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# Chapter 17 - Additional Topics in Variance Analysis

Chapter 17
Learning Objectives
1. Explain ho to prorate variances to inventories and cost o! goods sold.
". #se \$ar%et share variances to eval&ate \$ar%eting per!or\$ance.
'. #se sales \$ix and (&antity variances to eval&ate \$ar%eting per!or\$ance.
). Eval&ate prod&ction per!or\$ance &sing prod&ction \$ix and yield variances
*. Apply the variance analysis \$odel to non\$an&!act&ring costs.
+. ,eter\$ine hich variances to investigate.
Chapter O&tline
-. ./O0-T VA/-A1CE A1AL23-3 45E1 #1-T3 ./O,#CE, ,O 1OT E6#AL
#1-T3 3OL,
7 /econciling variable costing b&dgets and !&ll-absorption inco\$e state\$ents
--. 8ATE/-AL3 .#/C5A3E3 ,O 1OT E6#AL 8ATE/-AL3 #3E,
---. 8A/9ET 35A/E VA/-A1CE A1, -1,#3T/2 VOL#8E VA/-A1CE
-V. 3ALE3 ACT-V-T2 VA/-A1CE3 4-T5 8#LT-.LE ./O,#CT3
A. Eval&ating prod&ct \$ix
:. Eval&ating sales \$ix and sales (&antity
; 3o&rces o! the sales \$ix variance
V. ./O,#CT-O1 8-< A1, 2-EL, VA/-A1CE3
7 8ix and yield variances in \$an&!act&ring
V-. VA/-A1CE A1AL23-3 -1 1O18A1#0ACT#/-1= 3ETT-1=3
A. #sing the pro!it variance analysis in service and \$erchandise organi>ations
:. E!!iciency \$eas&res
C. 8ix and yield variances in service organi>ations
V--. 9EE.-1= A1 E2E O1 VA/-A1CE3 A1, 3TA1,A/,3
A. 5o \$any variances to calc&late
:. 4hen to investigate variances
C. #pdating standards
V---. 3#88A/2
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distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
9ey Concepts
LO 17-1 Explain how to prorate variances to inventories and cost of goods
sold.
7 The analysis o! variances beco\$es \$ore co\$plicated hen the &nits sold do not e(&al the &nits
prod&ced Bi.e.A hen inventory is presentC.
; The ass&\$ption that prod&ction as greater than sales has no e!!ect on the sales activity
variance beca&se the \$aster b&dget and !lexible b&dget are based on sales vol&\$e. 3o are
the sales price varianceA and \$ar%eting and ad\$inistrative variances in general.
; -n the ti\$e period in hich &nits are prod&cedA the variable prod&ction cost variance is
calc&lated as !ollosD
Variance E BAct&al variable cost F Esti\$ated variable costC G #nits prod&ced.
; The act&al variable prod&ction costs are really a hybrid.
Act&al variable
prod&ction costs
E 0lexible b&dget variable
prod&ction costs
H Bor -C Variable prod&ction
cost variances.
EEEEEEEEEEEEEEEEEEEEEE
,e\$onstration .roble\$ 1
B/evised !ro\$ Chapter 1+ ,e\$onstration .roble\$ 1C
The acco&ntant at EI ToysA -nc. is analy>ing the prod&ction and cost data !or its Tr&c%s
,ivision. 0or OctoberA the act&al res&lts and the \$aster b&dget data are presented belo.
Actual results Budget data
1"A@@@ tr&c%s prod&ced
1@A@@@ tr&c%s sold
1"A@@@ tr&c%s planned
#nit selling price J1* #nit selling price J1)
#nit variable costsD
a
#nit variable costD
,irect \$aterials J*."K ,irect \$aterials J*
,irect labor *.1@ ,irect labor )
Total variable costs J1".+K Total &nit variable costs J11

