Chapter 21 - Other Variance Analysis

CHAPTER 21
OTHER VARIANCE ANALYSIS
Changes from Twelfth Edition
All changes to Chapter 21 were minor.
Approach (also see Approach for Chapter 20)
The general message of the chapter is that differences between actual and budgeted production costs can
be decomposed into price, quantity, mix, and volume variances. This general idea is applied to a variety
of specific situations, but these details should not be permitted to obscure the general point. Illustration
21-1 helps keep the detailed calculations in perspective.
The computation of the mix variance is quite complicated and difficult to understand. However, students
should have a general comprehension of the concept of mix because it comes up in a great many practical
situations. We find it used more with respect to gross margin analysis than as a refinement of material
price or labor rate variances.
Often there is miscommunication in class because students differ in the situations that they are implicitly
thinking about. For example, the appropriateness of computing a gross margin variance rather than a
selling variance depends on the nature of the company. If the job of the marketing organization is to
obtain a certain gross margin above product costs, whatever the costs are, then attention should be
focused on gross margin. If both the marketing organization and the production organization are
responsible for the gross margin (one for the price component and the other for the cost component), then
attention should be focused on selling price. It is not that one approach is generally better than the other,
rather, each approach is appropriate for a certain situation and inappropriate for another situation.
Students may not perceive that both situations exist, particularly if they have had experience in one type
of company.
Cases
Campar Industries, Inc. is a problem set dealing with the variances that are introduced for the first time in
this chapter.
Darius Company parallels the example in the Complete Analysis section of the chapter text.
Woodside Products, Inc. is a good variance analysis review case. It requires the use of last years actuals
as the standards for analyzing this years performance.
Olympic Car Wash requires students to isolate the effects of an uncontrollable factor (rain) on the results
of a car wash company. It can be framed as either a flexible budgeting or variance analysis case. (Note:
This case was included in Chapter 25 in the Twelfth Edition. It fits equally well there.)

21-1

Chapter 21 - Other Variance Analysis

Problems
Problem 21-1: Beta Division

Bdgt. Vol. @
Bdgt Mix @
Bdgt. Margin

Act. Vol. @
Bdgt. Mix @
Bdgt. Margin

Sales Vol. Var.

Product
1

3,200 @ $10
= $32,000

Mix Var.

3,072 @ $10
= $30,720
$1,280 U

1,700 @ $13
= $22,100

5,100 @ $9
= $45,900

Act. Vol. @
Act. Mix @
Act. Margin

Unit Margin Var.

2,850 @ $10
= $28,500
$ 2,220 U

1,632 @ $13
= $21,216
884 U

Total

Act. Vol. @
Act. Mix @
Bdgt. Margin

2,850 @ $10.20
= 29,070
$ 570 F

2,500 @ $13
= $32,500
11,284 F

4,896 @ $9
= $44,064

2,500 @ $12.58
= $31,450
1,050 U

4,250 @ $9
= $38,250

4,250 @ $8.80
= $37,400

1,836 U

5,814 U

850 U

$4,000 U

$ 3,250 F

$1,330 U

Check: 10,000 x $10.00 9,600 x $10.20 = $2,080 U.

21-2

$2,080 U Net

Chapter 21 - Other Variance Analysis

Problem 21-2: Bradley Company

(all numbers are thousands, except per-unit amounts)
Calculation of Mix Variance

a. Mix variance
Product A
Produce B
Actual quantity........................................................................................................................................................
310
186
Standard proportion of actual (1).............................................................................................................................
298
198
Difference................................................................................................................................................................
+ 12 units
- 12 units

Standard gross margin:............................................................................................................................................

$5.90 - $4.00 std. cost.......................................................................................................................................
x $1.90
$5.50 - $4.00 std. cost.......................................................................................................................................
______
x $1.50

Sale of more units of A than B gave a variance of...................................................................................................

