AN ANALYSIS OF VARIANCES

FOR CROCKER COMPANY

An analysis of variance between actual profits and budgeted
profits for January 1988

ENROLLMENT NO: 09BS0002750

 BUDGET FOR JANUARY ($000s)    

PARTICULARS PRODUCT E PRODUCT F PRODUCT G PRODUCT H TOTAL

BUDGET
STANDARD 1000 2000 3000 4000  
VOLUME UNITS
  UNIT TOTA UNIT TOTA UNIT TOTA UNIT TOTAL  
L L L
SALES $0.15 150 $0.20 400 $0.25 750 $0.30 1200 $2,500
STANDARD                  
VARIABLE COST
1 MATERIAL 0.04 40 0.05 100 0.06 180 0.08 320 640
2 LABOUR 0.02 20 0.02 40 0.03 90 0.04 160 310
3 VARIABLE 0.02 20 0.03 60 0.03 90 0.05 200 400
OVERHEAD
TOTAL VARIABLE 0.08 80 0.1 200 0.12 360 0.17 680 1320
COST
CONTRIBUTION $0.07 $70.00 $0.10 $200.00 $0.13 $390.00 $0.13 $520.00 $1,180.00
FIXED COST   20   60   60   160 300
PROFIT BEFORE   $50.00   $140.00   $330.00   $360.00 $880.00
TAX

The calculation is made for each product line, and the product line results are then aggregated to calculate the
total variance. A positive variance is favorable, because it indicates that actual profit exceeded budgeted profit,
and a negative variance is unfavorable.

The selling price variance is calculated by multiplying the difference between the actual price and the standard
price by the actual volume. The calculation is shown in the following table. It shows that the price variance is
$90,000, unfavorable.

SELLING PRICE VARIANCES, JANUARY ($000s)    

PARTICULARS PRODUCT E PRODUCT F PRODUCT G PRODUCT TOTAL

H
ACTUAL VOLUME (units) 1000 1000 4000 3000  
ACTUAL PRICE/UNIT $0.13 $0.22 $0.22 $0.31  
BUDGET PRICE/UNIT $0.15 $0.20 $0.25 $0.30  
ACTUAL OVER/(UNDER) BUDGET/UNIT ($0.02) $0.02 ($0.03) $0.01 $0.00
FAVURABLE/(UNFAVOURABLE) PV ($20.00) $20.00 ($120.00) $30.00 ($90.00)
 SALES MIX AND VOLUME VARIANCE, JANUARY ($000s)

1 2 3 4 5 6
PRODUCT ACTUAL VOLUME BUDGETED VOLUME DIFFERENCE UNIT CONTRIBUTION VARIANCE
      (2-3)   (4*5)
E 1000 1000 0    
F 1000 2000 -1000 $0.10 ($100.00)
G 4000 3000 1000 $0.13 $130.00
H 3000 4000 -1000 $0.13 ($130.00)
TOTAL 9000 10000     ($100.00)

The calculation of mix and volume variance is $100,000 unfavorable. The volume variance results from selling
more units than budgeted. The mix variance results from selling a different proportion of products from that
assumed in the budget. Because products earn different contributions per unit, the sale of different proportions
of products from those budgeted will result in a variance. If the business unit has a “richer” mix, a higher
proportion of products with a high contribution margin, the actual profit will be higher than budgeted; and if it
has a “learner” mix, the profit will be lower.

The volume and mix variances are joint, so techniques for separating them are somewhat arbitrary. One such
technique is described below:

MIX VARIANCE, JANUARY ($000s)

1 2 3 4 5 6 7
PRODUCT BUDGETED BUDGETED MIX AT ACTUAL SALES DIFFERENCE UNIT VARIANCE
  PROPORTION ACTUAL VOLUME   (4-3) CONTRIBUTION (5*6)
E 0.1 900 1000 100 $0.07 $7.00
F 0.2 1800 1000 -800 $0.10 ($80.00)
G 0.3 2700 4000 1300 $0.13 $169.00
H 0.4 3600 3000 -600 $0.13 ($78.00)
TOTAL   9000 9000     $18.00

