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VARIANCE ANALYSIS

Profit Variance Analysis


Compare budgeted and actual results to
isolate the impact of individual input and
output factors
Used to
Revise plan assumptions
Evaluate employee performance

The Master Budget


Benchmark for computing variances
As you know, the master budget specifies in
detail
Sales volumes and prices
Input quantities and costs
Planned efficiencies and prices

Capacity costs
Also termed overhead cost

The master budget is like picking a point on


the profit line in the CVP graph

Budgeted and Actual Results


Profit Variance

Profit or Loss ($)

Profit Line (per


CVP model)

Budgeted Profit

Actual Profit
0
Volume of Activity

Budgeted Actual
volume volume

(Fixed Cost)

Variance Conventions

Many Possible Sources


Variance could be due to
Output quantities and/or prices
Input efficiencies and/or prices
Errors in estimated overhead costs

Variance analysis
Linear decomposition of overall profit variance
into above factors

Sales Volume Variance - Concept


Total Profit Variance

Sales Volume
Variance

Master budget
profit

Flexible Budget
Variance

Profit in flexible
budget

Sales volume variance

Actual
profit

Flexible budget variance

Total profit variance

Sales Volume Variance


Difference between income / contribution in master
and flexible budgets
units Budgeted UCM = revenue Budgeted CMR

Flexible budget is at actual output quantity


Sales volume is only change in plan assumption

Profit difference is due to change in sales volume

Focus on change in CM / income & not revenue


Change in volume changes revenues and variable costs
Fixed costs do not change if volume changes

Sales Volume Variance

Profit ($)

Profit ($)
Sales Volume
Variance
+
Flexible
Budget
Variance
=
Total
Profit
Variance

Flexible
Budget
Profit

Master
Budget
Profit

Actual
Profit

Profit Line (per


CVP relation)

B
A

C
0

Volume of
Activity
Budgeted
volume

(Fixed Costs)

Volume of Activity

Actual
volume

Flexible Budget Variance

10

Cost Variances
Cost in flexible budget is the right benchmark
Activity volume the same in flexible budget and
actual operations

Can compare line items


Materials
Labor
Overhead costs

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

Labour efficiency variance


= (standard quantity actual quantity)*standard
price
= Standard quantity for actual production actual
quantity used) * standard price

Variable-Overhead Spending
and Efficiency Variances

A variable-overhead efficiency variance occurs when


actual cost-driver activity differs from the standard
amount allowed for the actual output achieved.

A variable-overhead spending variance occurs when


the difference between the actual variable overhead
and the amount of variable overhead budgeted
for the actual level of cost-driver activity.

Variable-Overhead Variances

Variable
overhead
variance

Standard
variable
overhead

Actual
variable
overhead

Variable-Overhead Variances

With details of input quantities of variable overheads (e.g. hours)


variable overhead variance can be further analyzed as :
Variable overhead spending variance
Variable overhead efficiency variance

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

Fixed Overhead Variance

Fixed overhead spending variance = Budgeted fixed


overheads - Actual fixed overheads

Sales Price Variance

Sales Price variance = Actual quantity of sales x


(Actual price Budgeted price)

Interpreting Variances
Investigate all significant variances
Large variance shows poor plan / execution

Examine trends
Consistent sign may be related to plan
assumptions

Consider the total picture


Variances ignore interactions
Price-quantity, input substitution

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