Chapter 17

Additional Topics in
Variance Analysis

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Profit Variance Analysis

L.O. 1 Explain how to prorate variances to
inventories and cost of goods sold.

Most companies close variances to Cost of Goods Sold.

Other companies prorate the variances.

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Profit Variance Analysis

Bayou Division
Profit Variance Analysis (when units produced do not equal units sold)

Actual
Sales (units)
Sales revenue
Less: Variable costs
Variable manufacturing costs
Variable selling and administrative
Contribution margin
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative costs
Profit

Mfg.
Variances
(based on
Marketing
90,000 units and Admin.
produced)
Variances

80,000
$840,000
332,890
68,000
$439,110

$28,890 U

195,500
132,320
$111,290

4,500 F

$28.890 U

$24,390 U

$ 4,000 F
$ 4,000 F
7,680 F
$11,680 F

Sales
Price
Variance

Flexible
Budget

Sales
Activity
Variance

Master
Budget

$40,000 F

80,000
$800,000

$200,000 U

100,000
$1,000,000

$40,000 F

304,000
72,000
$424,000

76,000 F
18,000 F
$106,000 U

380,000
90,000
$ 530,000

$40,000 F

200,000
140,000
$ 84,000

-0-0$106,000 U

200,000
140,000
$ 190,000

Total variance from flexible

budget = $27,290 F
Total variance from master budget = $78,710 U

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Manufacturing Variances Based on

90,000 Units Produced
Variable manufacturing costs:
Actual quantity produced (AP SP)
90,000 ($4.121 - $3.800) = $28,890 U
Fixed manufacturing costs = $4,500 F

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Closing Production
Cost Variance to COGS
Journal entry to close production
variance to cost of goods sold:
Cost of Goods Sold
24,390
Fixed Overhead Price Variance
4,500
Variable Production Cost Variance
28,890
To close production cost variances to Cost of Goods Sold.

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Prorating Production
Cost Variances
Journal entry to prorate production variance to
cost of goods sold and finished goods inventory:
Cost of Goods Sold
21,680
Fixed Overhead Price Variance
4,500
Finished Goods Inventory
2,710
Variable Production Cost Variance
28,890
To close production cost variances to Finished Goods and
Cost of Goods Sold.
$21,680 (8/9 of the variance) is closed to Cost of Goods
Sold and $2,710 (1/9 of the variance) is closed to Finished
Goods Inventory.
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Reconciling Variable Costing and

Absorption Costing
Using variable costing, the entire fixed
production cost of $195,500 is expensed.
Using standard full absorption costing, a portion
of the fixed overhead remains with
the 10,000 units in inventory.
10,000 $2.00 = $20,000
$195,500 $20,000 = $175,500

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Standard Costs for Materials

Standard costs:
4 pounds per frame @ $.055 per pound = $2.20 per frame
Frames produced in August
80,000
Actual materials purchased and used:
328,000 pounds @ $0.60 per pound = $196,800
In addition, assume instead that 350,000 pounds
were purchased in August at $0.60 per pound
and 328,000 pounds were used.
What are the variances?

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1

(1)

Direct Materials Variance:

No Materials
Inventory
(2)

Actual

Actual Inputs at
Standard Prices

Actual materials price

(AP = $0.60)
Actual quantity
(AQ = 328,000 pounds)
of direct materials

Standard materials price

(SP = $0.55)
Actual quantity
(AQ = 328,000 pounds)
of direct materials

Standard materials price

(SP = $0.55)
Standard quantity
(SQ = 320,000 pounds)
of direct materials
allowed for actual output

AP AQ = $196,800

SP AQ = $180,400

SP SQ = $176,000

Price variance
$196,800 $180,400
= $16,400 U

(3)
Flexible Production
Budget

Efficiency variance
$180,400 $176,000
= $4,400 U

Total variance
= $16,400 + $4,400 = $20,800 U

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LO
1

(1)

Direct Materials Variance:

Materials(2)Inventory

Actual

Actual Inputs at
Standard Prices

Actual materials price

(AP = $0.60)
Actual quantity
(AQ = 350,000 pounds)
of direct materials

Standard materials price

(SP = $0.55)
Actual quantity
(AQ = 350,000 pounds)
of direct materials

AP AQ = $210,000

SP AQ = $192,500

Purchase
Computations
Usage
Computations

Price variance:
$210,000 $192,500
= $17,500 U
$0.55 328,000
pounds used = $180,400

(3)
Flexible Production
Budget

Standard materials price

(SP = $0.55)
Standard quantity
(SQ = 320,000 pounds)
of direct materials
allowed for actual output

SP SQ
$0.55 320,000
pounds allowed = $176,000

Efficiency variance:
$180,400 $176,000 = $4,400 U
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Materials: Standard Costing System

Journal entry to record purchase of materials:
Materials Inventory
192,500
Material Price Variance
17,500
Accounts Payable
$210,000
To record the purchase of 350,000 pounds of material with an actual
price of $0.60 per pound and a standard price of $0.55 per pound.

Journal entry to record materials used:

Work-in-Process Inventory
176,000
Material Efficiency Variance
4,800
Materials Inventory
$180,400
To record the use of 328,000 pounds of material with a standard price
of $0.55 per pound. Standard use is 320,000 pounds.

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Market Share Variance and

Industry Volume Variance
L.O. 2 Use market share variances to
evaluate marketing performance.

Industry volume variance:

Portion of the sales activity variance due to
changes in industry volume
Market share variance:
Portion of the activity variance due to changes
in the companys proportion of sales in the
markets in which the company operates

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Sales Activity Variances

L.O. 3 Use sales mix and quantity variances
to evaluate marketing performance.

Sales mix variance:

Variance arising from the relative proportion of
different products sold
Sales quantity variance:
Variance occurring in multiproduct companies from
the change in volume of sales, independent of any
change in sales mix

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Production Mix and Yield Variances

L.O. 4 Evaluate production performance using
production mix and yield variances.

Product mix variance:

Variance that arises from a change in the relative
proportion of inputs (a materials or labor mix variance)
Production yield variance:
Difference between expected output from a given level
of inputs and the actual outputobtained from those inputs

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Variance Analysis in
Nonmanufacturing Settings
L.O. 5 Apply the variance analysis model to nonmanufacturing costs.
Output Measures in Service Organizations
Organization
Public accounting, legal, and consulting firms
Hotel
Airline
Hospital

Professional staff hours

Room-nights, guests
Seat-miles, revenue-miles
Patient-days

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Variance and Standards

L.O. 6 Determine which variances to investigate.

Management by exception:
Approach to management requiring that reports
emphasize the deviation from an accepted base
point, such as a standard, a budget, an industry
average, or a prior period experience.

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End of Chapter 17

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.