a
These are average costs.
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distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
/e(&iredD
.repare a pro!it variance analysis.
3ol&tionD
Actual
(based on
actual
activit of
1!"!!! units
sold#
\$anufacturin
g variances
%ales price
variance
&lexible
budget
(based on
actual
activit of
1!"!!! units
sold#
%ales
activit
variance
\$aster
budget
(based on
1'"!!!
units
planned#
3ales reven&e J1*@A@@@ J1@A@@@ 0 J1)@A@@@ J"KA@@@ # J1+KA@@@
LessD Costs
Variable costs
,irect \$aterials J*'A'+@ J'A'+@ #
a
J*@A@@@ J1@A@@@ 0 J+@A@@@
,irect labor *'A"@@ 1'A"@@ #
b
)@A@@@ KA@@@ 0 )KA@@@
c
"@A@@@ )A@@@ 0 ")A@@@
Total variable costs J1'@A1+@ J11@A@@@ J""A@@@ 0 J1'"A@@@
Contrib&tion \$argin J1LAK)@ J'@A@@@ J+A@@@ # J'+A@@@
0ixed overhead LA@@@ +@@ 0 LA+@@ @ LA+@@
Operating pro!it J1@AK)@ J1LA*+@ # J1@A@@@ 0 J"@A)@@ J+A@@@ # J"+A)@@
0 E 0avorable variance.
# E #n!avorable variance.
a
1"A@@@ G BJ*."K - J*C E J'A'+@ #.
b
1"A@@@ G BJ*.1@ - J)C E J1'A"@@ #.
c
1"A@@@ G BJ".'@ - J"C E J'A+@@ #.
EEEEEEEEEEEEEEEEEEEEEE
; The entire variable prod&ction cost variance !or &nits prod&ced can be treated as a period cost
and expensed in the period inc&rredA or it can be prorated beteen &nits sold and &nits still in
inventory.
Cost of goods sold xx
Fixed overhead production volume variance xx
Variable production cost variances xx
BTo close prod&ction cost variances to Cost o! goods soldM the debits and credits are
ass&\$edC
17-'
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distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
Cost of goods sold xx
Finished goods inventory xx
Fixed overhead production volume variance xx
Variable production cost variances xx
BTo close prod&ction cost variances to Cost o! goods sold and 0inished goods inventoryM
the debits and credits are ass&\$edC
; #sing variable costingA the entire !ixed prod&ction cost is expensed hen inc&rred.
; 4hen standardA !&ll-absorption costing is &sed and prod&ction and sales vol&\$es are
not the sa\$eA the pro!it reported ill be di!!erent !ro\$ that reported &nder variable
costing Bd&e to the acco&nting syste\$A not \$anagerial e!!iciencyC. Care \$&st be ta%en to
identi!y the ca&se o! s&ch pro!it di!!erences.
; Exhibit 17." reconciles the reported inco\$e state\$ent &nder !&ll absorption ith that
&nder variable costing.
EEEEEEEEEEEEEEEEEEEEEE
,e\$onstration .roble\$ "
BContin&ed !ro\$ ,e\$onstration .roble\$ 1C
/e(&iredD
/econcile reported inco\$e &sing standardA !&ll-absorption costing ith that &sing standardA
variable costing !or the Tr&c%s ,ivision o! EI Toys in October.
17-)
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distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
3ol&tionD
Actual
(using
standard" full-
absorption
costing#
(nventor
Actual
(using
standard"
variable
costing#
3ales reven&e J1*@A@@@ J1*@A@@@
LessD
Variable costs
,irect \$aterials Bat standardC J*@A@@@ J*@A@@@
,irect labor Bat standardC )@A@@@ )@A@@@
Variable overhead Bat standardC "@A@@@ "@A@@@
Variable prod&ction cost variances BnetC "@A1+@
a
"@A1+@
LessD
0ixed overhead variance BnetC B+@@C B+@@C
Operating pro!it J1"A))@ JB1A+@@C J1@AK)@
a
J'A'+@ # H J1'A"@@ # H J'A+@@ # E J"@A1+@ #.
#sing variable costingA the entire !ixed prod&ction cost o! JLA@@@ is expensed in October.
#nder standardA absorption costingA each tr&c% is allocated !ixed prod&ction cost o! J@.K@
BE JLA+@@ N 1"A@@@ &nitsC. A portion o! the !ixed prod&ction cost is allocated to the "A@@@
&nits in ending inventoryD
J@.K@ G "A@@@ E J1A+@@.
Th&sA only J7A)@@ BE JLA@@@ - J1A+@@C o! the act&al !ixed prod&ction cost are expensed in
October &nder standardA !&ll-absorption costing. This incl&des JKA@@@ BE J@.K@ G 1@A@@@
&nitsC o! !ixed prod&ction cost in standard cost o! goods sold pl&s a !avorable b&dget
variance o! J+@@.
-n this caseA !&ll-absorption operating pro!it o&ld be J1"A))@A or J1A+@@ higher than variable
costing operating pro!it. The J1A+@@ di!!erence in pro!its is d&e to the acco&nting syste\$A not
beca&se o! operating activities.
EEEEEEEEEEEEEEEEEEEEEE
7 4hen the (&antities o! \$aterials p&rchased and &sed are not the sa\$eA a purchase price
variance based on the (&antity o! \$aterials p&rchased can be calc&lated.
.&rchase price variance E BAct&al price F 3tandard priceC G Act&al (&antity p&rchased.
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distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
; The \$aterials e!!iciency variance re\$ains the sa\$e beca&se it is based on \$aterials
&sed.
; One advantage o! &sing a standard costing syste\$ is that \$anagers receive in!or\$ation
that is &se!&l in \$a%ing decisions to i\$prove per!or\$ance.
; The sooner the in!or\$ation is received Bs&ch as in!or\$ation abo&t the p&rchase price
variance shortly a!ter the ac(&isition o! \$aterialsCA the sooner it can be &sed !or decision
\$a%ing p&rposes.
; -! \$aterials are storedA recording the p&rchase at standard cost provides in!or\$ation on
price variances earlier than i! the !ir\$ aits &ntil the \$aterials are &sed.
EEEEEEEEEEEEEEEEEEEEEE
,e\$onstration .roble\$ '
B/evised !ro\$ Chapter 1+ ,e\$onstration .roble\$ 'C
-n!or\$ation abo&t the &se o! direct \$aterials at EI ToysO Tr&c%s ,ivision !or October is as
!ollosD
3tandard costs
" &nits per tr&c% P J".*@ per &nit E J* per tr&c%
Tr&c%s prod&ced in October E 1@A@@@
Act&al \$aterials p&rchased
"'A"@@ &nits P J".)@ per &nit E J**A+K@
Act&al \$aterials &sed
""A@@@ &nits P J".)@ per &nit E J*"AK@@
There as no beginning inventory on October 1.
/e(&iredD
.repare the Tr&c% ,ivisionOs direct \$aterials variances !or October.
17-+
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distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
3ol&tionD
Act&al costs E
Act&al inp&t (&antity
at act&al inp&t price
J".)@ G "'A"@@ E
J**A+K@
Act&al inp&t (&antity at
standard inp&t price
J".*@ G "'A"@@ E
J*KA@@@
0lexible prod&ction b&dget E
3tandard inp&t (&antity alloed
!or act&al o&tp&t at standard
inp&t price