$22.80
-$18.00
Or $ 4.80 F
b. Volume variance given as $47.3U reflects the fact that not as many units were produced as were
expected to be produced. Net income would be higher if the expected units had been actually
produced.
c. There would be no gross margin mix variance and no sales volume variance, but the gross margin
would be lower by $21.3, due to the change in sales as illustrated below:

Sales.........................................................................................................................................
300 @ $5.50
$1,650
(2) 200 @ 5.45
1,090
$2,740
Change in gross margin
Actual
310 ($5.50) = $1,705
186 ($5.45) = $1013.7
Actual
$2718.70
Budgeted
Sales Units (2740.0)
X Actual
Selling
$21.3
d. As illustrated below, a unit margin variance of -164.3 would have occurred:

Product A...........................................................................................................................................
($1.40 - $1.90) x 310 =
-155.0
Product B...........................................................................................................................................
($1.45 - $1.50) x 186 =
-9.3
-164.3
1. Standard proportion:

A
B

21-3

300/500 = .6
200/500 = .4

Chapter 21 - Other Variance Analysis

2. If Product A sells for $5.50 per unit, then 310 units would show total sales of $1,705, leaving Product
B sales at $1,013.7, or $5.45/unit.

Problem 21-3: Delta Division

Gross margin variances:
Budgeted unit margin, A = $240 ($60 + $50 + $60) = $70
Budgeted unit margin, B = $148 ($45 + $30 + $36) = $37
Actual unit margin, A = ($427,000 1,750) - $170 = $74
Actual unit margin, B = ($481,000 3,250) - $111 = $37
Sales volume variance: $0. This can be determined by inspection because both actual and budgeted total
volumes were 5,000 units.
Mix variance:
A: (1,750 1,900) x $70
B: (3,250 3,100) x $37

=
=

$10,500U
5,550F
$ 4,950U

Unit margin variance:

A: ($74 - $70) x 1,750
B: (by inspection)

=
=

$7,000F
0
$7,000F

Net margin variance

$4,950U + $7,000F = $2,050F

Labor variances:
Standard labor per unit, A: $50 $20/hr. = 2.5 hrs./unit
Standard labor per unit, B: $30 $20/hr. = 1.5 hrs. unit
Efficiency variance:

Rate variance:
=
[$20 ($187,110 9,450 hr.] x 9,450]
Net labor variance =
Materials variances:

21-4

1,890F
$ 890F

Chapter 21 - Other Variance Analysis

Standard materials per unit, A: $60 $1.50/lb. = 40 lbs.

Standard materials per unit, B: $45 $1.50/lb. = 30 lbs.
Usage variance:
[(1,900 x 40) + (3,100 x 30) 180,000] x $1.50 = $16,500 U
Price variance:
[$1.50 - $275,400 180,000)] x 180,000
Net materials variance

= 5,400U
= $21,900U

$75,200 + $0.80 ($187,110) - $265,192

= $40,304U

1.2 ($187,110) - $224,888

Net overhead variance

=
356F
= $39,948U

Overhead variances:
Spending variance:
Volume variance:

Sum of all variances (profit variance):

$2,050 F + $21,900 U + $890 F + $39,948 U

= $58,908U

Statement of Budgeted and Actual Gross Margin

Budget
Actual
Revenues..............................................................................................................................................................................
$914,800
$908,000
Cost of goods sold................................................................................................................................................................
667,100
658,250
Gross margin @ std..............................................................................................................................................................
247,700
249,750
Production cost variances:
Materials usage................................................................................................................................................................
-(16,500)
Materials price.................................................................................................................................................................
-(5,400)
Labor efficiency..............................................................................................................................................................
-(1,000)
Labor rate........................................................................................................................................................................
-1,890
Overhead volume............................................................................................................................................................
-356
Overhead spending..........................................................................................................................................................
-(40,304)
Total variances................................................................................................................................................................
-(60,958)
Gross margin, actual.............................................................................................................................................................
$247,700
$188,792
Standard gross margin increased by $2,050 because of a $4 per unit higher margin on Product A; but a
shift in product mix toward lower-margin Product B more than eliminated this gain. The production cost
variances are self-explanatory, except for the overhead volume variance; this $356 represents the amount
our predetermined standard overhead cost per unit overcharged products for overhead, because our
planned overhead was $1.20 per direct labor dollar, but our actual overhead was way overspent ($40,304).
(Some students will offer details on the other production cost variances, which is fine.)

