Handout Chapter 10

Emerson Sports is a company that manufactures and sells ski helmets. One of their best-selling helmet
is the EMX360 and this helmet is produced exclusively in a manufacturing plant in Squamish, BC. The
manager has been pleased with the success of this helmet as the actual margins were much higher than
initially anticipated. He would like to increase the production of this helmet to grow the brand but first,
he asked you to perform a variance analysis of the Q4 performance.

For simplicity reasons, assume that the number of units sold = the number of units produced.
Price /
cost per Price / cost
STATIC BUDGET Qty unit Total ACTUAL RESULTS Qty per unit Total VARIANCE
Sales 4,500 229 $ 1,030,500 Sales 4,800 225 $ 1,080,000 $ 49,500 F

Direct Materials (3pnd @ Direct Materials (3pnd @

$15 per pound) 4,500 45 202500 $13.70 per pound) 4,800 41.1 197280 -5220 F
Direct Labour (3 hrs per unit Direct Labour (3.3 hrs @
@ $21 per hour) 4,500 63 283500 $19 per hour) 4,800 62.7 300960 17460 U
Variable MOH ($3.5 per DLH) 4,500 10.5 47250 Variable MOH 45,350 -1,900 F
Fixed MOH (allocation rate =
$9.5 per DLH) 4,500 28.5 128250 Fixed MOH 140,960 12,710 U
147 661500 103.8 684,550

Gross Margin $ 82 $ 369,000 Gross Margin $ 121 $ 395,450 26,450 F

©Rotman School of Management – authored by Catherine Barrette

Do not reproduce without author’s permission.
1 – Prepare a flexible Budget for Emerson

Price / cost
FLEXIBLE BUDGET Qty per unit Total TOTAL ACTUAL Variance
Sales 4,800
$ 1,080,000
229 1,099,200 19,200 —> U

Direct Materials $ 197,280

4,800 45 216,000 18,720 F

Direct Labour $ 300,960

4,800 63 302,400 1,440 F

Variable MOH $ 45,350

4,800 10.5 50,400 5050 F

Fixed MOH budgeted $ 140,960

128,250 -12,710 U

697,050
$ 684,550

402,150
Gross Margin $ - $ - $ 395,450 6700 U

2 – Compute the Sales Price Variance and Sales Quantity Variance

Sales price variance
= AQ (AP-SP)
= 4800 (225 - 229)
= -19,200 (unfavourable) -compared to what we have planned we are getting less revenue

Sales quantity variance

= SP (AQ-SQ)
= 225 (4800-4500)
= 68700 (favourable)

-19,200+68700 = 49500 Favourable

©Rotman School of Management – authored by Catherine Barrette

Do not reproduce without author’s permission.
3 – Compute the Materials Variance

A) The Material Price Variance

material price variance
(per pound)
AQ (AP-SP)
= 3*4800(13.70-15) = -180,720 favourable — incurred less cost
than expected (only considered the cost aspect)

B) The Material Quantity Variance

SP (AQ-SQ)
= 15 (4800*3 - 4800*3)
=0
- no variance in the price of the material

©Rotman School of Management – authored by Catherine Barrette

Do not reproduce without author’s permission.
4 – Compute the Labour Variances

A) The Labour Rate Variance

AQ*(AP-SP)
4800*3.3 (19-21) = -31,680
favourable

B) The Labour Efficiency Variance

SP*(AQ-SQ)
21*(4800*3.3 - 4800*3)
= 30,204 unfavourable
used more hours than budgeted
saved on labour rate, but the efficiency decreased (used more
hours)

©Rotman School of Management – authored by Catherine Barrette

Do not reproduce without author’s permission.
5 – Compute the Overhead Variances

A) Variable Overhead Spending Variance

actual rate: 45,350 / (3.3*4800)

= 3.3*4800 (Actual rate - Standard rate(3.5) ) = -10,090 —> favourable

B) Variable Overhead Efficiency Variance

SP*(AQ-SQ)
= 3.5 *( 3.3*4800 - 3*4800) = 50,040 -unfavourable

6 – Compute the fixed Overhead Variances

A) Budget Variance
= actual FOH - Flexible budget
= 140,960 - 128,250 = 12,710 U

B) Volume Variance
(AQ-SQ )*SP
(4500*3 - 4800*3) *9.5
= -8550 favourable

©Rotman School of Management – authored by Catherine Barrette

Do not reproduce without author’s permission.
VARIANCE FORMULA
SALES VARIANCES
Sales price variance (Actual Selling Price -
Budgeted Selling Price ) *
ASQ
Sales Quantity/Volume Variance (ASQ-BSQ)*BSP
FLEXIBLE BUDGET VARIANCES
Materials Price Variance (AP-SP)*AQ
Materials Quantity Variance (AQ-SQ)*SP
Labour Rate Variance (AR - SR) * AH
Labour Efficiency Variance (AH-SH)*SR
Variable OH Spending Variance (AR-SR)*Actual units of the
allocation basis
Variable OH Variance (Actual units of the
allocation basis -Standard
units of the allocation
basis)*SR
FIXED OVERHEAD VARIANCES
Fixed Overhead Budget Variance Actual FixedOH - Flexible
Budget OH
Fixed Overhead Volume Variance Fixed OH allocation Rate *
(denominator hours -
standard allowed allocation
basis)
©Rotman School of Management – authored by Catherine Barrette
Do not reproduce without author’s permission.
DESCRIPTION
Identifies the impact that is due to a change in
the selling price of the item.
Identifies the impact of the change in the volume
of sales made vs. the budgeted level of sales.
This helps management isolate the impact of the
level of sales on their overall performance.
Isolates the variance due to a change in price of
the materials used in the production.
Isolates the variance due to a change in the
quantity of the materials used in the production
process. This helps management assess if they
were efficient.
Isolates the variance due to a change in the rate
paid to employees for the production labour in
the period.
Isolates the variance due to number of hours
worked. This will help management determine if
the workers were efficient or not in the
production process.
Identifies the difference between the actual
variable OH cost incurred and the standard costs
that should've been incurred for a given period.
Isolates the variance due to a change in the
allocation base for the VOH. It presents the
difference between the actual activity(DLH,
DMH, units or other allocation base) and the
standard activity allowed for a given period.
Presents the difference between the actual costs
and what should've been spent based on the
flexible budget.
Measures the utilization of available plant
facility. A favorable variance means the
company operated at an activity level above the
one planned for the period (and vice versa).