.rice Variance
J"A'"@ 0
J".*@ G ""A@@@ E J**A@@@ J".*@ G "@A@@@ E J*@A@@@

E!!iciency Variance
J*A@@@ #
The price variance is based on the (&antities p&rchased B"'A"@@ &nitsCA hile the e!!iciency
variance is based on the (&antities &sed B""A@@@ &nits vs. "@A@@@ &nits alloed &nder the !lexible
b&dgetC.
EEEEEEEEEEEEEEEEEEEEEE
; The relevant jo&rnal entries are
Materials inventory xx
Material price variance xx
Accounts payable xx
BTo record \$aterials p&rchase and \$aterial price varianceM #n!avorable variance is
ass&\$edC.
Work in process inventory xx
Material efficiency variance
Materials inventory xx
BTo record the &se o! \$aterials and \$aterial e!!iciency varianceM #n!avorable variance is
ass&\$edC.
17-7
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distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
LO 17-' +se *ar,et share variances to evaluate *ar,eting perfor*ance.
7 The general approach in variance analysis is to separate the variance into co\$ponents based on
a b&dgeting !or\$&la.
; The sa\$e idea is applicable to variances in sales activities.
7 8any co\$panies base an initial sales !orecast on an esti\$ate o! sales activity in the ind&stry as
a hole and on an esti\$ate o! the co\$panyOs \$ar%et share.
; There are to reasons hy act&al sales activity is di!!erent !ro\$ b&dgeted sales activityD
B1C Act&al ind&stry vol&\$e as di!!erent !ro\$ b&dgeted ind&stry vol&\$eA andQor
B"C Act&al \$ar%et share as di!!erent !ro\$ b&dgeted \$ar%et share.
; (ndustr volu*e variance represents the portion o! the sales activity variance
attrib&table to changes in ind&stry vol&\$e.
; \$ar,et share variance represents the portion o! the sales activity variance d&e to
changes in the co\$panyOs proportion o! sales in the \$ar%ets in hich the co\$pany
operates.
; :y deco\$posing sales activity variance into an ind&stry vol&\$e and a \$ar%et share
varianceA \$anage\$ent has additional in!or\$ation that can be &sed to \$a%e operational
i\$prove\$ents next period.
; 8&ltiplying each !ig&re Bone !ro\$ the ind&stry e!!ectA the other !ro\$ the \$ar%et share
e!!ectC by the standard contrib&tion \$argin gives the i\$pact o! these variances on
operating pro!it. That isA
-nd&stry
vol&\$e
variance
E 3tandard
contrib&tion
\$argin per &nit
G BAct&al ind&stry vol&\$e F
:&dgeted ind&stry vol&\$eC
G :&dgeted
\$ar%et share.
8ar%et
share
variance
E 3tandard
contrib&tion
\$argin per &nit
G Act&al ind&stry
vol&\$e
G BAct&al \$ar%et share -
:&dgeted \$ar%et shareC.
17-K
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distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
Exa\$pleD .ioneer #ni!or\$A -nc. serves to gro&ps o! the c&sto\$ers in the \$ar%etA
/etail and Co\$\$ercial. The !olloing b&dget in!or\$ation is available !or R&ne.
C&sto\$ers
#nit
contrib&tion
\$argin
3ales
vol&\$e
3ales
\$ix
Co\$\$ercial J* )@A@@@ K@S
/etail K 1@A@@@ "@S
*@A@@@
3ince to Tprod&ctsU are o!!ered in the sa\$e ind&stryA a co\$posite Beighted-averageC
standard contrib&tion \$argin per &nit needs to be calc&lated to deter\$ine the ind&stry
vol&\$e and \$ar%et share variances later. The eights are based on the standard sales
\$ix.
Co\$posite standard contrib&tion \$argin per &nit E J* G K@S H JK G "@S E J*.+@.
; The \$ar%et share variance is &s&ally \$ore controllable by the \$ar%eting depart\$ent
and is a \$eas&re o! its per!or\$ance.
; The &se o! the ind&stry vol&\$e and \$ar%et share variances enables \$anage\$ent to
separate that portion o! the activity variance that coincides ith changes in the overall
ind&stry !ro\$ that hich is speci!ic to the co\$pany.
; Exhibit 17.) ill&strates the relation beteen these to \$ar%et-related variances.
EEEEEEEEEEEEEEEEEEEEEE
,e\$onstration .roble\$ )
BContin&ed !ro\$ ,e\$onstration .roble\$ 1C
EI ToysO \$ar%eting \$anager esti\$ated the sales o! 1"A@@@ tr&c%s in October !or the Tr&c%s
,ivision based on an esti\$ated ind&stry vol&\$e o! K@A@@@ tr&c%s and on the Tr&c%s ,ivisionOs
ability to \$aintain a \$ar%et share o! 1* percent in the past. That isA
K@A@@@ tr&c%s to be sold in the \$ar%et G 1*S o! esti\$ated \$ar%et share E 1"A@@@ tr&c%s.
,&e to &nexpected shi!t in de\$andA the ind&stry vol&\$e in toy tr&c% sales dropped to +"A*@@
&nits in October hile EI ToysO Tr&c%s ,ivision \$anaged to sell a total o! 1@A@@@ &nits.
17-L
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distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
The !olloing in!or\$ation is also available.
Budget data
#nit selling price J1)
#nit variable costD
,irect \$aterials J*
,irect labor )
Total &nit variable costs J11
/e(&iredD
.repare OctoberOs ind&stry vol&\$e and \$ar%et share activity variances !or the Tr&c%s
,ivision o! EI Toys.
3ol&tionD
The Tr&c%s ,ivisionOs act&al \$ar%et share !or October as 1+S BE 1@A@@@ &nits N +"A*@@
&nitsC.
-nd&stry vol&\$e variance BJ1) - J11C G B+"A*@@ &nits F K@A@@@ &nitsC G 1*S E J7AK7* #
8ar%et share variance BJ1) - J11C G +"A*@@ &nits G B1+S - 1*SC E 1AK7* 0
3ales activity variance J+A@@@ #
EEEEEEEEEEEEEEEEEEEEEE
LO 17-- +se sales *ix and .uantit variances to evaluate *ar,eting
perfor*ance.
7 The sales activity variance can be divided into to co\$ponentsD sales \$ix and sales (&antity.
; A sales *ix variance arises !ro\$ the relative proportion o! di!!erent prod&cts soldA
holding constant the (&antity e!!ects.
3ales \$ix
variance
E 3tandard contrib&tion
\$argin per &nit
G BAct&al (&antity sold F 6&antity that o&ld
have been sold at the standard \$ixC.
; A sales \$ix variance provides &se!&l in!or\$ation !or a co\$pany that sells \$&ltiple
prod&cts hen these prod&cts are Bi\$per!ectC s&bstit&tes !or each other.
; The sales \$ix variance \$eas&res the i\$pact o! s&bstit&tion.
17-1@
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distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
; A sales .uantit variance occ&rs in \$&ltiprod&ct co\$panies !ro\$ the change in
vol&\$e o! salesA independent o! any change in sales \$ix.
3ales
(&antity
variance
E 3tandard contrib&tion
\$argin per &nit
G B6&antity that o&ld have been sold at the
standard \$ix F :&dgeted sales (&antityC.
; The sales (&antity variance \$eas&res the variance in sales (&antityA holding the sales
\$ix constant.
; Altho&gh the variances can be calc&lated !or each prod&ct sold to sho the exact so&rceA
the total variance is \$ost !re(&ently &sed !or analysis.
; 3ee Exhibit 17.* !or an exa\$ple.
EEEEEEEEEEEEEEEEEEEEEE
,e\$onstration .roble\$ *
EI ToysO 3t&!!ed Ani\$als ,ivision has to prod&ctsD :ear and 8on%ey. ,ata on the to
prod&cts !or October are as !ollos.
Bear \$on,e /otal
3tandard selling price J"@ J1"
3tandard variable costs 1" K
3tandard &nit contrib&tion \$argin JK J)
:&dgeted sales (&antity "A*@@ 7A*@@ 1@A@@@
:&dgeted sales \$ix "*S 7*S
:&dgeted contrib&tion \$argin J"@A@@@ J'@A@@@ J*@A@@@
Act&al sales (&antity 'A@@@ *A@@@ KA@@@
Act&al sales \$ix '7.*S +".*S
:&dgeted contrib&tion \$argin at act&al (&antities J")A@@@
a
J"@A@@@ J))A@@@
3ales activity variance J+A@@@ #
b