21-5

Chapter 21 - Other Variance Analysis

Problem 21-4: Inman Company

a

Comparison of Master Budget and Flexible Budget

November
Flexible Budget
at 19,000 Units
Variable
Master
per Unit
Fixed
Total
Budget
Difference
Sales revenue..................................................................................................................................................................................
$20
$380,000
$400,000
$(20,000)
Costs:
Direct material................................................................................................................................................................................
3
57,000
$ 60,000
3,000
Direct labor.....................................................................................................................................................................................
3
57,000
60,000
3,000
Manufacturing overhead.................................................................................................................................................................
4
$ 50,000
126,000
130,000
4,000
Selling and administration...............................................................................................................................................................
2
60,000
98,000
100,000
2,000
Total costs.......................................................................................................................................................................................
$12
$110,000
338,000
350,000
12,000
Operating income............................................................................................................................................................................
$ 42,000
$ 50,000
$ (8,000)

21-6

Chapter 21 - Other Variance Analysis

b.

(1)

Sales volume variance:

Act. vol. @ bdgtd. margin: 19,000 units x ($20 - $12.50*)
Bdgt. vol. @ bdgtd. margin: 20,000 units x ($20 - $12.50)
Unfavorable sales volume variance

=
=

$142,500
150,000
$ 7,500U

*Budgeted mfg. overhead per unit = $130,000 20,000 = $6.50; this plus budgeted direct material ($3.00) and direct labor
($3.00) gives a budgeted unit cost of $12.50.

(2) Unit margin variance:

Act. vol. @ act. margin: 19,000 units x ($19* - $12.50)
Act. vol. @ bdgtd. margin (from l above)
Unfavorable unit margin variance

=
=
=

$123,500
142,500
$ 19,000U

*$361,000 revenues 19,000 units = $19

(3) Direct material (net) variance:

Budgeted: $3 x 19,000 units

=
$57,000
Actual (give)...................................................................................................................................................
42,000
Unfavorable direct material variance..............................................................................................................
$15,000F
(4) Direct labor (net) variance:

Budgeted: $3 x 19,000 units

=
$57,000
Actual (given).................................................................................................................................................
76,000
Unfavorable direct labor variance..................................................................................................................
$19,000U
(5) Manufacturing overhead (net) variance:

Absorbed: $6.50 x 19,000 units

= $123,500
Actual (given)
=
130,000
Manufacturing overhead variance...................................................................................................................
$6,500U
(6) Selling ant administration (net) variance:

Budgeted (given)
= $100,000
Actual (given)
=
99,000
Favorable selling and administration variance................................................................................................
$1,000F
Sum of (l) through (6): $36,000 U = $14,000 actual - $50,000 budget
Note: Both (5) and (6) can be decomposed into volume and spending components. There is not enough
information given to decompose (3) and (4) into price and usage components.

21-7

Chapter 21 - Other Variance Analysis

Cases
Case 21-1: Campar Industries, Inc.
Note: This case is unchanged from the Twelfth Edition.
Approach
This problem set can be completed in one class session. Alpha is a straightforward calculation of gross
margin variances. Beta introduces the gross margin mix variance. Gamma gives the student the
opportunity to apply the mix concept to raw materials. Delta is a review problem, containing both margin
and production cost variances.
Alpha Division

Unit margin, budgeted:......................................................................................................................................................

