Crear rs C.1. Cost and Variance Measures: Part 1 ‘This madule covers the following content from the IMA Learning Outcome Statements. ee eel “The candidate should be able to: ‘8. analyze performance against operational goals using measures based on revenue, manufacturing costs nonmanufacturing Costs. and profit depending on the type of center or unit being measured explain the reasons for variances within a performance monitoring system prepare a performance analysis by comparing actual results to the master budget Calculate favorable and unfavorable variances from the budget. and provide explanations for variances identity and describe the benefits and imitations of measuring performance by comparing actual results tothe master budget analyze a flexible budget based on actual sales output) volume calculate the sales volume variance and the sales price variance by comparing the ‘exible budget to the master (static) budget caleulatetheflexible-budget variance by comparing atal results to the exible budget [ 1. calculate asales-mix variance and explain its impact on revenue and contribution margin ‘| Budgets and Variances 105 1€t9| Los cre Managers compare actual performance with expected (budzetes) results to determine variances. The review and analysis of variances are done periodically as a control ana perfarmance management tool. Managers of cost centers are evaluated based on actual costs 22nd how much they deviate fom planned costs, managers of revenue centers are evalusted bbssed on the revenues they actually achieve compared with budgeted revenues; and managers Of profit centers are evaluated based on the level of profit their units achieve compared with ‘the planned level of profits. variances occur when volume, costs, and/or sales prices differ from budget and when resources are used more or less efficently than planned. tice] 2 Variance Analysis Using the Master Budget ‘Comparison of actual results tothe master budget isthe most basic form of variance analysis. 2.1 Annual Budgets and Performance Reports “The mactor budget (ao called the annual budget or annual business plan) is prepared assuming a single level of activity. This level of activity Is che forecasted sales volume that was ‘estimated atthe beginning ofthe budget process.Los cia| ce nt rad Facts: Neostar Corporation has precared its annual business plan for Year 1. The ‘organization anticipated that it would sell 10,000 units ofits product at $15 apiece, that its contribution margin percentage would be 20 percent, and that its fixed costs would be $525,000, Actual units sold numbered ony 8.000 (totaling $112.000 in revenue: variable ‘expenses materialized at $100,800 and fixed costs materialized at $24,000, Required: Prepare a performance report comparing actual versus budgeted resus. Solution: Budget Actual variance Revenue 5150000 $112.00 (38.000) Unfavorable Variable expenses (120.000) 100.800) _19200 Favorable ‘contribution margin 30,000 11,200 (18,800) Unfavorable Fixed costs 25000 _24000) 1,000 Favorable Operatingincome §_S000 $1280 $17,800) Unfavorable Variances need signifcent analysis before they are useful. The favorable variance in ‘variable expenses. for example. does not represent efficiencies. Budgeted contribution margin ratios ae 20 percent: actual contribution margin ratios are 10 percent. Sales in units were of budget by 20 percent yet revenue was down by 25 percent. Something is very wrong at Neostar. but what? 2.2 Benefits and Limitations of Measuring Actual Performance Based on Master Budget Variances Performance reports based on the master budget can be used to ident variances that require further investigation. However, they do not produce effective management by exception dats because variance analysis using the master budget does not isolate variances due to efficiencies or inefficiencies from variances due to volume ce. selling or producing more or less than the ‘amounts in the master budget. 23 Use of Flexible Budgets to Analyze Performance Budget variance analysis using flexible budgets allows managers to separate ‘volume variances from efficiency variances. Flexible budgets are budgets presented for multiple sales volumes, more accurstely reflecting expected costs basec on actual outout. Fevible bucget Netiances ate 2 Deiter measure of performance than master budget vetiances becouse they compare actual revenues and actual costs with budgeted revenues and budgeted costs for the same level of output. 1os1Ge 10S 1CigFacts: Management at Neos:ar has heard that fenble budgeting can provide more meaningfulinformauion. Required: Prepare a lexibie budge: using the same informacion described in Example Solution: Report Forte yeor ended December 3), Year sates — Results Budget (Planned (Volume) Master @rcrat varances ““cost). Variances Bucget Unite 8000 8000 10900 Sales 3112000 $@00% 120000 © sn000) 150000 Yarale cos 0mm 13809 96000 24009 zB oneitution margin 11200 2800)” 24000 (e000) 30000 Foe cons m9. aio Operseng income 20m 5600 § son Fesibie budget variances (11300) Sales acevey (ume) variances esco) ‘Total master buageevarances (7309 240007 120000 = 20% ‘3000 80,000 = 20% Flexdble bude variances show that revenue per unit was less than expected and variable costs per unit were greater than expected. The company has performed $11,200 worse than expected. Mearmiile. differences in volume produced a $6.000 unfavorable variance. yielding 2 total variance from the budget of $17,800. The variance does nct identify the problem, but points managementin the right direction. Revenue ic nat materlliing a: expected decpite efforts to discount our calling price (producing an unfavorable Sales pice variance of $8,000), and expenses are over budget (Groducing an unfavorable variable cost variance of $4,800 despite a favorable fxed.cost variance of $1.000). Ghee EbvcaonCopron Aah reed Mower 4sLosier 3 Sales Variances Sales variance analyses can be used to evaluate te effectiveness ofan en identification of ‘Brpet markets anos stesso capture tose mares. 