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Chapter 17 - Additional Topics in Variance Analysis

Chapter 17
Additional Topics in Variance Analysis
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 )
Variable overhead ".'@ Variable overhead "
Total variable costs J1".+K Total &nit variable costs J11
0ixed overhead JLA@@@ 0ixed overhead JLA+@@


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@@@
Variable overhead "'A+@@ 'A+@@ #
c
"@A@@@ )A@@@ 0 ")A@@@
Total variable costs J1'@A1+@ J11@A@@@ J""A@@@ 0 J1'"A@@@
Contrib&tion $argin J1LAK)@ J'@A@@@ J+A@@@ # J'+A@@@
0ixed overhead LA@@@ +@@ 0 LA+@@ @ LA+@@
Operating pro!it J1@AK)@ J1LA*+@ # J1@A@@@ 0 J"@A)@@ J+A@@@ # J"+A)@@
0 E 0avorable variance.
# E #n!avorable variance.
a
1"A@@@ G BJ*."K - J*C E J'A'+@ #.
b
1"A@@@ G BJ*.1@ - J)C E J1'A"@@ #.
c
1"A@@@ G BJ".'@ - J"C E J'A+@@ #.
EEEEEEEEEEEEEEEEEEEEEE
; The entire variable prod&ction cost variance !or &nits prod&ced can be treated as a period cost
and expensed in the period inc&rredA or it can be prorated beteen &nits sold and &nits still in
inventory.
Cost of goods sold xx
Fixed overhead price variance xx
Fixed overhead production volume variance xx
Variable production cost variances xx
BTo close prod&ction cost variances to Cost o! goods soldM the debits and credits are
ass&$edC
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distrib&tion in any $anner. This doc&$ent $ay not be copiedA scannedA d&plicatedA !orardedA distrib&tedA or posted on a ebsiteA in
hole or part.
Chapter 17 - Additional Topics in Variance Analysis
Cost of goods sold xx
Finished goods inventory xx
Fixed overhead price variance xx
Fixed overhead production volume variance xx
Variable production cost variances xx
BTo close prod&ction cost variances to Cost o! goods sold and 0inished goods inventoryM
the debits and credits are ass&$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
ad)ust*ent
Actual
(using
standard"
variable
costing#
3ales reven&e J1*@A@@@ J1*@A@@@
LessD
Variable costs
,irect $aterials Bat standardC J*@A@@@ J*@A@@@
,irect labor Bat standardC )@A@@@ )@A@@@
Variable overhead Bat standardC "@A@@@ "@A@@@
Variable prod&ction cost variances BnetC "@A1+@
a
"@A1+@
LessD
0ixed overhead KA@@@ JB1A+@@C LA+@@
0ixed overhead variance BnetC B+@@C B+@@C
Operating pro!it J1"A))@ JB1A+@@C J1@AK)@
a
J'A'+@ # H J1'A"@@ # H J'A+@@ # E J"@A1+@ #.
#sing variable costingA the entire !ixed prod&ction cost o! JLA@@@ is expensed in October.
#nder standardA absorption costingA each tr&c% is allocated !ixed prod&ction cost o! J@.K@
BE JLA+@@ N 1"A@@@ &nitsC. A portion o! the !ixed prod&ction cost is allocated to the "A@@@
&nits in ending inventoryD
J@.K@ G "A@@@ E J1A+@@.
Th&sA only J7A)@@ BE JLA@@@ - J1A+@@C o! the act&al !ixed prod&ction cost are expensed in
October &nder standardA !&ll-absorption costing. This incl&des JKA@@@ BE J@.K@ G 1@A@@@
&nitsC o! !ixed prod&ction cost in standard cost o! goods sold pl&s a !avorable b&dget
variance o! J+@@.
-n this caseA !&ll-absorption operating pro!it o&ld be J1"A))@A or J1A+@@ higher than variable
costing operating pro!it. The J1A+@@ di!!erence in pro!its is d&e to the acco&nting syste$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 $aterials J*
,irect labor )
Variable overhead "
Total &nit variable costs J11
/e(&iredD
.repare OctoberOs ind&stry vol&$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.