7–1
Chapter 17
Additional Topics in Variance Analysis
Learning Objectives
1. Explain how to prorate variances to inventories and cost of goods sold.
2. Use market share variances to evaluate marketing performance.
3. Use sales mix and quantity variances to evaluate marketing performance.
4. Evaluate production performance using production mix and yield variances
5. Apply the variance analysis model to nonmanufacturing costs.
6. Determine which variances to investigate.
Chapter Overview
I. PROFIT VARIANCE ANALYSIS WHEN UNITS PRODUCED DO NOT EQUAL
UNITS SOLD
• Reconciling Variable Costing Budgets and Full-Absorption Income Statements
II. MATERIALS PURCHASES DO NOT EQUAL MATERIALS USED
III. MARKET SHARE VARIANCE AND INDUSTRY VOLUME VARIANCE
V. PRODUCTION MIX AND YIELD VARIANCES
• Mix and Yield Variances in Manufacturing
VI. VARIANCE ANALYSIS IN NONMANUFACTURING SETTINGS
• Using the Profit Variance Analysis in Service and Merchandise Organizations
• Efficiency Measures
• Mix And Yield Variances in Service Organizations
VII. KEEPING AN EYE ON VARIANCES AND STANDARDS
• How Many Variances to Calculate
• When to Investigate Variances
• Updating Standards
7–3
Chapter Outline
LO 17-1 Explain how to prorate variances to inventories and cost of goods
sold.
PROFIT VARIANCE ANALYSIS WHEN UNITS PRODUCED DO NOT EQUAL UNITS
SOLD
• The analysis of variances becomes more complicated when the units sold do not equal the
units produced (i.e., when inventory is present).
o In the time period in which units are produced, the variable production cost variance is
calculated as follows:
Variance = (Actual variable cost – Estimated variable cost) × Units produced
o The actual variable production costs are really a hybrid.
Actual Variable
Production Costs
=
Flexible Budget Variable
Production Costs
+ (or -)
Variable Production
Cost Variances
Cost of Goods Sold
(To close production cost variances to Cost of Goods Sold)
See Demonstration Problem 1
o The entire variable production cost variance for units produced can be treated as a period
cost and expensed in the period incurred or it can be prorated between units sold and
units still in inventory:
▪ If the entire variable production cost variance for units produced are treated as a
period cost and expensed in the period incurred, the entry is:
7–4
▪ If the entire variable production cost variance for units produced are prorated between
units sold and units still in inventory, the entry is:
Cost of Goods Sold
Finished Goods Inventory
o Using variable costing, the entire fixed production cost is expensed when incurred.
▪ When standard, full-absorption costing is used and production and sales volumes are
not the same, the profit reported will be different from that reported under variable
costing (due to the accounting system, not managerial efficiency).
• Reconciling Variable Costing Budgets and Full-Absorption Income Statements
o Exhibit 17.2 reconciles the reported income statement under full absorption with that
under variable costing.
See Demonstration Problem 2
MATERIALS PURCHASES DO NOT EQUAL MATERIALS USED
• So far, we have assumed that the amount of materials used equals the amount of materials
purchased. Now we show how to calculate variances when the quantities purchased and used
are not the same.
xxx
Goods Sold)
7–5
o One advantage of using a standard costing system is that managers receive information
that is useful in making decisions to improve performance.
See Demonstration Problem 3
o The purchase of materials is recorded with the following entry:
Materials Inventory
Material Price Variancea
Accounts Payable
xxx
(To record materials purchase and material price variance.)
Material Efficiency Variancea
Materials Inventory
xxx
(To record the use of materials and materials efficiency variance.)
LO 17-2 Use market share variances to evaluate marketing performance.
MARKET SHARE VARIANCE AND INDUSTRY VOLUME VARIANCE
• The general approach in variance analysis is to separate the variance into components based
on a budgeting formula.
