Variance Analysis

Evaluate the Effectiveness and Efficiency

of an Operating Income

Oleh: Dr. Judith Felicia Pattiwael Irawan, Dra., MT., AWP., CPF.
Reference: SRIKANT M. DATAR & MADHAV V. RAJAN;
HORNGREN”S COST ACCOUNTING. A MANAGERIAL EMPHASIS, 17Ed.
 Learning Objectives
Level 1 Analysis Calculate Static-Budget Variances

Develop Flexible Budget, Calculate Sales-Volume Variance

Level 2 Analys is

dan Flexible-Budget Variances

Level 3 Analysis Understand Standards Costs, Calculate Price Variances and

Efficiency Variances for Direct-Cost Categories

Understand how Managers use Variance

Describe benchmarking and explain its role in

Cost Management
Dibuat oleh: Judith Felicia Pattiwael Irawan, Manajemen-UNPAR
 Variance Analysis

Variance Analysis = Actual _ Static- Budget

Result Amount

Revenue, Contribution Margin & Operating Income

F: favorable effect on operating income, Static-Budget Amount < Actual Result
U: unfavorable effect on operating income, Static-Budget Amount > Actual Result
Cost
F: favorable effect on operating income, Static-Budget Amount > Actual Result
U: unfavorable effect on operating income, Static-Budget Amount < Actual Result

Dibuat oleh: Judith Felicia Pattiwael Irawan, Manajemen-UNPAR

 VARIANCE ANALYSIS
Static-Budget Variance
Level 1 Analysis for operating income

Sales-Volume Variance Flexible-Budget Variance

Level 2 Analysis for operating income for operating income

Level 2 Analysis Selling-Price Direct Materials Direct Manuf. Variable Manuf. Fixed Manuf.
Variance Labor Variance Overhead Overhead
Individual line Variance
Variance Variance

Direct Direct Direct Manf. Direct Manf.

Level 3 Analysis Materials Materials Labor Labor Price
Efficiency Price Efficiency Variance
Variance Variance Variance
TRY IT !
Jamie Draperies manufactures curtains. To complete a curtain, Jamie
requires the following inputs:
Direct materials standard: 10 square yards at $5 per yard
Direct manufacturing labor standard: 5 hours at $10 per hour

During the second quarter, Jamie Draperies made 1,500 curtains and
used 14,000 square yards of fabric costing $68,600. Direct manufacturing
labor totaled 7,600 hours for $79,800.
a. Compute the direct materials price and efficiency variances for the
quarter
b. Compute the direct manufacturing labor price and efficiency variances
for the quarter
Dibuat oleh: Judith Felicia Pattiwael Irawan, Manjamenen-UNPAR
Direct Material
Efficiency Variance
= $5/ sq yrd x (9,3334 sq yr/curtain – 10 sq yr/curtain) x 1,500 curtains
= 5,000 Favourable

Price Variance
= ($4,9 sq yr- $5/sq yr) x 9,3334 sq yr/curtain x 1,500 curtains
= 1,400 Favourable

Dibuat oleh: Judith Felicia Pattiwael Irawan, Manajemen-Unpar

Direct Manufacturing Labor-hour
Efficiency Variance
= $10/hour x (5,0667 hours/curtain – 5 hours/curtain) x 1,500 curtains
= $1,000 Unfavourable

Price Variance
= ($10,5/hour - $10/hour ) x 5,0667 hours/curtain x 1,500 curtains
= $3,800 Unfavourable

Dibuat oleh: Judith Felicia Pattiwael Irawan, Manajemen-Unpar

 MANAGEMENT’S USE of
VARIANCES

 Management use variances to evaluate

performance after implementing and to make
continuous improvements.
 Variances serve as an early warning system to
alert managers to existing problems or to
prospective opportunities.
 Variances analysis enables managers to evaluate
the effectiveness in the current period an to
improve performance in the future.

Dibuat oleh: Judith Felicia Pattiwael Irawan

 MANAGEMENT’S USE of
VARIANCES

Managers need to recognize that variances

can have multiple causes.
Managers must not interpret variances in
isolation of each other.The causes of
variances in one part of the value chain can
be the result of decisions made in another
part of the value chain.