a
J")A@@@ E JK G 'A@@@ &nits.

b
J+A@@@ # E J))A@@@ - J*@A@@@.
/e(&iredD
,eter\$ine the 3t&!!ed Ani\$als ,ivisionOs sales \$ix and sales (&antity variances !or
October.
17-11
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distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
3ol&tionD
0or :earA
0lexible b&dget
B3C8
a
G A6C

B3C8 x A36
b
C
8aster b&dget
B3C8 G 36C
JK G 'A@@@ E J")A@@@ JK G B."* G KA@@@C E J1+A@@@ JK G "A*@@ E J"@A@@@

8ix Variance E JKA@@@ 0 6&antity variance E J)A@@@ #
Activity Variance E J)A@@@ 0
0or 8on%eyA
J) G *A@@@ E J"@A@@@ J) G B.7* G KA@@@C E J")A@@@ J) G 7A*@@ E J'@A@@@

8ix Variance E J)A@@@ # 6&antity variance E J+A@@@ #
Activity Variance E J1@A@@@ #
0or the 3t&!!ed Ani\$als ,ivision as a holeA
J))A@@@ J)@A@@@ J*@A@@@

8ix Variance E J)A@@@ 0 6&antity variance E J1@A@@@ #
Activity Variance E J+A@@@ #
a
3C8 E 3tandard &nit contrib&tion \$argin.
b
A36 E 6&antity that o&ld have been sold at the standard \$ix.
EEEEEEEEEEEEEEEEEEEEEE
17-1"
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distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
LO 17-0 Evaluate production perfor*ance using production *ix and ield
variances.
7 The analysis o! \$ix and (&antity variances !or sales can be applied to prod&ction as ell.
; The direct \$aterials e!!iciency variance can be divided into to co\$ponentsD \$ix and
yield.
; A production *ix variance arises !ro\$ a change in the relative proportion o! inp&ts Ba
\$aterials or labor \$ix varianceC.
.rod&ction \$ix
variance
E 3tandard inp&t
price
G BAct&al (&antity F Act&al inp&t
&sed at the standard \$ixC.
; The prod&ction \$ix variance \$eas&res the i\$pact o! s&bstit&tion.
; A production ield variance \$eas&res the di!!erence beteen expected o&tp&t !ro\$ a
given level o! inp&ts and the act&al o&tp&t obtained !ro\$ those inp&ts.
.rod&ction
yield variance
E 3tandard inp&t
price
G BAct&al inp&t &sed at the standard
\$ix F 3tandard inp&t alloedC.
; The prod&ction yield variance \$eas&res the inp&t-o&tp&t relationship holding the
standard \$ix inp&ts constant.
; :y separating the e!!iciency variance into its \$ix and yield co\$ponentsA the p&re \$ix
e!!ect is isolated by holding constant the yield e!!ectA and the p&re yield e!!ect is isolated
by holding constant the \$ix e!!ect.
; 3ee Exhibit 17.+ !or an exa\$ple.
EEEEEEEEEEEEEEEEEEEEEE
,e\$onstration .roble\$ +
:ea&ti!&l .aints Co\$pany \$a%es di!!erent paints. -ts se\$i-gloss paint prod&ct re(&ires to
che\$ical ingredientsA < and 2. The standard cost and (&antity data !ollo.
,irect
\$aterials
3tandard
price per
gallon
3tandard (&antity BgallonC
o! inp&t per gallon o! se\$i-
gloss paint
3tandard cost per
gallon o! se\$i-
gloss paint
Che\$ical < JK .* J)
Che\$ical 2 " .* 1
17-1'
? "@1) by 8c=ra-5ill Ed&cation. This is proprietary \$aterial solely !or a&thori>ed instr&ctor &se. 1ot a&thori>ed !or sale or
distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
,&ring OctoberA :ea&ti!&l .aints Co\$pany had the !olloing res&ltsD
#nits prod&ced "@A@@@ gallons o! se\$i-gloss paint
8aterials p&rchased and &sed
Che\$ical < LAK@@ gallons at JK."@ per gallon
Che\$ical 2 1@A*@@ gallons at J".1@ per gallon
/e(&iredD
,eter\$ine the priceA \$ixA and yield variances !or :ea&ti!&l .aints Co\$panyOs se\$i-gloss
paint in October.
3ol&tionD
0or Che\$ical <A
Act&al
BA. G A6C B3. G A6C B3. G A36
a
C
0lexible b&dget
B3. G 36C
.&rchase price
variance 8ix variance 2ield variance
JK."@ G LAK@@ E JK@A'+@ JK G LAK@@ E J7KA)@@ JK G B.*G"@A'@@C E JK1A"@@ JK G 1@A@@@ E JK@A@@@

J1AL+@ # J"AK@@ 0 J1A"@@ #

J1A+@@ 0
0or Che\$ical 2A
J".1@ G 1@A*@@ E J""A@*@ J" G 1@A*@@ E J"1A@@@ J" G B.*G"@A'@@C E J"@A'@@ J" G 1@A@@@ E J"@A@@@