7–6
• Many companies base an initial sales forecast on an estimate of sales activity in the industry
as a whole and on an estimate of the company’s market share.
o There are two reasons why actual sales activity is different from budgeted sales activity:
▪ Actual industry volume was different from budgeted industry volume.
• The industry volume variance represents the portion of the sales activity
variance due to changes in industry volume.
▪ Actual market share was different from budgeted market share.
o By decomposing sales activity variance into an industry volume and a market share
variance, management has additional information that can be used to make operational
improvements next period.
▪ Multiplying each figure (one from the industry effect, the other from the market share
effect) by the standard contribution margin gives the impact of these variances on
operating profit.
7–7
• Example: Pioneer Uniform, Inc. serves two groups of the customers in the market,
Retail and Commercial. The following budget information is available for June.
Customers
Unit
Contribution
Margin
Sales
Volume
Sales
Mix
Commercial
$5
40,000
80%
▪ The market share variance is usually more controllable by the marketing department
and is a measure of its performance.
o The use of the industry volume and market share variances enables management to
separate that portion of the activity variance that coincides with changes in the overall
industry from that which is specific to the company.
LO 17-3 Use sales mix and quantity variances to evaluate marketing
performance.
SALES ACTIVITY VARIANCES WITH MULTIPLE PRODUCTS
• Evaluating Product Mix
Retail
8
10,000
20%
50,000
7–8
▪ The sales mix variance measures the impact of substitution (it appears that the
industrial model has been substituted for the standard model).
• A sales mix variance arises from the relative proportion of different products
sold.
• Evaluating Sales Mix and Sales Quantity
o A sales mix variance provides useful information for a company that sells multiple
products when these products are (imperfect) substitutes for each other.
o Sources of the Sales Mix Variance
▪ Although the variances can be calculated for each product sold to show the exact
source, the total variance is most frequently used for analysis.
7–9
LO 17-4 Evaluate production performance using production mix and yield
variances.
PRODUCTION MIX AND YIELD VARIANCES
• Mix and Yield Variances in Manufacturing
o The analysis of mix and quantity variances for sales can be applied to production as well.
▪ The production yield variance measures the difference between expected output
from a given level of inputs and the actual output obtained from those inputs.
Production
Yield Variance
=
Standard
Input Price
×
(Actual Input Used at the Standard
Mix – Standard Input Allowed)
Input Price
7–10
LO 17-5 Apply the variance analysis model to nonmanufacturing costs.
VARIANCE ANALYSIS IN NONMANUFACTURING SETTINGS
• Using the Profit Variance Analysis in Service and Merchandise Organizations
o The comparison of the master budget, the flexible budget, and actual results can also be
used in service and merchandising organizations.
o Merchandising and service organizations focus on marketing and administrative costs to
measure efficiency and control costs.
• Efficiency Measures
• Mix And Yield Variances in Service Organizations
o By substituting different types of labor, service organizations need to calculate labor mix
and yield variances.
▪ Two factors are important when considering mix variances.
7–11
LO 17-6 Determine which variances to investigate.
KEEPING AN EYE ON VARIANCES AND STANDARDS
• How Many Variances to Calculate
o Managers and accountants in each organization should perform their own cost-benefit
analysis to ascertain which calculations of variances are justified.
o In deciding how many variances to calculate, it is important to note the impact and
controllability of each variance.
▪ Impact represents the likely monetary effect from an activity (such as a variance).
The question to ask is, “Does this variance matter?”
▪ Controllability is the extent to which an item can be managed. The question to ask is,
“Can we do something about it?”
• When to Investigate Variances
o After computing variances, managers and accountants must decide which ones to
investigate.
7–12
o Some problems are easily corrected as soon as they are discovered. The investigation cost
is low and the benefits are very likely to exceed the costs.
▪ Some variances are not controllable in the short run. Such variances sometimes
prompt (Long-run actions. In such case, the short-run benefits of variance
investigation are low, but the long-run benefits could be higher.
• Updating Standards
o Standards are estimates that require updating to reflect current conditions.
o Variances may occur because conditions change during the year but the standards do not.