The calculation of mix variance is shown in above table. It shows that a highest proportion of product G
followed by product E and a lowest proportion of product F followed by product H. Since products G and E have
a higher unit contribution than products H and F, the mix variance is favorable, by $18,000.
The volume variance can be calculated by subtracting the mix variance from the combined mix and volume
variance. This is ($100,000)-$18,000, or ($118,000). The calculation of volume variance is shown in table below:

SALES VOLUME VARIANCE, JANUARY ($000s)

1 2 3 4 5 6
PRODUCT BUDGETED MIX AT BUDGETED DIFFERENCE UNIT VOLUME
  ACTUAL VOLUME VOLUME (2-3) CONTRIBUTION VARIANCE
E 900 1000 -100 $0.07 ($7.00)
F 1800 2000 -200 $0.10 ($20.00)
G 2700 3000 -300 $0.13 ($39.00)
H 3600 4000 -400 $0.13 ($52.00)
TOTAL 9000 10000 -1000   ($118.00)

Revenue variances may be further subdivided. Above tables provide the information needed to classify them by
product. Such a classification is shown in table below:

REVENUE VARIANCES BY PRODUCT, JANUARY ($000s)

PARTICULARS PRODUCT TOTAL

  E F G H  
PRICE VARIANCE ($20.00) $20.00 ($120.00) $30.00 ($90.00)
MIX VARIANCE $7.00 ($80.00) $169.00 $78.00 $174.00
VOLUME VARIANCE ($7.00) ($20.00) ($39.00) ($52.00) ($118.00)
TOTAL ($20.00) ($80.00) $10.00 $56.00 ($34.00)

Variances between actual and budgeted fixed costs are obtained simply by subtraction, since these costs
are not affected by either the volume of sales or the volume of production. This is shown in table below:
 FIXED COST VARIANCE

PARTICULARS ACTUAL BUDGET FAVOURABLE OR

      UNFAVOURABLE VARIANCES
R &D EXPENSES 250 300 50
SELLING EXPENSE 290 250 -40
ADMINISTRATIVE 110 120 10
EXPENSE
TOTAL 650 670 20

Variable costs are costs that vary directly and proportionately with volume. The budgeted variable
manufacturing costs must be adjusted to the actual volume of production. The budgeted manufacturing
expense is adjusted to the amount that should have been spent at the actual level of production by
multiplying each element of standard cost for each product by the volume of production for that
product. This calculation is shown in table below:

VARIABLE MANUFACTURING EXPENSE VARIANCES, JANUARY ($000s)  

PARTICULARS PRODUCT TOTAL ACTUAL FAVOURABLE/

  E F G H     (UNFAVOURABLE) VARIANCES
MATERIAL 40 100 180 320 640 360 280
LABOR 20 40 90 160 310 200 110
OVERHEAD (VARIABLE) 20 60 90 200 370 530 -160
TOTAL 80 200 360 680 1320 1090 230

There are several ways in which the variances can be summarized in a report for management. One
possibility is shown in the following table. It was used primarily because the amounts can be traced
easily to the earlier tables.
 SUMMARY PERFORMANCE REPORT, JANUARY ($000s)
PARTICULARS AMOUN
T
ACTUAL PROFIT -70
BUDGETED PROFIT 210
VARIANCE -280
ANALYSIS OF VARIANCE -  
FAVOURABLE/UNFAVOURABLE
REVENUE VARAINCES:  
PRICE -90
MIX 18
VOLUME -118
NET REVENUE VARIANCES -190
VARIABLE-COST VARAINCES  
MATERIAL 280
LABOR 110
VARIABLE OVERHEAD -160
NET VARIABLE-COST VARIANCES 230
FIXED-COST VARIANCES  
SELLING EXPENSE -40
ADMINSITRATIVE EXPENSE 10
R&D EXPENSE 50
NET FIXED-COST VARIANCES 20
VARIANCE 60