$72 - $43 = $29
Unit margin, actual:...........................................................................................................................................................
($1,658,250 / 22,000) - $43 = $75.38 - $43 - $32.38
Unit margin variance
= Unit margin * Actual volume
= ($32.38 - $29) * 22,000 = $74,360 F
Sales volume variance
= Volume * Bdgt. unit margin
= (22,000 - 24,000) * $29 = $58,000 U
Net gross margin variance
= Act. gross margin Bdgt. gross margin
= 22,000 * $32.38 - 24,000 * $29 = $16,360 F
Check: $74,360 F + $58,000 U = $16,360 F
The unfavorable volume variance is more than overcome by the favorable unit margin (also often
called selling price) variance. I point out to students how this problem illustrates the importance of
calculating margin variances rather than revenue variances.
Beta Division on following page.
Gamma Division
Mix variance:
(Standard Mix*

Actual Quantity)

Standard
= Mix Variance
Price
Material X......................................................................................................................................................................................
(6,000
5,500)
*
$1.69
=
$ 845 F
Material Y......................................................................................................................................................................................
(4,000
4,500)
*
$2.34
=
1,170 U
$ 325 U

*Actual quantity used at budgeted proportion (60/40).

Price variance:
Standard Price

Actual Price)

Actual Quantity

Price
Variance
Material X......................................................................................................................................................................................
($1.69
$1.69)
*
5,500
=
$0
Material Y......................................................................................................................................................................................
($2.34
$2.53)
*
4,500
=
855 U
$855 U
Usage variance:
(Standard quantity
(9,900
Net variance:

Actual quantity)
10,000)

*
*

Standard Price
$1.95

=
=

Usage variance
$195 U

Mix variance
$325 U
Check:

+
+

Price variance
$855 U

Usage variance
$195 U

=
=

$1,375 U

21-8

Chapter 21 - Other Variance Analysis

Actual cost
Standard cost
Net variance

=
=
=

9,900 lbs. * $1.95

21-9

$20,680
19,305
$1,375U

Chapter 21 - Other Variance Analysis

Beta Division
Bdgt. Vol. @
Bdgt Mix @
Bdgt. Margin

Act. Vol. @
Bdgt. Mix @
Bdgt. Margin
Sales Vol. Var.

Pdt.
1
2
3
Total

Act. Vol. @
Act. Mix @
Bdgt. Margin
Pdt. Mix Var.

Act. Vol. @
Act. Mix @
Act. Margin
Unit Margin Var.

3,200 @ $12
= $38,400

$1,536 U

3,072 @ $12
= $36,864

$2,664 U

2,850 @ $12
= $34,200

$684 F

2,850 @ $12.24
=$34,884

1,700 @ $15.60
= $26,520

$1,061 U

1,632 @ $15.60
= $25,459

$13,541 F

2,500 @ $15.60
= $39,000

$1,250 U

2,500 @ $15.10
= $37,750

$2,203 U
$4,800 U

4,896 @ $10.80
= $52,877
+

$6,977 U
$3,900 F

4,250 @ $10.80
= $45,900
+

$1,020 U
$1,586 U

4,250 @ $10.56
= $44,880
= $2,486 U Net

5,100 @ $10.80
= $55,080

Check: 9,600 x $12.241 10,000 x $12.00 = $2,486 U.

The analysis indicates that if Beta explicitly changed its marketing program in order to produce the actual results, this was not a good move. The
shift toward a richer mix did not generate enough additional margin to overcome the unfavorable sales volume and unit margin impacts.

