Chapter 6 – Performance Evaluation: Variance Analysis
6-1
Performance Evaluation:
Variance Analysis
Learning Objectives
1. Prepare a flexible budget and explain its use in evaluating performance. (Unit 6.1)
2. Calculate the direct materials price and quantity variances. (Unit 6.2)
3. Identify potential causes of the direct materials price and quantity variances. (Unit 6.2)
4. Calculate the direct labor rate and efficiency variances. (Unit 6.3)
5. Identify potential causes of the direct labor rate and efficiency variances. (Unit 6.3)
6. Calculate the variable overhead spending and efficiency variances. (Unit 6.4)
7. Calculate the fixed overhead spending variance. (Unit 6.4)
8. Identify potential causes of the variable overhead spending and efficiency variances and the fixed
overhead spending variance.
Summary of End of Chapter Material
Difficulty: E = Easy, M = Moderate, D = Difficult
Bloom: K = Knowledge, C = Comprehension, AP = Application, AN = Analysis, S = Synthesis, E = Evaluation
AACSB: A = Analytic, C = Communication, E = Ethics
AICPA FN: DM = Decision modeling, RA = Risk Analysis, M = Measurement, R = Reporting, RS = Research, T = Technology
AICPA PC: C = Communication, I = Interaction, L = Leadership, P = Professional demeanor, PM = Project Management,
PS = Problem Solving and Decision Making, T = Technology
IMA: BA = Business applications, BP = Budget Preparation, CM = Cost Management, DA = Decision Analysis,
PM = Performance Measurement, R = Reporting, SP = Strategic Planning
Item
L. O.
Difficulty
Level
Minutes to
Complete
Bloom’s
Taxonomy
AACSB
AICPA
PC
IMA
Ethics
Coverage
GUIDED UNIT PREPARATION
Unit 6.1
1
1
E
2
K
A
R
C
BP
2
1
E
3
K
A
R
C
PM
3
1
M
3
K
A
R
C
PM
4
1
E
4
K, C
A
R
C
BP
5
1
M
4
K
A
M
PS
PM
Unit 6.2
1
2
M
3
K
A
M
PS
PM
2
2
M
3
K
A
M
PS
PM
3
2
M
2
K
A
M
PS
PM
4
2
D
3
C
A
M
PS
PM
5
3
D
4
C
A
M
PS
PM
6
3
D
4
C
A
PS
PM
Unit 6.3
1
4
M
3
K
A
PS
PM
2
4
M
3
K
A
PS
PM
3
5
D
4
C
A
PS
PM
4
5
D
4
C
A
PS
PM
Unit 6.4
1
6
M
3
K
A
PS
PM
2
6
M
3
K
A
PS
PM
3
7
E
2
K
A
PS
PM
4
8
D
3
C
A
PS
PM
5
8
D
3
C
A
PS
PM
CHAPTER
6
photo: © jsnyderdesign / iStockphoto
Solutions for Davis & Davis, Managerial Accounting, 2nd ed.