▪ A planned variance is a variance that is expected to occur if certain conditions affect
operations.
7–13
Matching
A.
Controllability
F.
Planned variance
B.
Impact
G.
Production mix variance
C.
Industry volume variance
H.
Production yield variance
D.
Management by exception
I.
Purchase price variance
E.
Market share variance
J.
Sales mix variance
K.
Sales quantity variance
_____ 1. The portion of the sales activity variance attributable to changes in industry volume.
_____ 2. An approach to management requiring that reports emphasize the deviation from an
accepted base point.
_____ 3. A variance that is expected to occur if certain conditions affect operations.
_____ 4. The likely monetary effect from an activity.
_____ 5. The extent to which an item can be managed.
_____ 6. Measures the difference between expected output from a given level of inputs and the
actual output obtained from those inputs.
_____ 7. (Actual price – Standard price) × Actual quantity purchased.
_____ 8. Arises from the relative proportion of different products sold, holding constant the
quantity effects.
_____ 9. Arises from a change in the relative proportion of inputs.
_____ 10. Occurs in multiproduct companies from the change in volume of sales, independent
of any change in sales mix.
_____ 11. The portion of the sales activity variance due to change in the company’s proportion
of sales in the markets in which the company operates.
Matching Answers
7–15
Multiple Choice
1. Which of the following statements is not correct?
a. The industry volume variance is usually more controllable by the marketing department
and is a measure of its performance.
b. The sooner the information is received, the sooner it can be used.
c. The materials efficiency variance is the same regardless of whether the quantities of
materials purchased and used are the same.
d. Using variable costing, the entire fixed production cost is expensed when incurred.
Use the following information to answer questions 2 and 3:
Marketing manager of Jean’s World estimated the sales of 20,000 jeans in August with an
industry volume of 200,000 jeans for the month and the standard contribution margin of $6 per
jean sold. The actual industry sales figure was around 160,000 jeans out of which Jean’s World
sold 18,000 jeans.
2. What is the industry volume variance for the month of August?
a. $24,000 F
b. $12,000 F
c. $24,000 U
d. $28,000 U
3. What is the market share variance for the month of August?
a. $24,000 U
b. $12,000 U
c. $18,000 F
d. $12,000 F
4. Which of the following statements is not correct?
a. The sales mix variance measures the impact of substitution.
b. The sales quantity variance measures the variance in sales quantity, holding the sales mix
constant.
c. The sales activity variance can be divided into two components: sales mix and market
share.
d. A sales mix variance provides useful information for a company that sells multiple
products
7–16
Use the following information to answer questions 5 and 6:
Toy Kingdom sells two similar products: Big Bear and Little Bear. Data on the two products for
October are as follows.
Big Bear
Little Bear
Standard unit contribution margin
$8
$4
Budgeted sales quantity
2,000
8,000
Actual sales quantity
2,500
7,500
5. What is Little Bear’s sales mix variance?
a. $0
b. $1,000 F
c. $2,000 U
d. $2,400 U
6. What is Big Bear’s sales quantity variance?
a. $0
b. $1,000 F
c. $2,000 U
d. $2,400 U
Use the following information to answer questions 7 and 8:
Home Lab supplies chemical solutions for high school labs. Its Coloration Kit uses two inputs, A
and B, during production. The standard cost and quantity data follow.
Direct
Materials
Standard
Price per
Gallon
Standard Quantity (Gallon)
of Input per
Gallon of Coloration Kit
Chemical A
$10
.4
Chemical B
4
.6
During February, the following results were available:
Units produced
10,000 gallons of Coloration Kit
Materials purchased and used:
Chemical A
4,200 gallons at $10.10 per gallon
Chemical B
5,900 gallons at $3.80 per gallon
7. What is the production mix variance for Chemical A?
a. $240 U
b. $1,600 U
c. $1,180 F
d. $420 U
8. What is the production yield variance for Chemical B?
a. $1,600 U
b. $240 U
c. $1,180 F
d. $420 U
9. Which of the following statements is correct?
a. The computation of efficiency variance requires a reliable measure of output activity that
is linked to input.
b. By substituting different types of labor, service organizations calculate labor price
variance.
c. In general, jobs with nonroutine tasks lend themselves to efficiency measures
d. Merchandising organizations focus on Cost of goods sold to measure efficiency and
control costs.