21-8

Chapter 21 - Other Variance Analysis

There are two mistakes students frequently make in this analysis. First, some forget to change the order of
subtraction in the gross margin mix variance formula with the result that they show a favorable mix
variance. A little discussion quickly reveals why it must be unfavorable, and reminds them again that
whether a variance is favorable or unfavorable should be a matter of common sense (Will the
phenomenon described tend to increase or decrease profit?) rather than algebraic sign. Second, some
students calculate the mix variance this way
X:
Y:

(Standard Mix
(5,940
(3,960

Actual Quantity)
5,500)
4,500)

*
*
*

Standard Price
$1.69
$2.34

=
=

$ 744 F
1,264 U
$ 520 U

Since 5,940 + 3,960 = 9,900 rather than 10,000, this approach changes both the mix and the quantity
between the terms in parentheses. Thus, this would give a combined mix and usage variance; note that in
the correct calculation, the sum of the mix and usage variance is in fact $520 unfavorable.
Delta Division
Gross margin variances:
Budgeted unit margin, A = $300 - ($72 + $62.50 + $75) = $90.50
Budgeted unit margin, B = $185 - ($54 + $37.50 + $45) = $48.50
Actual unit margin, A = ($533,750 / 1,750) - $209.50 = $95.50
Actual unit margin, B = ($601,250 / 3,250) - $136.50 = $48.50
Sales volume variance: $0. This can be determined by inspection because both actual and
budgeted total volumes were 5,000 units.
Mix variance:
A: (1,750 -1,900) * $90.50
B: (3,250 - 3,100) * $48.50
Unit margin variance:
A: ($95.50 - $90.50) * 1,750
B: (by inspection)

=
=

$13,575 U
7,275 F
$6,300 U

$ 8,750F
0
$8,750 F
Net margin variance = $6,300 U + $8,750 F = $2,450 F
Materials variances:
Standard materials per unit, A: $72 / $l.80/lb. = 40 lbs.
Standard materials per unit, B: $54 / $l.80/lb. = 30 lbs.
Usage variance:
[(l,800 * 40) + (3,300 * 30) - 180,000] * $1.80 = $16,200 U
Price variance:
[$1.80 - ($330,480 / 180,000)] * 180,000
Net materials variances:

=
=

21-9

$ 6,480 U
$22,680 U

Chapter 21 - Other Variance Analysis

Labor variances:
Standard labor per unit. A: $62.50 / $25/hr. = 2.5 hrs.
Standard labor per unit, B: $37.50 / $25/hr. = 1.5 hrs.
Efficiency variance:
[(1,800 * 2.5 + 3,300 * 1.5) - 9,450] * $25 = $0
Rate variance:
[$25 - ($233,880 / 9,450)] * 9,450
Net labor variance

=
=

Overhead variances:
Spending variance:
$94,000 + $0.80 (233,880) - $320,000
Volume variance:
$1.20 (233,880) - $281,104
Net overhead variance
Sum of all variances (profit variance):
$2,450F + $22,680U + $2,370F + $39,344U

$2,370 F
$2,370 F

$38,896 U

448 U
$39,344 U

$57,204 U

Delta Division Statement of Budgeted and Actual Gross Margin

Budget
Actual
Revenues............................................................................................................................................................................
$1,143,500 $1,135,000
Cost of goods sold @ standard...........................................................................................................................................
821,200
810,250
Gross margin @ standard...................................................................................................................................................
$ 322,300 $ 324,750
Production cost variances:
Materials usage..............................................................................................................................................................
-(16,200)
Materials price...............................................................................................................................................................
-(6,480)
Labor rate......................................................................................................................................................................
-2,370
Overhead spending........................................................................................................................................................
-(38,896
)
Overhead volume..........................................................................................................................................................
-(448)
Total variances..............................................................................................................................................................
-(59,654)
Gross margin, actual..........................................................................................................................................................
$ 322,300 $ 265,096
Standard gross margin increased by $8,750 because of a $5 per unit higher margin on Product A; but a
shift in product mix toward lower-margin Product B eliminated $6,300 of this gain. The production cost
variances are self-explanatory, except for the overhead volume variance; this represents the amount the
predetermined standard overhead cost per unit undercharged products for overhead, because the overhead
rate was based on a planned volume of 235,000 DL$, whereas the actual volume was slightly less,
233,880 DL$. (Some students will offer details on the other production cost variances, which is fine.)