J1A@*@ # J7@@ # J'@@ #

J1A@@@ #
0or the se\$i-gloss paintA
J1@"A)1@ JLLA)@@ J1@1A*@@ J1@@A@@@

J'A@1@ # J"A1@@ 0 J1A*@@ #

J+@@ 0
a
A36 E 6&antity that o&ld have been sold at the standard \$ix.
17-1)
? "@1) by 8c=ra-5ill Ed&cation. This is proprietary \$aterial solely !or a&thori>ed instr&ctor &se. 1ot a&thori>ed !or sale or
distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
EEEEEEEEEEEEEEEEEEEEEE
LO 17-1 Appl the variance analsis *odel to non*anufacturing costs.
7 The co\$parison o! the \$aster b&dgetA the !lexible b&dgetA and act&al res&lts can also be &sed in
service and \$erchandising organi>ations.
; O&tp&t is &s&ally de!ined as sales &nits in \$erchandisingA b&t service organi>ations &se
other \$eas&resA s&ch as pro!essional sta!! ho&rs Bacco&nting !ir\$sCA roo\$ nights or g&ests
BhotelsCA seat \$iles or reven&e \$iles BairlinesCA and patient days BhospitalsC.
; 8erchandising and service organi>ations !oc&s on \$ar%eting and ad\$inistrative costs to
\$eas&re e!!iciency and control costs.
; The %ey ite\$s to control are labor costs B!or service organi>ationsCA and occ&pancy costs
per sales dollar B!or \$erchandising organi>ationsC.
; The co\$p&tation o! e!!iciency variance re(&ires a reliable \$eas&re o! o&tp&t activity
that is lin%ed to inp&t.
; -n generalA jobs ith ro&tine tas%s lend the\$selves to e!!iciency \$eas&resA and jobs ith
nonro&tine tas%s do not.
; :y s&bstit&ting di!!erent types o! laborA service organi>ations need to calc&late labor
\$ix and yield variances.
; To !actors are i\$portant hen considering \$ix variances.
B1C There is an ass&\$ed s&bstit&tability o! inp&ts.
B"C The inp&t costs \$&st be di!!erent !or a \$ix variance to exist.
17-1*
? "@1) by 8c=ra-5ill Ed&cation. This is proprietary \$aterial solely !or a&thori>ed instr&ctor &se. 1ot a&thori>ed !or sale or
distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
,e\$onstration .roble\$ 7
A C.A !ir\$ is to per!or\$ an a&dit job !or a reg&lar client. :ased on past experiences or%ing
ith the clientA 7*@ partner ho&rs Bat a cost o! J"@@ per ho&rC and "A"*@ sta!! ho&rs Bat a cost o!
J7* per ho&rC are b&dgeted !or the job.
,&e to &n!oreseen events at the clientOs sitesA a total o! "A7@@ ho&rs are &sed consisting o! L@@
partner ho&rs and 1AK@@ sta!! ho&rs. The ho&rly rate !or partner ti\$e is the sa\$e as b&dgeted b&t
the ho&rly rate !or sta!! ti\$e beco\$e J1@@ per ho&r beca&se \$ore experienced sta!! \$e\$bers are
p&t to or%.
/e(&iredD
,eter\$ine all the variances !or the C.A !ir\$ on the a&dit job.
3ol&tionD
Act&al
BA. G A6C B3. G A6C B3. G A36
a
C
0lexible b&dget
B3. G 36C
Labor price
variance 8ix variance 2ield variance
J"@@ G L@@ H J"@@ G L@@ H J"@@ G +7* H J"@@ G 7*@ H
J1@@ G 1AK@@ E J'+@A@@@ J7* G 1AK@@ E J'1*A@@@ J7* G "A@"* E J"K+AK7* J7* G "A"*@ E J'1KA7*@