10. Which of the following statements is not correct?
a. Standards are estimates that require updating to reflect current conditions.
b. The issue of impact asks the question, “Can we do something about it?”
c. Only the variances for which the benefits of correction exceed the costs of follow-up
should be investigated.
d. Many variances occur because of errors in recording, bookkeeping adjustments, or timing
problems.
11. The following budget information is available for September.
Products
Unit
Contribution
Margin
Sales
Volume
Standard Set
$6
50,000
Deluxe Set
10
30,000
80,000
What is the composite contribution margin per unit?
a. $8.40
b. $7.50
c. $7.20
d. $6.80
12. Which of the following statements is not correct?
a. Management by exception emphasizes materiality.
b. The shorter the time interval, the greater is the ability to control an item.
c. Most variances are controllable in the long run.
d. Planned variance is one that is expected to occur if certain conditions affection operations.
7–18
Multiple Choice Answers
7–19
Demonstration Problem 1
(Revised from Chapter 16 Demonstration Problem 1)
The accountant at EZ Toys, Inc. is analyzing the production and cost data for its Trucks Division.
For October, the actual results and the master budget data are presented below.
Actual results
Budget data
12,000 trucks produced
10,000 trucks sold
12,000 trucks planned
Unit selling price
$15
Unit selling price
$14
Unit variable costs:a
Unit variable cost:
Direct materials
$5.28
Direct materials
$5
Direct labor
5.10
Direct labor
4
Variable overhead
2.30
Variable overhead
2
Total variable costs
$12.68
Total unit variable costs
$11
Fixed overhead
$9,000
Fixed overhead
$9,600
a These are average costs.
Required:
Prepare a profit variance analysis.
7–20
Demonstration Problem 1 – Solution
Actual
(Based On
Actual
Activity of
10,000
Units Sold)
Manufacturing
Variances
Sales Price
Variance
Flexible
Budget
(Based on
Actual
Activity of
10,000
Units Sold)
Sales
Activity
Variance
Master
Budget
(Based on
12,000
Units
Planned)
$10,000 F
$22,000 F
7–21
Demonstration Problem 2
(Continued from Demonstration Problem 1)
Required:
Reconcile reported income using standard, full-absorption costing with that using standard,
variable costing for the Trucks Division of EZ Toys in October.
7–22
Demonstration Problem 2 – Solution
Actual
(Using
Standard, Full-
Absorption
Costing)
Inventory
Adjustment
Actual
(Using
Standard,
Variable
Costing)
Sales revenue
$150,000
$150,000
Less:
Variable costs
Direct materials (at standard)
Direct labor (at standard)
Variable overhead (at standard)
Variable production cost variances (net)
Less:
Fixed overhead
Fixed overhead variance (net)
Operating profit
$ 12,440
7–23
Demonstration Problem 3
(Revised from Chapter 16 Demonstration Problem 3)
Information about the use of direct materials at EZ Toys’ Trucks Division for October is as
follows:
Standard costs:
2 units per truck @ $2.50 per unit
=
$5 per truck
Trucks produced in October
=
10,000
Actual materials purchased:
23,200 units @ $2.40 per unit
=
$55,680
Actual materials used:
22,000 units @ $2.40 per unit
=
$52,800
There was no beginning inventory on October 1.
Required:
Prepare the Truck Division’s direct materials variances for October.