21-10

Chapter 21 - Other Variance Analysis

Case 21-2: Darius Company

Note: This case is unchanged from the Twelfth Edition. Please see the printed Instructors Resource
Guide for the Harvard Teaching Note.
Case 21-3: Woodside Products, Inc.*
Note: This case is unchanged from the Twelfth Edition.
Approach
This case provides a good summaryor good examinationof income variance analysis. Weaker
students are thrown off balance at first because none of the costs given are labeled as being standard.
However, because the task at hand is to explain 1992 results vis-a-vis those for 1993, the 1992 figures,
although actual amounts, constitute the standards for analytical purposes. The case also asks the student
to prepare a fairly intuitive summary analysis for a board meeting. I use this part of the assignment to
emphasize the importance of communicating the results of quite complicated calculations in a
straightforward, easy-to-grasp way to nonaccountants. The detailed analysis and a suggested summary
follow.
A. Gross Margin Variances
Since inventory was valued at $55 per unit in 1992, this is the number used to determine the unit
margins for these calculations:
Unit margin variance = ($50 - $39) * 82,350
Sales volume variance a (82,350 - 88,125) * $39
Net gross margin

=
=

$905,850F
225,225U
$680,625

B. Selling and Administrative Variance

The text mentions that these variances sometimes are decomposed into volume and spending
components. The data given makes this possible in this case:
Volume effect = (88,125 - 82,350) * $4.42
Spending effect (derived from volume effect and net)
Net variance = $2,086,810 - $2,039,343

=
=

$25,525F
21,942F
$47,467F

=
=

$23,058U
45,000F
$21,942F

=
=

$250,480U
56,500F
$193,980U

This spending variance can be further analyzed

Variable costs: ($4.42 - $4.70) * 82,350
Fixed costs $1,697,298 - $1,652,298
Net spending effect
C. Prime Cost Variances
Material price variance = ($2.50 - $2.90) * 626,200
Material usage variance = (648,8001 - 626,200) * $2.50
Net material variance
1

81,100 units produced @ 8 lbs per unit

This teaching note was prepared by Professor James S. Reece. Copyright by James S. Reece.

21-11

Chapter 21 - Other Variance Analysis

Labor rate variance = ($16.00 - $16.80) * 64,860

Labor efficiency variance = (60,8252 - 64,860) * $16.00
Nat labor variance

=
=

$ 51,888U
64,560U
$116,448U

81,100 units * 0.75 hr./unit

D. Production Overhead Variances

These calculations are challenging: Enough information is given to calculate every variance
except the fixed overhead component of the overhead spending variance. However, this can be
deduced from the other variances and the total production cost variance.
Overhead production variance =
(81,100 - 88,125) * $19.003

$133,475U

This is the fixed overhead absorption rate (see Appendix of Chapter 20)

Overhead spending variance, variable costs =

(81,100 * $4.00) - $359,500
Overhead spending variance, fixed costs
derived as follows:
Cost of goods sold @ std. = 82,350 * $55
Cost of goods sold, incl. pdn. cost variances
So total pdn. cost variances
of which:
Material variance
Labor variance
Ohd. pdn. vol. var.
Ohd. spending var., vbl. costs
So we have accounted for
Leaving as ohd. spending var., fixed costs