J)*A@@@ # J"KA1"* # J'1AK7* 0

J'A7*@ 0
a
A36 E Labor ho&rs that o&ld have been &sed at the standard \$ix.
"A7@@ G V E +7*M "A7@@ G W E "A@"*.
A total o! 'A@@@ a&dit ho&rs are b&dgeted !or the job. The standard \$ix calls !or three sta!!
ho&rs !or each partner ho&r per!or\$ed B"A"*@ N 7*@ E 'C. The act&al a&dit ta%es "A7@@ ho&rs
in hich each partner ho&r is s&pported by only to sta!! ho&rs d&e to sta!! \$e\$bersO
seniority and experiences.
EEEEEEEEEEEEEEEEEEEEEE
17-1+
? "@1) by 8c=ra-5ill Ed&cation. This is proprietary \$aterial solely !or a&thori>ed instr&ctor &se. 1ot a&thori>ed !or sale or
distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
LO 17-2 3eter*ine which variances to investigate.
7 8anagers and acco&ntants in each organi>ation sho&ld per!or\$ their on cost-bene!it analysis
to ascertain hich calc&lations o! variances are j&sti!ied.
; The variances that ill be i\$portant !or a partic&lar co\$pany depend on the strategic
i\$peratives !or the co\$pany.
; (*pact represents the li%ely \$onetary e!!ect !ro\$ an activity Bs&ch as a varianceC. The
(&estion to as% isA T,oes this variance \$atterXU
; 4ontrollabilit is the extent to hich an ite\$ can be \$anaged. The (&estion to as% isA
TCan e do so\$ething abo&t itXU
; 5igh-i\$pactA highly controllable variances Bs&ch as \$aterials and labor e!!iciency
variancesC sho&ld get the \$ost attention.
; Lo-i\$pactA &ncontrollable variances sho&ld get the least attention.
; The longer the ti\$e interval is consideredA the greater is the ability to control an ite\$.
7 A!ter co\$p&ting variancesA \$anagers and acco&ntants \$&st decide hich ones to investigate.
; Only the variances !or hich the bene!its o! correction exceed the costs o! !ollo-&p
sho&ld be p&rs&ed.
; \$anage*ent b exception is an approach to \$anage\$ent re(&iring that reports
e\$phasi>e the deviation !ro\$ an accepted base pointA s&ch as a standardA a b&dgetA an
ind&stry averageA or a prior period experience.
; 3o\$e proble\$s are easily corrected as soon as they are discovered. The investigation
cost is lo and the bene!its are very li%ely to exceed the costs.
; 3o\$e variances are not controllable in the short r&n. 3&ch variances so\$eti\$es pro\$pt
long-r&n actions. -n s&ch caseA the short-r&n bene!its o! variance investigation are loA
b&t the long-r&n bene!its co&ld be higher.
; 8any variances occ&r beca&se o! errors in recordingA boo%%eeping adj&st\$entsA or
ti\$ing proble\$s. The acco&nting sta!! \$&st care!&lly chec% variance reports be!ore
sending the\$ to operating \$anagers.
7 3tandards are esti\$ates that re(&ire &pdating to re!lect c&rrent conditions.
17-17
? "@1) by 8c=ra-5ill Ed&cation. This is proprietary \$aterial solely !or a&thori>ed instr&ctor &se. 1ot a&thori>ed !or sale or
distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
; Variances \$ay occ&r beca&se conditions change d&ring the year b&t the standards do
not.
; 5lanned variance is one that is expected to occ&r i! certain conditions a!!ect
operations.
; #sing a planned varianceA the co\$pany sends \$anagers the right signal thatA !or
exa\$pleA the planned &n!avorable prod&ction vol&\$e variance d&e to long-r&n excess
capacity ill not a!!ect the per!or\$ance eval&ation and control activities.
8atching
A. Controllability 0. .lanned variance
:. -\$pact =. .rod&ction \$ix variance
C. -nd&stry vol&\$e variance 5. .rod&ction yield variance
,. 8anage\$ent by exception -. .&rchase price variance
E. 8ar%et share variance R. 3ales \$ix variance
9. 3ales (&antity variance
YYYYY 1. The portion o! the sales activity variance attrib&table to changes in ind&stry vol&\$e.