Dibuat oleh: Judith Felicia Pattiwael Irawan

 USING VARIANCES for PERFORMANCE MEASUREMENT
 Two attributes of performance are commonly evaluated:
1. Effectiveness : the degree to which a predetermined
objectives or target is met
2. Efficiency: the relative amount of inputs used to achieve a
given output level.
Financial measures are being run to evaluate the overall cost
efficiency. Financial measures are critical in a company because
they indicate the economic impact of diverse physical activities.
This knowledge allows managers to make trade-offs, such as
increasing the cost of one physical activity to reduce the costs
of another physical measure.

Dibuat oleh: Judith Felicia Pattiwael Irawan

 BENCHMARKING and VARIANCE ANALYSIS
 Benchmarking is the continuous process of
comparing your firm’s performance levels against
the best level of performance in competing
companies or in companies having similar process.
 When benchmarks are used as standards,
managers know that the company will be
competitive in the marketplace if it can meet or
beat those standards.
 Companies develop benchmarks and calculate
variances on items that are the most important
to their business.
Dibuat oleh: Judith Felicia Pattiwael Irawan
 Financial and Nonfinancial
Performance Measures
Almost all companies use a combination of financial and nonfinancial
performance measures for planning and control rather than relying
exclusively on either type of measure.

To control a production process, supervisors cannot wait for an report with

variances analysis in dollars. Instead, timely nonfinancial performance
measure are frequently used for control purposes.
 Financial and Nonfinancial
Performance Measures
In Webb’s cutting room, cloth is laid out and cut into pieces, which are
then matched and assembled. Manager controls in cutting room by
observing workers and by focusing on nonfinancial measures, such as:
 a number of square yard of cloth used to produce 1,000 jackets or
 the percentage of jackets started and completed without requiring any
rework.
Webb’s production workers find these nonfinancial measures easy to
understanding.
 Financial and Nonfinancial
Performance Measures

This knowledge allows managers to make trade-offs, such as:

increasing the costs of one physical activity (say, cutting)
to reduce the costs of another physical measure (say, defects)
 Balance Scorecard and
Strategy Implementation
 The Balanced scorecard translates an organization’s mission and strategy
into a set of performance measures that provides the framework for
implementing its strategy.
 Not only does the balanced scorecard focus on achieving financial
objectives, it also highlights the nonfinancial objectives that an
organization must achieves to meet and sustain its financial objectives.
 The scorecard measures an organization’s performance from four
perspectives:
 Balance Scorecard and
Strategy Implementation
The scorecard measures an organization’s performance from four
perspectives:
1. Financial: the profits and value created for shareholders
2. Customer: the success of the company in its target market
3. Internal business process: the internal operations that creates value for
customers
4. Learning and growth: the people and system capabilities that support
operations
 Balance Scorecard and
Strategy Implementation
 The measure that a company uses to track performance depend on its
strategy.
 This set a measures is called a ‘ balanced scorecard’ because
it balances the use of financial and nonfinancial performance measure
to evaluate short-run and long-run performance in a single report.
 By balancing the mix of financial and nonfinancial measures,
the balanced scorecard broaden management’s attention to short-run
and long-run performance.
 Problem for Study
O’Shea Company manufactures ceramics vases. It uses its standard costing system when
developing its flexible-budget amounts.
In September 2019, O’Shea produced 2,000 finished units. The following information relates to its
two direct manufacturing cost categorie: direct materials and direct manufacturing labor.
Direct materials used were 4,400 kg. The standard direct materials input allowed for one output
unit is 2 kg at $15 per kg. O’Shea purchased 5,000 kg of materials at $16,5 per kg, a total of $82,500.
(This Problem Study illustrates how to calculates direct materials variances when the quantity of
materials purchased in a period differs from the quantity of materials used in that period.)
Actual direct manufacturing labor-hours were 3,250, at a total cost of $66,300.
Standard manufacturing labor time allowed is 1.5 hours per output unit, and the standard direct
manufacturing labor cost is $20 per hour.
# Calculate the direct materials price variance and efficiency variance and the direct manufacturing
labor price variance and efficiency variance. Base the direct materials price variance on a flexible
budget for actual purchased, but base the direct materials efficiency variance on a flexible budget
for actual quantity used
 Static Flexible Budget New Budget Actual Results
Budget
Unit sold 2,000 ceramics 2000 ceramics
Variable Cost being produced being used being purchased