=
=

$ 35,100U
$ 247,135U

=
=
=

$4,529,250
5,255,388
$ 726,138U

=
=
=
=

193,980U
116,448U
133,475U
35,100U
479,003U
$ 247,135U

As a check, the variances in categories A-D calculated above total $680,625 F + 47,467 F +
193,980 U + 116,448 U + 133,475 U + 35,100 U + 247,135 U = $1,954F, which is the income
variance to be explained.
As a summary for the board of directors, I would present the numbers as follows: (The
explanation contains a few conjectures, which Marilyn Mynar would easily be able to validate;
this is done simply to remind students that the report should contain some reasons for balances,
not just the numbers.)
1. We increased our unit selling price by $11 (or 11.7%). If our production costs had not
increased this would have increased our pretax profit by $905,850
2. However, this price increase caused our sales volume to decline by 5,775 units (6.6%). At
last years price and cost levels, the impact of this decline was to reduce pretax profit by
$225,225.
3. This decrease in unit sales did have a favorable impact on pretax profits in one respect based
on last years per-unit selling cost, the volume decline saved us $25,525 in selling costs
(primarily salespeoples commissions).

21-12

Chapter 21 - Other Variance Analysis

4.
5. Our variable selling cost per unit, however, increased by $0.28 (or 6.3%), primarily because
of salespeoples commissions related to the higher per-unit selling price. This increase caused
pretax profit to decline by $23,058.
6. Other selling costs and administrative costs were reduced by $45,000, with a corresponding
favorable impact on pretax profit.
7. Increases in the purchase price of materials and labor rates caused pretax profit to decline by
$302,368. We were more efficient in using materials than last year, but our labor was less
productive; the combined effect of material usage and labor efficiency decreased pretax profit
by $8,060.
8. Our factory worked at less than its usual volume this year, which increased the production
cost of each unit because fixed factory overhead was spread over a lower volume. This had
the effect of reducing pretax profit by $133,475.
9. Our factory overhead costs also increased considerably, reducing pretax profit by $282,235.
10. To sum up, pretax profit increased $1,954 for these reasons:

Impact of higher selling price..............................................................................................................................

$905,850
Impact of lower sales volume..............................................................................................................................
(199,700)
Impact of lower production volume.....................................................................................................................
(133,475)
Impact of all spending and efficiency changes....................................................................................................
(570,721)
Net change in pretax income................................................................................................................................
$ 1,954
[A really brief report would include only this ninth item.]
For some reason, students often end up with a set of numbers that do not add up to $1,954. I
stress that a good explanation will contain a set of numbers that can be addedor, better, have
been addedto demonstrate that the $1,954 pretax profit variance has indeed been explained.
Case 21-4: Olympic Car Wash.*
Note: This case is unchanged from the Twelfth Edition, but it has been moved from Chapter 25 in the
Twelfth Edition to Chapter 21 in the Thirteenth Edition.

Approach
This is a flexible budgeting or profit variance analysis case in a setting that the students will easily
understand. They will figure out that they have to make adjustments for an uncontrollable factor that is
important in this industrythe weather. But doing the calculations is a little tricky.
Calculations
How large should the bonus pool be for the Aalst location?
One possible solution
*

This teaching note was prepared by Professors Kenneth A. Merchant and Wim A. Van der Stede. Copyright by Kenneth A.
Merchant and Wim A. Van der Stede.

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Chapter 21 - Other Variance Analysis

Flex the budget based on number of hours of good weather.

Flexible

Controllable
Variance
(Actual - Flex
Budget)

Budget

Actual

Budget

184,00
0

124,08
0

108,10
0

15,980

Variable expenses (50%

of revenue)

92,000

62,040

54,050

(7,990)

Fixed expenses

53,820

55,000

53,820

(1,180)

145,820

117,040

107,870

(9,170)

