Variance Analysis

Performance report usually means a comparison of actual results with some Budget/Standard

Variance is a deviation of an actual amount from the expected or budgeted amount.
1

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

Variance Analysis - Objective • Identify the causes of the variances of financial performance and Identify Organizational Unit/Activity/Person responsible for it.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

2

Analytical Framework used for

Variance Analysis
- Identify the key causal factors that affect profits.
- Break down the overall profit variance by these causal factors. - Estimate the degree of impact of each factor on the profit. - Try to calculate the specific, separable impact of each causal factor by varying only that factor, holding all other factors constant. - Add complexity sequentially, one layer at a time.(peel the onion) - Stop the process digging dip when the further digging is not justified
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

3

Variance Analysis
Total Variance

Non Mfg Costs Variance Admn. Mktg. R&D

Mfg Costs Variance Variabl e Cost Fixed Cost

Sales Variance Volume Selling Price

Materia l

Direct Labor

Variabl e O/H

Market Share

Industr y Volume

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

4

Favorable or Unfavorable Variance? To determine whether a variance is favorable or unfavorable, use logic rather than memorizing a formula.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

5

Sales Variance

ariance + SPV = Actual Qty. Sold * (Budgeted Price – Actual Price)

geted Qty. Sold S Mix V = Budgeted Price* (Budgeted Mix of Actual Qty. - Actual Mix of Actual Qty.)
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

6

Cost Variance :– Material

Price Variance

MPV = Material Price Variance = Actual Usage * (Budgeted Price – Actual Price)

M Mix V = Budgeted Price * (Budgeted Mix of Actual Usage - Actual Mix of Actual Usage)
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

7

Cost Variance :– Labor

e Variance +

Labor Rate Variance = Actual Usage * (Budgeted Rate – Actual Rate)

te * Labor Idle Time variance = Idle Time * Budgeted Rate Labor Efficiency Variance = Budgeted Rate * 8 (Standard Horngren/Sundem/Stratton ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Input –Actual Input)

Cost Variance :– Overhead

Fixed Overhead
Fixed Overhead Variance = (Actual Output * Standard Fixed O/H per unit) - Actual F O/H incurred
Standard F O/H per unit = Total Standard Fixed O/H output / Budgeted

Variable Overhead

ual Output *
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

Standard V
9

Reasons for Variance There are basically two reasons why actual results might differ from the standard.

activity and fixed costs per peri

vities were
10

n

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

Analysis of Cost data and variance Analysis –
Total Variance

Profits

Non Mfg Costs Variance Admn. Mktg. R&D

Mfg Costs Variance Variable Cost Fixed Cost

Sales Variance

Volume

Selling Price

Material

Direct Labor

Variable O/H

Market Share

Industry Volume

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

11

Sign up to vote on this title
UsefulNot useful