YYYYY ". An approach to \$anage\$ent re(&iring that reports e\$phasi>e the deviation !ro\$ an
accepted base point.
YYYYY '. A variance that is expected to occ&r i! certain conditions a!!ect operations.
YYYYY ). The li%ely \$onetary e!!ect !ro\$ an activity.
YYYYY *. The extent to hich an ite\$ can be \$anaged.
YYYYY +. 8eas&res the di!!erence beteen expected o&tp&t !ro\$ a given level o! inp&ts and the
act&al o&tp&t obtained !ro\$ those inp&ts.
YYYYY 7. BAct&al price F 3tandard priceC G Act&al (&antity p&rchased.
YYYYY K. Arises !ro\$ the relative proportion o! di!!erent prod&cts soldA holding constant the
(&antity e!!ects.
YYYYY L. Arises !ro\$ a change in the relative proportion o! inp&ts.
YYYYY 1@. Occ&rs in \$&ltiprod&ct co\$panies !ro\$ the change in vol&\$e o! salesA independent
o! any change in sales \$ix.
17-1K
? "@1) by 8c=ra-5ill Ed&cation. This is proprietary \$aterial solely !or a&thori>ed instr&ctor &se. 1ot a&thori>ed !or sale or
distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
YYYYY 11. The portion o! the sales activity variance d&e to change in the co\$panyOs proportion
o! sales in the \$ar%ets in hich the co\$pany operates.
Ansers
1. C
". ,
'. 0
). :
*. A
+. 5
7. -
K. R
L. =
1@. 9
11. E
8&ltiple Choice
1. 4hich o! the !olloing state\$ents is incorrectX
a. The ind&stry vol&\$e variance is &s&ally \$ore controllable by the \$ar%eting
depart\$ent and is a \$eas&re o! its per!or\$ance.
b. The sooner the in!or\$ation is receivedA the sooner it can be &sed.
c. The \$aterials e!!iciency variance is the sa\$e regardless o! hether the (&antities
o! \$aterials p&rchased and &sed are the sa\$e.
d. #sing variable costingA the entire !ixed prod&ction cost is expensed hen
inc&rred.
17-1L
? "@1) by 8c=ra-5ill Ed&cation. This is proprietary \$aterial solely !or a&thori>ed instr&ctor &se. 1ot a&thori>ed !or sale or
distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
The !olloing in!or\$ation is !or (&estions " F '.
8ar%eting \$anager o! ReanOs 4orld esti\$ated the sales o! "@A@@@ jeans in A&g&st ith an
ind&stry vol&\$e o! "@@A@@@ jeans !or the \$onth and the standard contrib&tion \$argin o! J+ per
jean sold. The act&al ind&stry sales !ig&re as aro&nd 1+@A@@@ jeans o&t o! hich ReanOs 4orld
sold 1KA@@@ jeans.
". 4hat is the ind&stry vol&\$e variance !or the \$onth o! A&g&stX
a. J")A@@@ 0.
b. J1"A@@@ 0.
c. J")A@@@ #.
d. J"KA@@@ #.
'. 4hat is the \$ar%et share variance !or the \$onth o! A&g&stX
a. J")A@@@ #
b. J1"A@@@ #.
c. J1KA@@@ 0.
d. J1"A@@@ 0.
). 4hich o! the !olloing state\$ents is incorrectX
a. The sales \$ix variance \$eas&res the i\$pact o! s&bstit&tion.
b. The sales (&antity variance \$eas&res the variance in sales (&antityA holding the sales \$ix
constant.
c. The sales activity variance can be divided into to co\$ponentsD sales \$ix and \$ar%et
share.
d. A sales \$ix variance provides &se!&l in!or\$ation !or a co\$pany that sells \$&ltiple
prod&cts
The !olloing in!or\$ation is !or (&estions * F +.
Toy 9ingdo\$ sells to si\$ilar prod&ctsD :ig :ear and Little :ear. ,ata on the to prod&cts !or
October are as !ollos.
Big Bear Little Bear
3tandard &nit contrib&tion \$argin JK J)
:&dgeted sales (&antity "A@@@ KA@@@
Act&al sales (&antity "A*@@ 7A*@@
*. 4hat is Little :earOs sales \$ix varianceX
a. J@.
b. J1A@@@ 0
c. J"A@@@ #.
d. J"A)@@ #.
17-"@
? "@1) by 8c=ra-5ill Ed&cation. This is proprietary \$aterial solely !or a&thori>ed instr&ctor &se. 1ot a&thori>ed !or sale or
distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
+. 4hat is :ig :earOs sales (&antity varianceX
a. J@.
b. J1A@@@ 0.
c. J"A@@@ #.
d. J"A)@@ #.
The !olloing in!or\$ation is !or (&estions 7 F K.
