Chap 021

Chapter 21 - Other Variance Analysis

CHAPTER 21 OTHER VARIANCE ANALYSIS

Changes from Twelfth Edition

All changes to Chapter 21 were minor. Approach (also see “Approach” for Chapter 20)

The general message of the chapter is that differences between actual and budgeted production costs can be decomposed into price, uantity, mi!, and "olume "ariances. This general idea is applied to a "ariety of specific situations, but these details should not be permitted to obscure the general point. #llustration 21-1 helps $eep the detailed calculations in perspecti"e. The computation of the mi! "ariance is uite complicated and difficult to understand. %owe"er, students should ha"e a general comprehension of the concept of mi! because it comes up in a great many practical situation situations. s. &e find it used more with respect respect to gross margin analysis analysis than as a refinement refinement of material material price or labor rate "ariances. Often there is miscommunication in class because students differ in the situations that they are implicitly thin$ing about. 'or e!ample, the appropriateness of computing a gross margin "ariance rather than a selling "ariance depends on the nature of the company. #f the (ob of the mar$eting organi)ation is to obtain a certain gross margin abo"e product costs, whate"er the costs are, then attention should be focuse focused d on gross gross margin margin.. #f both both the mar$e mar$etin ting g organi organi)at )ation ion and the produc productio tion n organi organi)at )ation ion are responsible for the gross margin *one for the price component and the other for the cost component+, then attention should be focused on selling price. #t is not that one approach is generally better than the other, rather, rather, each approach approach is appropriate appropriate for a certain certain situatio situation n and inappropriate inappropriate for another another situation. situation. tudents may not percei"e that both situations e!ist, e!ist, particularly if they ha"e had e!perience in one type of company. Cases

Campar Industries, Inc . is a problem set dealing with the "ariances that are introduced for the first time in this chapter. Darius Company parallels the e!ample in the Complete Analysis section of the chapter te!t. Woodside Products, Inc . is a good "ariance analysis re"iew case. #t reuires the use of last year/s actuals as the standards for analy)ing this year/s performance. Olympic Car Wash reuires students to isolate the effects of an uncontrollable factor *rain+ on the results of a car wash company. #t can be framed as either a fle!ible fle!ible budgeting or "ariance "ariance analysis case. *0ote This case was included in Chapter 2 in the Twelfth 3dition. #t fits eually well there.+

21-1

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Problems

Problem 211! "eta #i$ision

4dgt. Vol. 5 4dgt 6i! 5 4dgt. 6argin

Act. Vol. 5 4dgt. 6i! 5 4dgt. 6argin

ales Vol. Var.

8roduct 1

9,2:: 5 ;1: < ;92,:::

6i! Var.

9,:=2 5 ;1: < ;9:,=2: ;1,2>: 7

2

1,=:: 5 ;19 < ;22,1::

9

,1:: 5 ;? < ;,?::

Act. Vol. 5 Act. 6i! 5 Act. 6argin

7nit 6argin Var.

2,>: 5 ;1: < ;2>,:: ; 2,22: 7

1,@92 5 ;19 < ;21,21@ >> 7

Total

Act. Vol. 5 Act. 6i! 5 4dgt. 6argin

2,>: 5 ;1:.2: < 2?,:=: ; =: '

2,:: 5 ;19 < ;92,:: 11,2> '

,>?@ 5 ;? < ;,:@

2,:: 5 ;12.> < ;91,: 1,:: 7

,2: 5 ;? < ;9>,2:

,2: 5 ;>.>: < ;9=,::

1, 1,>9@ 7

,>1 7

>: 7

;,::: 7

; 9,2: '

;1,99: 7

Chec$ 1:,::: ! ;1:.:: B ?,@:: ! ;1:.2: < ;2,:>: 7.

21-2

;2,:>: 7 0et




Problem 212! "radle% Compan%

*all numbers are thousands, e!cept per-unit amounts+ Calculation of i! Variance

a.

6i 6i! "ariance 8roduct A 8roduce 4 Actual Actual uantity.. uantity................. ............................. ............................. .............................. ............................. ............................. .............................. 91: ............................. ............................. 1>@ ............................. .............. tandard proportion of actual *1+............................................................................................................................. 2?> 1?> ifference. ifference................ ............................. ............................. ............................. ............................. .............................. ............................. ............................. D 12 u.............................. nits ............................. - 12 u........................... nits ............. tandard gross margin............................................................................................................................................ ;.?: - ;.:: std. cost....................................................................................................................................... ! ;1.?: ;.: - ;.:: std. cost....................................................................................................................................... EEEEEE ! ;1.: ale of more units of A than 4 ga"e a "ariance of.................................................................................................. ;22.>: -;1>.:: Or ; .>: '