38,180

7,040

230

6,810

Revenue

Total expenses
Profit

Size of the bonus pool = 3,000 + 681 = 3,681

While this solution is simple and straightforward, it is far from the only possible solution to this
case. Students might well be asked to judge whether zero is a possible correct answer to this case. It is.
Jacques Van Raemdonck might well conclude that no adjustments should be made for the uncontrollable
effects of weather for any of the following reasons:
1. The weather constantly varies. While the employees were unlucky during the Spring quarter of
2002, they have been lucky in prior quarters. It evens out.
2. The company perhaps cannot afford to pay bonuses in periods when it is not taking in healthy
amounts of cash.
3. The costs of making these adjustments exceed the benefits of making them. In order to make
these adjustments, someone has to keep track of periods of rain that will deter customers from
getting their cars washed. Some difficult judgments might be required. For example, how much
rain warrants an adjustment? More than a drizzle? A duration more than a brief shower? Is
just the threat of rain a justifiable cause for an adjustment? Is it not possible that customers will
just defer their car wash until a good weather period, resulting is no (or little) actual loss of
business? And if an adjustment seems warranted, someone has to sit down and do the
calculations.
Note that regardless of the reasons, this approach of not adjusting for this weather factor, or any other
uncontrollable factor, forces employees to share some risk with the owners of the company. The
employees will have to be compensated somehow for bearing this risk.
But even if it is decided to make adjustments for the unforeseen 330 hours of bad weather (the
difference between budget and actual), many solutions are possible because of the effects of what
textbooks describe as joint variances. A variance analysis is a systematic way to explain the difference
between two numbers, such as an actual and a budget target. The variance ascribed to any particular

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Chapter 21 - Other Variance Analysis

factor will depend on the order in which the factors are introduced into the analysis. This can be
illustrated graphically as is shown in Figure A:

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Chapter 21 - Other Variance Analysis

Figure A
Graphical Representation of a Variance Analysis
Factor

Budget

(1)

(2)

(3)

(4)

Actual

Hours of good weather

Vehicles/hr.
Revenue/vehicle
Variable costs
Fixed costs

P
P
P
P

P
P
P
P

A
P
P
P

A
A
P
P

A
A
A
P

A
A
A
A

Figure A shows that the budget is based on planned assumptions about each of the factors that
affect performance. This is shown with the letter P. The actuals are calculated based on the actual levels
for each of those factors, here designated with the letter A. The effect of each of the factors on
performance can be calculated by changing the factor from P to A, or A to P. The difference between the
budget and column (1) can be called the weather variance. The difference between columns (1) and (2)
is the productivity variance. The difference between columns (2) and (3) is the price variance. And so
on. If the budget is the starting point, the analysis is known as flexing the budget. If the actuals are the
starting point, the analysis is known as adjusting actuals.
The numerical solution shown on the first page of this teaching note took the budget as the
starting point. It changed the hours-of-good-weather factor from the planned to the actual amount to
calculate the performance effect of the poor forecasting of hours of good weather. Note that the flexible
budget column in that solution left all of the other factors at their planned (or budgeted) levels. This is, in
effect, the analysis shown as column (1) in Figure A.
If the factors had been introduced into the analysis in a different order, or if the actuals had been
adjusted first for weather, the resulting answer would be different. Just as one example, consider the
numbers that would result if the actuals were adjusted first for the effects of the mis-forecast hours of bad
weather.1

Note that this is identical to flexing the budget but considering the effects of the hours-of-bad-weather factor last
in the analysis.

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Chapter 21 - Other Variance Analysis

Adjusted

Controllable
Variance (Adjusted
Actual - Budget)

Budget

Actual

Actual2

184,00
0

124,08
0

211,200

27,200

Variable expenses (50%

of revenue)

92,000

62,040

105,600

(13,600)

Fixed expenses

53,820

55,000

55,000

(1,180)

145,820

117,040

160,600

(14,780)

38,180

7,040

50,600

12,420

Revenue

Total expenses
Profit

Size of the bonus pool = 3,000 + 1,242 = 4,242.

This answer is as theoretically correct as the 3,681 answer given on p. 1 of this teaching note.
So too are all of the other answers that would result if the performance factors were introduced into the
analysis in a different order. If the incentive plan promises that adjustments will be made for the effects of
specific uncontrollable factors, care must be taken to explain just how those adjustments will be made.
This little case is not as simple as it might first seem.

What actual performance would have been if the hours of good weather had been as forecast in the budget.

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