6-2
Item
L. O.
Difficulty
Level
Minutes to
Complete
Bloom’s
Taxonomy
AACSB
AICPA
FN
AICPA
PC
IMA
Ethics
Coverage
EXERCISES
6-1
1
M
15
AP
A
M
PS
BP
6-2
1
M
15
AP
A
M
PS
PM
6-3
1
M
15
AP
A
M
PS
PM
6-4
1
M
15
AP
A
M
PS
BP, PM
6-5
1
M
15–20
AP
A
M
PS
PM
6-6
2
E
5
AP
A
M
PS
PM
6-7
2
E
5
AP
A
M
PS
PM
6-8
2
M
8
AP
A
M
PS
PM
6-9
2
D
5
AP
A
M
PS
PM
6-10
2
D
5
AP
A
M
PS
PM
6-11
2
D
8
AP
A
M
PS
PM
6-12
3
D
10–15
AN
A
R
C
PM
6-13
2, 3
M
12
AP, AN
A
M
PS
PM
6-14
4
E
5
AP
A
M
PS
PM
6-15
4
E
5
AP
A
M
PS
PM
6-16
4
M
8
AP
A
M
PS
PM
6-17
4
M
5
AP
A
M
PS
PM
6-18
4
D
5
AP
A
M
PS
PM
6-19
4
D
8
AP
A
M
PS
PM
6-20
4, 5
D
12
AP, AN
A
M
PS
PM
6-21
6
D
8
AP
A
M
PS
PM
6-22
7
E
3
AP
A
M
PS
PM
6-23
7
E
5
AP
A
M
PS
PM
6-24
7
E
5
AP
A
M
PS
PM
6-25
2, 4, 6, 7
M
25–30
AP, AN
A
M
PS
PM
6-26
2, 4, 6, 7
M
20–25
AP
A
M
PS
PM
PROBLEMS
6-27
1
D
35–40
AP, AN
A
M
PS
BP
6-28
3, 5
D
10–15
AN
A
M
PS
PM
6-29
6, 7
M
10–15
AP
A
M
PS
PM
6-30
1, 2, 3, 4,
5, 6, 7, 8
D
55–60
AP, AN, S
A
M
PS
BP, PM
6-31
1, 2, 3, 4,
5, 6, 7, 8
D
55–60
AP, AN, S
A
M
PS
BP, PM
6-32
2, 3, 4, 5,
6, 7, 8
D
55–60
AP, AN
A
M
PS
BP, PM
C&C CONTINUING CASE
6-33
3, 5
D
30–35
AP, AN
A
M
PS
BP, PM
CASES
6-34
1
D
30–35
AP, AN, C
A
M
PS
BP, PM
6-35
2, 3, 4, 5
D
55–60
AP, AN, E
A, E
M
PS
BA, PM
6-36
1, 2, 3, 4,
5, 6, 8
D
60–70
AP, AN, S
A
M
PS
BP, PM
Chapter 6 – Performance Evaluation: Variance Analysis
6-3
SOLUTIONS TO GUIDED UNIT PREPARATION
Unit 6.1
1. A static budget is a budget developed for a single level of expected
2. A variance is any difference between actual results and budgeted
amount.
3. Management by exception requires managers to investigate only
investigated.
4. A flexible budget is a budget that can be prepared before an
the actual level of output. In this instance, a flexible budget differs
5. A static budget variance can be separated into a flexible budget
variance and a sales volume variance. The flexible budget variance
level of output and the static budget.
6-4
Unit 6.2
1. A direct materials price variance is the difference between the actual
the actual quantity purchased, AP = the actual price paid per unit of
2. A direct materials quantity variance is the difference between the
SQ), where SP = the standard price allowed per unit of material,
level.
3. The standard quantity allowed is the amount of inputs allowed for the
4. The standard quantity of tires for 8 bicycles is 16 tires. Standard
level of production.
5. A difference in the quality of materials purchased will likely result in a
volume discounts unexpectedly.
6. A difference in the quality of materials purchased will likely result in a
materials quantity variance. For example, higher quality materials
machines used in production.
Chapter 6 – Performance Evaluation: Variance Analysis
6-5
Unit 6.3
1. A direct labor rate variance is the difference between the actual wage
paid per direct labor hour, and SP = the standard wage rate per direct
labor hour.
2. A labor efficiency variance is the difference between the actual hours
per direct labor hour, AQ = the actual number of direct labor hours
allowed for the actual production level.
3. Actual labor rates might differ from standard rates if a different skill
rate per hour, so the labor rate variance would be unfavorable.
4. Actual labor hours might differ from standard hours if a different skill
increase workers’ efficiency and vice versa.
Solutions for Davis & Davis, Managerial Accounting, 2nd ed.