- Direct Materials 4,400 kg 5,000 kg

$15/kg
2 kg/c $16,5/kg
5,000 kg

$82,500

2,000 ceramics

- Direct Manf. $20/hr 3,250hr

Labor 1,5 hr/cr

$66,300

Total Variable
Costs
 Static Flexible Budget Budgeted Price x Actual Results
Budget Actual Input

Unit sold 2,000 ceramics 2000 ceramics

Variable Cost being produced being used being purchased

- Direct Materials 4,000 kg 4,400 kg 5,000 kg 5,000 kg

$15/kg =$15/kg x 2 kg/c x =$15/kg x 4,400 kg =$15/kg x $5,000 kg =$16,5/kg x 5,000 kg
2 kg/c 2,000 ceramics
$82,500

Efficiency variance Price variance

2,000 ceramics

- Direct Manf. $20/hr 3,250hr

Labor 1,5 hr/cr

$66,300

Total Variable
 Static Flexible Budget Budgeted Price x Actual Results
Budget Actual Input

Unit sold 2,000 ceramics 2000 ceramics

Variable Cost being produced being used being purchased

- Direct Materials 4,400 kg 5,000 kg 5,000 kg

$15/kg $16,5/kg
2 kg/c 5,000 kg

$82,500

2,000 ceramics

- Direct Manf. $20/hr $20/hr x 1,5 hr/cr x $20/hr x 1,5 hr/cr x $20/hr x 3,250 hrs $20.4/hr x 3,250hr
Labor 1,5 hr/cr 2,000 ceramics 2,000 ceramics

Total Variable Efficiency variance Price variance

Costs =$5,000 U = $1,300U
 Static Flexible Budget Budgeted Price x Actual Results
Budget Actual Input

Unit sold 2,000 ceramics 2000 ceramics

Variable Cost being produced being used being purchased

- Direct Materials 4,000 kg 4,400 kg 5,000 kg 5,000 kg

$15/kg =$15/kg x 2 kg/c x =$15/kg x 4,400 kg =$15/kg x $5,000 kg =$16,5/kg x 5,000 kg
2 kg/c 2,000 ceramics =$15/kg x 2,2 kg/c x
$60,000 2,000 ceramics $75,000 $82,500
$66,000

Efficiency variance Price variance

2,000 ceramics

- Direct Manf. $20/hr $20/hr x 1,5 hr/cr x $20/hr x 1,5 hr/cr x $20.4/hr x 3,250hr
Labor 1,5 hr/cr 2,000 ceramics 2,000 ceramics $20/hr x 3,250 hrs

$60,000 $65,000 $66,300

Total Variable Efficiency variance Price variance

Costs =$5,000 U = $1,300U
TRY It !
Flexible Budget, Direct Materials, and Direct Manufacturing Labor
Variance
■ Milan Statuary manufactures statues of famous historical figures.
All statues are the same size. Each unit requires the same amount of
resources. The following information is from the static budget for
2019:
Expected production and sales 6,100 units
Expected selling price per unit $ 700/unit
Total fixed costs $1,350,000
■ Each statue needs 16 pounds at rate $14 per pound.
■ Budgeted direct manufacturing labor-hour were $695,400 with
budgeted price of input was $30 per hour.
Dibuat oleh: Judith Felicia Pattiwael Irawan, Manjamenen-UNPAR
TRY It !
Milan Statuary (continue)
■ During 2019, actual number of units produced and sold was 5,100
at an average selling price of $730. Actual cost of direct material
used was $1,149,000 based on 70,000 pounds. Direct
manufacturing labor-hours actually were used 17,000 at the rate of
$33.70 per hour. Actual fixed costs were $1,200,000. There were
no beginning or ending inventories.
1. Calculate the static-budget variance for operating income
2. Calculate the sales-volume variance and flexible-budget variance
for operating income.
3. Calculate efficiency and price for direct costs

Dibuat oleh: Judith Felicia Pattiwael Irawan, Manjamenen-UNPAR

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Oleh: Dr. Judith Felicia Pattiwael Irawan, Dra., MT., AWP., CPF