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Additional Topics in Variance Analysis
Chapter 17
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Profit Variance Analysis
L.O. 1 Explain how to prorate variances toinventories and cost of goods sold.
• Most companies close variances to Cost of Goods Sold.
• Other companies prorate the variances.
17 - 2
Profit Variance Analysis
Sales (units)Sales revenueLess: Variable costs
Variable manufacturing costsVariable selling and administrative
Contribution marginFixed costs:
Fixed manufacturing overheadFixed selling and administrative costs
Profit
$28,890 U $28.890 U
4,500 F $24,390 U
Mfg.Variances(based on
90,000 unitsproduced)
$ 4,000 F$ 4,000 F
7,680 F$11,680 F
Marketingand Admin.VariancesActual
80,000$840,000
332,890 68,000$439,110
195,500 132,320$111,290
$40,000 F
$40,000 F
$40,000 F
SalesPrice
Variance
80,000$800,000
304,000 72,000$424,000
200,000 140,000$ 84,000
FlexibleBudget
$200,000 U
76,000 F 18,000 F$106,000 U
-0- -0-
$106,000 U
SalesActivityVariance
100,000$1,000,000
380,000 90,000$ 530,000
200,000 140,000$ 190,000
MasterBudget
Bayou DivisionProfit Variance Analysis (when units produced do not equal units sold)
Total variance from flexiblebudget = $27,290 F
Total variance from master budget = $78,710 U
LO1
17 - 3
Manufacturing Variances Based on 90,000 Units Produced
LO1
• Variable manufacturing costs:Actual quantity produced (AP –SP)
• 90,000 × ($4.121 - $3.800) = $28,890 U
• Fixed manufacturing costs = $4,500 F
17 - 4
Closing ProductionCost Variance to COGS
LO1
Cost of Goods Sold 24,390Fixed Overhead Price Variance 4,500
Variable Production Cost Variance 28,890To close production cost variances to Cost of Goods Sold.
• Journal entry to close productionvariance to cost of goods sold:
17 - 5
Prorating ProductionCost Variances
LO1
Cost of Goods Sold 21,680Fixed Overhead Price Variance 4,500Finished Goods Inventory 2,710
Variable Production Cost Variance 28,890To close production cost variances to Finished Goods andCost of Goods Sold.$21,680 (8/9 of the variance) is closed to Cost of GoodsSold and $2,710 (1/9 of the variance) is closed to FinishedGoods Inventory.
• Journal entry to prorate production variance tocost of goods sold and finished goods inventory:
17 - 6
Reconciling Variable Costing and Absorption Costing
LO1
• Using variable costing, the entire fixedproduction cost of $195,500 is expensed.
• Using standard full absorption costing, a portionof the fixed overhead remains withthe 10,000 units in inventory.
10,000 × $2.00 = $20,000
$195,500 – $20,000 = $175,500
17 - 7
Standard Costs for MaterialsLO1
Standard costs:4 pounds per frame @ $.055 per pound = $2.20 per frame
Frames produced in August 80,000Actual materials purchased and used:
328,000 pounds @ $0.60 per pound = $196,800
• In addition, assume instead that 350,000 poundswere purchased in August at $0.60 per poundand 328,000 pounds were used.
• What are the variances?
17 - 8
Direct Materials Variance:No Materials Inventory
LO1
(1)
Actual
(2)Actual Inputs atStandard Prices
(3)Flexible Production
Budget
Actual materials price(AP = $0.60)
× Actual quantity(AQ = 328,000 pounds)
of direct materials
Standard materials price(SP = $0.55)
× Actual quantity(AQ = 328,000 pounds)
of direct materials
Standard materials price(SP = $0.55)
× Standard quantity(SQ = 320,000 pounds)
of direct materialsallowed for actual output
AP × AQ = $196,800 SP × AQ = $180,400 SP × SQ = $176,000
Total variance= $16,400 + $4,400 = $20,800 U
Price variance$196,800 – $180,400
= $16,400 U
Efficiency variance$180,400 – $176,000
= $4,400 U
17 - 9
Direct Materials Variance:Materials Inventory
LO1
(1)
Actual
(2)Actual Inputs atStandard Prices
(3)Flexible Production
Budget
Actual materials price(AP = $0.60)
× Actual quantity(AQ = 350,000 pounds)
of direct materials
Standard materials price(SP = $0.55)
× Actual quantity(AQ = 350,000 pounds)
of direct materials
Standard materials price(SP = $0.55)
× Standard quantity(SQ = 320,000 pounds)
of direct materialsallowed for actual output
AP × AQ = $210,000 SP × AQ = $192,500
$0.55 × 320,000pounds allowed = $176,000
Efficiency variance:$180,400 – $176,000 = $4,400 U
Price variance:$210,000– $192,500
= $17,500 U
$0.55 × 328,000pounds used = $180,400
SP × SQ
PurchaseComputations
UsageComputations
17 - 10
Materials: Standard Costing SystemLO1
Materials Inventory 192,500Material Price Variance 17,500
Accounts Payable $210,000To record the purchase of 350,000 pounds of material with an actualprice of $0.60 per pound and a standard price of $0.55 per pound.
• Journal entry to record purchase of materials:
Work-in-Process Inventory 176,000Material Efficiency Variance 4,800
Materials Inventory $180,400To record the use of 328,000 pounds of material with a standard priceof $0.55 per pound. Standard use is 320,000 pounds.
• Journal entry to record materials used:
17 - 11
Market Share Variance andIndustry Volume VarianceL.O. 2 Use market share variances to
evaluate marketing performance.
• Industry volume variance:Portion of the sales activity variance due tochanges in industry volume
• Market share variance:Portion of the activity variance due to changesin the company’s proportion of sales in themarkets in which the company operates
17 - 12
Sales Activity Variances
L.O. 3 Use sales mix and quantity variancesto evaluate marketing performance.
• Sales mix variance:Variance arising from the relative proportion ofdifferent products sold
• Sales quantity variance:Variance occurring in multiproduct companies fromthe change in volume of sales, independent of anychange in sales mix
17 - 13
Production Mix and Yield Variances
L.O. 4 Evaluate production performance usingproduction mix and yield variances.
• Product mix variance:Variance that arises from a change in the relativeproportion of inputs (a materials or labor mix variance)
• Production yield variance:Difference between expected output from a given levelof inputs and the actual outputobtained from those inputs
17 - 14
Variance Analysis inNonmanufacturing Settings
L.O. 5 Apply the variance analysis model to nonmanufacturing costs.
Output Measures in Service OrganizationsOrganization
Public accounting, legal, and consulting firms Professional staff hoursHotel Room-nights, guestsAirline Seat-miles, revenue-milesHospital Patient-days
17 - 15
Variance and Standards
L.O. 6 Determine which variances to investigate.
• Management by exception:Approach to management requiring that reportsemphasize the deviation from an accepted basepoint, such as a standard, a budget, an industryaverage, or a prior period experience.
17 - 16
End of Chapter 17
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin