TM1 - 14 Sep

ANALYZING OF VARIANCES

Variance analysis is a part of the process of control and involves the calculation of variance and interpretation of result so as to localize the
different factor that are responsible for the variance. It leads us to ascertain the magnitude of each of each of the variance and the causes there of
so that corrective action may be taken. Variance analysis helps the management early warning for corrective action, and is useful in
accountability.

Analysis of Variance consist of:

Variable standard cost accounting system (Cost: variable cost).
Full standard cost accounting system (Cost: variable cost and or plus fixed cost).

Revenue Variances consist of:

1. Price Variance = (Actual price - Standard price) x Actual sales volume.
2. Mix Variance = (Actual sales volume - Actual sales volume at budget mix) x Budgeted contribution margin per unit.
3. Volume Variance = (Actual sales volume at budget mix - Budgeted sales volume) x Budgeted contribution margin per unit.

Cost variances:
Variable standard cost accounting system = (Actual variable production cost - Standard variable cost).
Full standard cost accounting system = (Actual production cost - Standard production cost).

Profit variance = (Actual profit - Standard profit).

Market share variance = [(Actual sales) - (Industry volume)] x Budgeted market penetration x Budgeted unit contribution
Industry volume variance = (Actual industry volume - Budgeted industry volume) x Budgeted market penetration x Budgeted unit contribution

Analysis of variance: Variable standard cost accounting system.

Revenue variances:
Price variance $xxx
Mix variance xxx
Volume variance xxx $xxx
Variable cost variance:
Direct materials variance $xxx
Direct labors variance xxx
Variable factory overhead variance xxx $xxx
Fixed cost variance:
Fixed factory overhead variance $xxx
Fixed selling expenses variance xxx
Fixed administrative expenses variance xxx $xxx
Net/Total variance $xxx

Analysis of variance: Full standard cost accounting system.

Revenue variances:
Price variance $xxx
Mix variance xxx
Volume variance xxx $xxx
Manufacturing cost variance:
Direct materials variance $xxx
Direct labors variance xxx
Factory overhead variance xxx $xxx
Commercial expenses variance:
Selling expenses variance $xxx
Administrative expenses variance xxx $xxx
Net/Total variance $xxx

The rule of calculating variances

Benefit/Revenue variances perspective:
If Actual revenue ($10) > Budgeted revenue ($8), so variance should be $2 Favorable (F).
If Actual revenue ($10) < Budgeted revenue ($15), so variance should be $5 Unfavorable (UF).

If Actual profit ($100) > Budgeted profit ($75), so variance should be $25 Favorable (F).
If Actual profit ($100) < Budgeted profit ($150), so variance should be $50 Favorable (F).

Costs/Expenses perspective:
If Actual cost ($10) > Budgeted cost($8), so variance should be $2 Unfavorable (UF).
If Actual cost ($10) < Budgeted cost ($15), so variance should be $5 Favorable (F).

Added/Total variances:
$10 F + $7 F = $17 F; $10 F + $15 UF = $5 UF; $10 F + $7 UF = $3 F; $10 UF + $15 UF = $25 UF.

Multiplied of variances:
If the sign of variance are the same, variance is favorable (F).
If the sign of variance are different, variance is unfavorable (UF).
For example: $10 F x 7 UF = $70 UF; $10 F x $7 F = $70F; and $10 UF x $7 UF = $70 F.
PT Sibalec manufactures four products—product A, B, C, and D. The profit budget for the month of August 2021 was as follows:

Product A Product B Product C Total Budget

Sales volume —units 100 80 120 300
Unit Total Unit Total Unit Total
Sales revenue ($) 1,00 100 2,00 160 3,00 360 620
Standard variable cost:
Direct material cost ($) 0,50 50 0,70 56 1,50 180 286
Direct labor cost ($) 0,10 10 0,15 12 0,10 12 34
Variable overhead cost ($) 0,20 20 0,25 20 0,20 24 64
Total variable cost ($) 0,80 80 1,10 88 1,80 216 384
Contribution margin ($) 0,20 20 0,90 72 1,20 144 236
Fixed cost:
Fixed overhead cost ($) --- 24 --- 24 --- 24 72
Selling expense ($) --- 17 --- 17 --- 17 51
Administrative expense ($) --- 9 --- 9 --- 9 27
Total fixed costs ($) --- 50 --- 50 --- 50 150
Net operating income ($) --- (30) --- 22 --- 94 86

Below are the data describing the actual financial results of PT Sibalec for the month of August 2021.

Sales revenue ............................................................................................................................. ...................................................... $781

Variable cost of good sold ............................................................................................................................. ................................. 552
Contribution margin ........................................................................................................................................................................ $229
Fixed Costs:
Fixed overhead cost ......................................................................................................................................................................... $ 80
Fixed selling expense ....................................................................................................... ............................................................... 57
Fixed administrative expense ................................................................................................ .......................................................... 33
Total fixed costs ........................................................................................................... ................................................................... $170
Net operating income (loss) ................................................................................................. ............................................................ $ 59

Operational statistics for the month of August 2021 as follows:

Sales Production
Product Units Sold Price per Total Sales Product Units Direct Direct Variable Total
unit Produced Material Labor Overhead costs
A 120 $0,95 $114 A 150 $80 $20 $40 $140
B 130 $1,90 $247 B 130 $91 $21 $35 147
C 150 $2,80 $420 C 120 190 $15 $30 235
Total 400 $781 400 $361 $56 $105 $552

Budgeted industry volume and Actual industry volume for April 2021 were presented below.

Product

A B C
Budgeted industry volume (units) 833 500 1.667
Actual industry volume (units) 600 650 1.500

Questions
1. Prepare an analysis of variance, a market penetration variance, and an industry volume variance between actual profit and budgeted
profit for August 2021 assuming that PT Sibalec employed a variable standard cost accounting system.
2. Prepare an analysis of variance, a market penetration variance, and an industry volume variance between actual profit and budgeted
profit for August 2021 assuming that PT Sibalec employed a full standard cost accounting system.