3.1. Sales Variance Analysis ‘The sales variance (the ference bernen actual sales revenue and budgeted sales revenue) has two man components: the soles price variance and the sales volume variance, eee [> =Acrual quanticy sold x (Acual price ~ Standard price) Aug “(AP -SP) Sates 4 —— Le =Standard contibucion margin x (Actual quantisy- Standard quantity) Sc =(aQ-50) BALL. Sales Price Variance ‘The sales prce variance measures the aggregate effet of an actual sales price that difers from ‘he budgeted sais price, [—e ~Actunl quantity sold (Actual pice ~Seadard rie) Satesprice |_| eA AP-SP) —__J A favorable varlance exists when the actual Sling pice f higher than budget and an Unfavorable variance occurs when the actual seling orice is ess than the budgeted sales price Facts: n Cascade Company's January budget. the company shows 3.000 budgeted units sold. a sale price of $16 per unit. and variable costs of $10 per unit. The company actually ‘sells 4.000 units at a price of $14 per unit. Required: Calculate Cascade's sales price variance for january. ‘Solution: Sales price variance = AQ...» (AP ~SP) = ($14 516) = 4.000 = $8,000 unfavorable. “This variance is unfavorable because the per-unit selling pice was less than anticipated.3.1.2. Sales Volume Variance ‘The sales volume variance isa flexible budget variance that quantifies the degree to which total seles variances are traceable to variances in sales volume or the number of Units sold, The Basic sales volume variance is: Standerd contribution margin = (Actual quantity - Stendard quency) — Sates volume | variance —_J Le scm 9-5) J A favorable variance exsts when more units ar sold than budgeted, and an unfavorable valance occurs when fewer units are sold than budgeted es ocd Facts: In Cascade Company's January budget. the company shows 3.000 budgeted units Sold. sale price of $15 per unit and variable costs of $10 per unit. The company actually sels .000 units at a price of $14 per unit Required: Calculate Cascade's cales volume varlance for january. Solution: Sales volume variance = SCM = (AQ ~SQ)= (4,000 - 3,000) = $6 = $6,000 Favorable. This variance Is favorable because the company sold more units than it anticipated 3.2 Sales Mix Variance Los icin ‘The sales mix variance considers the impact of multiple products on the projected and actual sales volume of an organization. Anticipated sales revenue is often derived from the sale of ‘multiple products with different contribution margin. ifsales volume meets projections but ‘occu in 2 rato different from the anticipated sales mix, sales revenue and net income may fer from the budget ‘Actual Budgeted] Total number Budgeted [salesmix _salesmix|, of units of contribution Sales mix variance | Tae for ~ ratio for |* all produets * ‘margin per Japroduct aproduct| ‘sold unitof product —eeSsSsSsSsSFSFSFSFSFSFSFSSSSSSS'Neostar Corporation has two products: the Nova and the Sunbeam. Despite the total ‘combined sales volume of both products (in units) having materialized as expected, the ‘company’s net income has not met managements expectations. Sales mi variance ‘analysis can be used to analyze this variance. fegin by comparing the master budget with the actual results forthe period, determining the difference in the sales mix rai, and then applying that difference tothe contribution and weighting that result by total units. 'Neostar Corporation Sales tix Variance ase Boag ue som 7.00 ‘Stes z a a) Verebiecoms 009 09 N88] oN 000) constucon marge" 29a00 $500 25000 $47 so 450 Reseoss ssa 25009 ‘Speraang income ss zon uss = 79900 ses rr a rr Yorsbiecoss mp 1 ay 209 Conreuccnmargn so00 $500 S750 $417 Sa Presson 000 23009 0 Operergincone $00) onetutlon ()=(0)) ‘erg Vartonce 500 (05000) a7 12509 0 “The unfavorable sales mix variance of $2.500 comprises a $15.000 unfavorable sales ‘mx variance for Nova and 2 $12,500 favorable sales mix variance for Sunbeam. Seling more ofthe product with the lower contribution margin has created the overall Unfavorable variance.Sellex Co, prepared the following master budget atthe beginning ofthe current year on forecasted sales of 100,000 units of output ssles revenue 1.500.000 Direct materials 300.000 Direct labor 200,000 Fecory overnead 500,000 seling and administrative expenses 120.000 Operating income $380,000 Shit percent ofthe factory overhead costs are fixed and 20 percent ofthe seling and ‘administrative costs are fixed. ‘Avthe end ofthe period. actual sales volume was lower than forecasted due to changes Inthe economic environment. Actual sles volume was 85.000 units. The flexible budget (operating income at tne end ofthe year's: a. $523,000 b. 274400 < $598.400 d. §425,000 ‘Acompany sells books and CDs. The following information is collected from the records of the company showing actual sales and budgeted sales ofeach ter. Also the standard and ‘actual contribution margins are presented in the table showing results forthe yea. Actual ‘Actual Stondard Quantity —Contibution Cartribution Budgeted Sold Mon Morzin ‘Soles Books 19.000 ‘$40 $38 12.000 os 3.000 512 510 10.000 ven this information, the sales mic variance for the period is: a $5,100 favorable B. $5,000 unfavorable $110,100 unfavorable d._ $96,000 unfavorable