5o\$e Lab s&pplies che\$ical sol&tions !or high school labs. -ts Coloration 9it &ses to inp&tsA A
and :A d&ring prod&ction. The standard cost and (&antity data !ollo.
,irect
\$aterials
3tandard
price per
gallon
3tandard (&antity BgallonC
o! inp&t per gallon o!
Coloration 9it
Che\$ical A J1@ .)
Che\$ical : ) .+
,&ring 0ebr&aryA the !olloing res&lts ere availableD
#nits prod&ced 1@A@@@ gallons o! Coloration 9it
8aterials p&rchased and &sed
Che\$ical A )A"@@ gallons at J1@.1@ per gallon
Che\$ical : *AL@@ gallons at J'.K@ per gallon
7. 4hat is the prod&ction \$ix variance !or Che\$ical AX
a. J")@ #.
b. J1A+@@ #.
c. J1A1K@ 0.
d. J)"@ #.
K. 4hat is the prod&ction yield variance !or Che\$ical :X
a. J1A+@@ #.
b. J")@ #.
c. J1A1K@ 0.
d. J)"@ #.
L. 4hich o! the !olloing state\$ents is correctX
a. The co\$p&tation o! e!!iciency variance re(&ires a reliable \$eas&re o! o&tp&t activity that
is lin%ed to inp&t.
b. :y s&bstit&ting di!!erent types o! laborA service organi>ations calc&late labor price
variance.
c. -n generalA jobs ith nonro&tine tas%s lend the\$selves to e!!iciency \$eas&res
17-"1
? "@1) by 8c=ra-5ill Ed&cation. This is proprietary \$aterial solely !or a&thori>ed instr&ctor &se. 1ot a&thori>ed !or sale or
distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
d. 8erchandising organi>ations !oc&s on Cost o! goods sold to \$eas&re e!!iciency and
control costs.
1@. 4hich o! the !olloing state\$ents is incorrectX
a. 3tandards are esti\$ates that re(&ire &pdating to re!lect c&rrent conditions.
b. The iss&e o! i\$pact as%s the (&estionA TCan e do so\$ething abo&t itXU
c. Only the variances !or hich the bene!its o! correction exceed the costs o! !ollo-&p
sho&ld be investigated.
d. 8any variances occ&r beca&se o! errors in recordingA boo%%eeping adj&st\$entsA or ti\$ing
proble\$s.
11. The !olloing b&dget in!or\$ation is available !or 3epte\$ber.
.rod&cts
#nit
contrib&tion
\$argin
3ales
vol&\$e
3tandard 3et J+ *@A@@@
,el&xe 3et 1@ '@A@@@
K@A@@@
4hat is the co\$posite contrib&tion \$argin per &nitX
a. JK.)@.
b. J7.*@.
c. J7."@.
d. J+.K@.
1". 4hich o! the !olloing state\$ents is incorrectX
a. 8anage\$ent by exception e\$phasi>es \$ateriality.
b. The shorter the ti\$e intervalA the greater is the ability to control an ite\$.
c. 8ost variances are controllable in the long r&n.
d. .lanned variance is one that is expected to occ&r i! certain conditions a!!ection
operations.
17-""
? "@1) by 8c=ra-5ill Ed&cation. This is proprietary \$aterial solely !or a&thori>ed instr&ctor &se. 1ot a&thori>ed !or sale or
distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
Ansers
1. a LO1A LO"
". c LO"
Esti\$ated \$ar%et share E "@A@@@ jeans N "@@A@@@ jeans E 1@S.
J+ G B1+@A@@@ F "@@A@@@C G 1@S E J")A@@@ #.
'. d LO"
Act&al \$ar%et share E 1KA@@@ jeans N 1+@A@@@ jeans E 11."*S.
J+ G 1+@A@@@ G B11."*S - 1@SC E J1"A@@@ 0.
). c LO'
*. c LO'
3tandard sales \$ix E KA@@@ &nits N B"A@@@ &nits H KA@@@ &nitsC E K@S.
J) G B7A*@@ F B@.K G 1@A@@@CC E J"A@@@ #.
+. a LO'
3tandard sales \$ix E "A@@@ &nits N B"A@@@ &nits H KA@@@ &nitsC E "@S.
JK G BB@." G 1@A@@@C F "A@@@C E J@.
7. b LO)
Total (&antity p&rchased E )A"@@ gallons H *AL@@ gallons E 1@A1@@ gallons.
J1@ G B)A"@@ F @.) G 1@A1@@C E J1A+@@ #.
K. b LO)
J) G B@.+ G 1@A1@@ F @.+ G 1@A@@@C E J")@ #.
L. a LO*
1@. b LO+
11. b LO"
3tandard 3et represents +".*S BE *@A@@@ N K@A@@@C o! the salesM ,el&xe 3et the rest '7.*S.
J+ G +".*S H J1@ G '7.*S E J7.*@.
1". b LO+
17-"'
? "@1) by 8c=ra-5ill Ed&cation. This is proprietary \$aterial solely !or a&thori>ed instr&ctor &se. 1ot a&thori>ed !or sale or
distrib&tion in any \$anner. This doc&\$ent \$ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.