] Stand.CM [(Actual Vol. x Exp.Mix) – Expect. vol.] Stand.CM = (150 – (200x80%)) x 1415 = -14,150 & (50 – (200x20%)) x 3085 = 30,850 Total Mix variance = $16,700 = ((200x80%) - 164) x 1415 = -5,660 & ((200x20%) – 41) x 3085 = -3,085 Total Quantity variance = -8,745 • Volume variance = Mix variance + Quantity variance = $16,700 – 8,745 = $7,955 F Example 1 • DM Cost variance : 1) Budgeted units : 10 000 units Direct materiel unit cost: € 4,5 per kg Direct material per unit: 0,5kg 2) Actual results : 11 000 units Direct materiel cost: 5610 kg x € 4= €22 440 • Analyse the variance between the budgeted cost and the actual ones. 35 Example 2 (cost accounting Pearson) static budget units of LLL produced and sold 180 000 151 200 150 140 1 200 1 080 5 5,25 6 000 5 670 14 14,5 84 000 82 215 batch size (units per batch) number of batches (line1/line2) labour hours per batch total labour hours (line3xline4) cost per hour in $ total cost actual result 1) Compute the cost variances 36 Example 3 Budgeted units : 16 000 units Labor cost: 50€/hour Labor hour per unit: ½ hour Number of normal hours per month : 8 500h If needed 800 more hours may be used with an increasing cost of 25%. And then it is possible to buy vacation hours on the market at a price of 80€ /hour. Actual units: 20 000 units; total hours used : 10 400h Normal hours: 453 500€ Extra hours: 50 000€ Vacation hours: 85 800€ 1) Compute the cost variances 37 MCQ on sales variance MCQ Comfort Chairs (CC) is a manufacturer of reclining chairs. CC manufactures two different models of chair, the classic and deluxe model. Below is CC's budget information and actual results for last year. Budget Classic Chair Deluxe Chair Expected Sales Volume 35,000 Chairs 20,000 Chairs Standard Price per Chair $375 $500 Actual Classic Chair Deluxe Chair Actual Sales Volume 34,000 Chairs 20,500 Chairs Actual Price per Chair $380 What is the sales price variance based on the above information? $57,500 Favorable $67,500 Favorable $57,500 Unfavorable $67,500 Unfavorable $495 MCQ • What is the sales volume variance based on the information given for Comfort Chairs? • $125,000 Unfavorable • $125,000 Favorable • $67,500 Unfavorable • $67,500 Favorable MCQ Comfort Chairs (CC) is a manufacturer of reclining chairs. CC manufactures two different models of chair, the classic and deluxe model. Below is CC's budget information and actual results for last year. Budget Classic Chair Deluxe Chair Expected Sales Volume 35,000 Chairs 20,000 Chairs Standard Price per Chair Standard Variable Cost Standard Contribution Margin Actual Actual Sales Volume Actual Price per Chair Actual Variable Cost Actual Contribution Margin $375 $500 ($200) ($300) $175 $200 Classic Chair Deluxe Chair 34,000 Chairs 20,500 Chairs $380 $495 ($200) ($290) $180 $205 What is the sales volume variance (measured in terms of contribution margin) based on the above information? $272,500 Unfavorable $272,500 Favorable $75,000 Unfavorable $75,000 Favorable MCQ Which variance would be added to the flexible budget variance to arrive at the total static budget variance A. efficiency variance B. price variance C. sales mix variance D. sales volume variance
