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Capacity costs
Also termed overhead cost
Budgeted Profit
Actual Profit
0
Volume of Activity
Budgeted Actual
volume volume
(Fixed Cost)
Variance Conventions
Variance analysis
Linear decomposition of overall profit variance
into above factors
Sales Volume
Variance
Master budget
profit
Flexible Budget
Variance
Profit in flexible
budget
Actual
profit
Profit ($)
Profit ($)
Sales Volume
Variance
+
Flexible
Budget
Variance
=
Total
Profit
Variance
Flexible
Budget
Profit
Master
Budget
Profit
Actual
Profit
B
A
C
0
Volume of
Activity
Budgeted
volume
(Fixed Costs)
Volume of Activity
Actual
volume
10
Cost Variances
Cost in flexible budget is the right benchmark
Activity volume the same in flexible budget and
actual operations
Cost Variances
Material cost
variance
Price
variance
Labour cost
variance
Usage
variance
Rate
variance
Efficiency
variance
Material Variance
Material price variance
= (standard price actual price)*actual quantity
Material usage variance
= (Standard quantity actual quantity)* standard
price
= (Standard quantity for actual production actual
quantity production) * standard price
Labour Variance
Labour rate variance
= (standard price actual price)*actual quantity
Variable-Overhead Spending
and Efficiency Variances
Variable-Overhead Variances
Variable
overhead
variance
Standard
variable
overhead
Actual
variable
overhead
Variable-Overhead Variances
Variable
overhead
spending
variance
Budgeted
variable
overhead for
actual hours
Standard
variable
overhead rate
per hour
Actual
variable
overhead
Actual
variable
overhead
rate per
hour
Actual hours
Variable-Overhead Variances
Variable
overhead
efficiency
variance
Standard
hours for
actual output
Actual
hours
Standard
variable
overhead per
hour
Interpreting Variances
Investigate all significant variances
Large variance shows poor plan / execution
Examine trends
Consistent sign may be related to plan
assumptions