6-6
Unit 6.4
2. The variable overhead efficiency is the difference between the actual
3. The fixed overhead spending variance is the difference between the
spending variance.
5. A variable overhead efficiency is strictly due to the use of the activity
Chapter 6 – Performance Evaluation: Variance Analysis
SOLUTIONS TO EXERCISES
Exercise 6-1
Unit
1,500
2,500
3,500
Sales revenue
$50.00a
$75,000
$125,000
$175,000
Less variable expenses:
Cost of goods sold
30.00b
45,000
75,000
105,000
Operating expenses
3.50c
5,250
8,750
12,250
Total variable expenses
33.50
50,250
83,750
117,250
Contribution margin
$16.50
24,750
41,250
57,750
Fixed operating expenses
28,000d
28,000
28,000
Operating income
($3,250)
$ 13,250
$ 29,750
a
$100,000
2,000 kits
b
$60,000
2,000 kits
c
$35,000 0.20
2,000 kits
d $35,000 × 0.80
Exercise 6-2
Flexible
Budget
Sales Volume
Variance
Static
Budget
Unit sales
2,100
100 F
2,000
Sales revenue
$105,000
$5,000 F
$100,000
Cost of goods sold
63,000
3,000 U
60,000
or
Exercise 6-3
Sales price variance = ($48 – $50) × 2,100 = $4,200 U
6-8
Exercise 6-4
Unit
2,500
3,000
3,500
Sales revenue
$800
$2,000,000
$2,400,000
$2,800,000
Less variable expenses:
Direct material
300
750,000
900,000
1,050,000
Direct labor
150
375,000
450,000
525,000
Utilities
35
87,500
105,000
122,500
Indirect material
30
75,000
90,000
105,000
Indirect labor
60
150,000
180,000
210,000
Total variable expenses
575
1,437,500
1,725,000
2,012,500
Contribution margin
$225
562,500
675,000
787,500
Less fixed expenses:
Maintenance
20,000
20,000
20,000
Depreciation
40,000
40,000
40,000
Insurance
27,000
27,000
27,000
Rent
30,000
30,000
30,000
Total fixed expenses
117,000
117,000
117,000
Operating income
$ 445,500
$ 558,000
$ 670,500
Chapter 6 – Performance Evaluation: Variance Analysis
6-9
Exercise 6-5
Actual
Results
Flexible Budget
Variance
Flexible
Budget
Sales Volume
Variance
Static
Budget
Unit sales
3,100
0
3,100
100 F
3,000
Sales revenue
$2,635,000
$155,000 F
$2,480,000
$80,000 F
$2,400,000
Less variable expenses:
Direct material
910,000
20,000 F
930,000
30,000 U
900,000
Direct labor
435,000
30,000 F
465,000
15,000 U
450,000
Overhead
398,000
10,500 U
387,500
12,500 U
375,000
Total variable expenses
1,743,000
39,500 F
1,782,500
57,500 U
1,725,000
Contribution margin
892,000
194,500 F
697,500
22,500 F
675,000
Total fixed expenses
125,000
8,000 U
117,000
0
117,000
Operating income
$ 767,000
$186,500 F
$ 580,500
$22,500 F
$ 558,000
6-10
Exercise 6-6
AQ × AP
AQ × SP
4,000 lbs. × AP
4,000 lbs. × $1.60/lb.
$6,800
$6,400
$400 U
Direct materials price variance
Exercise 6-7
AQ × AP
AQ × SP
1,100 oz. × AP
1,100 oz. × $800/oz.
$875,000
$880,000
$5,000 F
Direct materials price variance
Exercise 6-8
AQ × AP
AQ × SP
50,000 gallons × $2.50/gallon
50,000 gallons × SP
$125,000
$5,000 F
$125,000 – (50,000 gal. × SP) =
($5,000)
$130,000 =
50,000 gal. × SP
$130,000
50,000
=
SP
$2.60/gal. =
SP