Demonstration Problem 3 – Solution
Actual Costs =
Actual Input Quantity
at Actual Input Price
Actual Input Quantity
at Standard Input Price
Flexible Production Budget =
Standard Input Quantity Allowed
7–25
Demonstration Problem 4
(Continued from Demonstration Problem 1)
EZ Toys’ marketing manager estimated the sales of 12,000 trucks in October for the Trucks
Division based on an estimated industry volume of 80,000 trucks and on the Trucks Division’s
ability to maintain a market share of 15 percent in the past. That is,
80,000 trucks to be sold in the market × 15% of estimated market share = 12,000 trucks.
Due to unexpected shift in demand, the industry volume in toy truck sales dropped to 62,500
units in October while EZ Toys’ Trucks Division managed to sell a total of 10,000 units.
The following information is also available.
Budget Data
Unit selling price
$14
Unit variable cost:
Direct materials
$ 5
Direct labor
4
Variable overhead
2
Total unit variable costs
$11
Required:
Prepare October’s industry volume and market share activity variances for the Trucks Division
of EZ Toys.
7–26
Demonstration Problem 4 – Solution
The Trucks Division’s actual market share for October was 16% (= 10,000 units ÷ 62,500 units).
7–27
Demonstration Problem 5
EZ Toys’ Stuffed Animals Division has two products: Bear and Monkey. Data on the two
products for October are as follows.
Bear
Monkey
Total
Standard selling price
$20
$12
Standard variable costs
12
8
Standard unit contribution margin
$ 8
$ 4
Budgeted sales quantity
2,500
7,500
10,000
Budgeted sales mix
25%
75%
Budgeted contribution margin
$20,000
$30,000
$ 50,000
Actual sales quantity
3,000
5,000
8,000
Actual sales mix
37.5%
62.5%
Budgeted contribution margin at actual quantities
$24,000a
$20,000
$ 44,000
Sales activity variance
$6,000 Ub
a $24,000 = $8 × 3,000 units
b $6,000 U = $44,000 – $50,000
Required:
Determine the Stuffed Animals Division’s sales mix and sales quantity variances for October.
Demonstration Problem 5 – Solution
For Bear:
Flexible Budget
(SCMa × AQ)
(SCM x ASQb)
Master Budget
(SCM × SQ)
7–29
Demonstration Problem 6
Beautiful Paints Company makes different paints. Its semi-gloss paint product requires two
chemical ingredients, X and Y. The standard cost and quantity data follow.
Direct
Materials
Standard
Price per
Gallon
Standard Quantity (Gallon)
of Input per Gallon
of Semi-Gloss Paint
Standard Cost per
Gallon of
Semi-Gloss Paint
Chemical X
$8
0.5
$4
Chemical Y
2
0.5
1
During October, Beautiful Paints Company had the following results:
Units produced
20,000 gallons of semi-gloss paint
Materials purchased and used:
Chemical X
9,800 gallons at $8.20 per gallon
Chemical Y
10,500 gallons at $2.10 per gallon
Required:
Determine the price, mix, and yield variances for Beautiful Paints Company’s semi-gloss paint
in October.
7–30
Demonstration Problem 6 – Solution
For Chemical X:
Actual
(AP × AQ)
(SP × AQ)
(SP × ASQa)
Flexible Budget
(SP × SQ)
7–31
Demonstration Problem 7
A CPA firm is to perform an audit job for a regular client. Based on past experiences working
with the client, 750 partner hours (at a cost of $200 per hour) and 2,250 staff hours (at a cost of
$75 per hour) are budgeted for the job.
Due to unforeseen events at the client’s sites, a total of 2,700 hours are used consisting of 900
partner hours and 1,800 staff hours. The hourly rate for partner time is the same as budgeted but
the hourly rate for staff time become $100 per hour because more experienced staff members are
put to work.
Required:
Determine all the variances for the CPA firm on the audit job.
Demonstration Problem 7 – Solution
Actual
(AP × AQ)
(SP × AQ)
(SP × ASQa)
Flexible Budget
(SP × SQ)
Purchase Price Variance Mix Variance Yield Variance
$45,000 U $28,125 U $31,875 F
$3,750 F