b. Volume "ariance gi"en as ;=.97 reflects the fact that not as many units were produced as were e!pect e!pected ed to be produc produced. ed. 0et income income would would be higher higher if the e!pected e!pected units had been been actual actually ly produced. c. There There would would be no gross gross margin margin mi! mi! "ariance "ariance and no sales sales "olume "olume "arian "ariance, ce, but the gross gross margin margin would be lower by ;21.9, due to the change in sales as illustrated below ales............... ales............................. ............................. 9:: 5 ;............................. .: ............................. ;1,@: .............................. ............................. ............................. .............................. .................... ..... *2+ 2:: 5 . . 1,:?: ;2,=: Change in gross margin Actual 91: *;.:+ < ;1,=: 1>@ *;.+ < ;1:19.= Actual ;2=1>.=: 4udgeted ales 7nits *2=:.:+ F Actual elling ;21.9 d. As illustra illustrated ted below, below, a unit unit margin margin "ariance "ariance of -1@.9 -1@.9 would would ha"e ha"e occurred occurred 8roduct 8roduct A...................... A..................................... *;1.: - ............................. ;1.?:+ ! 9............................. 1: < .............................. -1.............................. : ............................. ............................. ............................. ............... 8roduct 8roduct 4....................... 4...................................... *;1. - .............................. ;1.:+ ! 1............................. >@ < ............................. -?.9.............................. -1@............................. .9 ............................. ............................ ............. 1. tandard proportion

A 4

9::G:: < .@ 2::G:: < .










2. #f 8roduct 8roduct A sells for for ;.: ;.: per unit, unit, then 91: 91: units units would show show total total sales sales of ;1,=:, ;1,=:, lea"ing lea"ing 8roduct 8roduct 4 sales at ;1,:19.=, or ;.Gunit.

Problem 21&! #elta #i$ision

Hross margin "ariances 4udgeted unit margin, A < ;2: B *;@: D ;: D ;@:+ < ;=: 4udgeted unit margin, 4 < ;1> B *; D ;9: D ;9@+ < ;9= Actual unit margin, A < *;2=,::: ÷ 1,=:+ - ;1=: < ;= Actual unit margin, 4 < *;>1,::: ÷ 9,2:+ - ;111 < ;9= ales "olume "ariance ;:. This can be determined by inspection because both actual and budgeted total "olumes were ,::: units. 6i! "ariance A *1,=: B 1,?::+ ! ;=: 4 *9,2: B 9,1::+ ! ;9=

< <

;1:,::7 ,:' ; ,?:7

7nit margin "ariance A *;= - ;=:+ ! 1,=: 4 *by inspection+

< <

;=,:::' : ;=,:::'

0et margin "ariance

<

;,?:7 D ;=,:::' < ;2,::' ;2,::'

Iabor "ariances tandard labor per unit, A ;: ÷ ;2:Ghr. < 2. hrs.Gunit tandard labor per unit, 4 ;9: ÷ ;2:Ghr. < 1. hrs. unit 3fficiency "ariance

Jate "ariance ;2: B ;1>=,11: ÷ ?, ?,: : hr. hr. ! ?, ?,: : 0et labor "ariance 6aterials "ariances

< <

1,>?:' ; >?:'










tandard materials per unit, A ;@: ÷ ;1.:Glb. < : lbs. tandard materials per unit, 4 ; ÷ ;1.:Glb. < 9: lbs. 7sage "ariance K*1,?:: ! :+ D *9,1:: ! 9:+ B 1>:,:::L ! ;1.: < ;1@,:: 7 8rice "ariance K;1.: - ;2=,:: ÷ 1>:,:::+L ! 1>:,::: 0et materials "ariance "ariance

< ,::7 < ;21,?::7

;=,2:: D ;:.>: *;1>=,11:+ - ;2@,1?2

< ;:,9:7

1.2 *;1>=,11:+ - ;22,>>> 0et o"erhead "ariance

< 9@' < ;9?,?>7

O"erhead "ariances pending "ariance

Volume "ariance

um of all "ariances *profit "ariance+ ;2,:: ;2,:: ' D ;21 ;21,?: ,?:: : 7 D ;>? ;>?: : ' D ;9? ;9?,? ,?> >7

< ;> ;>,?: ,?:>7 >7

tatement of 4udgeted and Actual Hross 6argin

4udget Actual Je"enues.... Je"enues................... ............................. ............................. ............................. ............................. .............................. ............................. ............................. .............................. ;?1,>............................. :: ............................. ;?:>,:::........................ ......... Cost of goods goods sold.............. sold............................. ............................. ............................. ............................. ............................. .............................. ............................. @@............................. =,1:: .............................. @>,2 ............................. : .............. Hross margin margin 5 std................ std............................... .............................. ............................. ............................. .............................. ............................. ............................. 2=,=.............................. :: ............................. 2?,=:........................ .......... 8roduction cost "ariances 6aterials 6aterials usage............. usage........................... ............................. ............................. ............................. .............................. ............................. ............................. .............................. -- ............................. *1@,............................. ::+ ............... 6aterials 6aterials price............. price............................ ............................. ............................. ............................. ............................. .............................. ............................. ............................. -- .............................. *,............................. ::+ .............. Iabor Iabor efficiency... efficiency.................. .............................. ............................. ............................. .............................. ............................. ............................. ............................. -............................. .............................. *1,:::+ ....................... ........ Iabor Iabor rate................. rate................................ ............................. ............................. .............................. ............................. ............................. ............................. ............................. -- .............................. 1............................. ,>?: ................... ..... O"erhead O"erhead "olume........ "olume...................... ............................. .............................. ............................. ............................. .............................. ............................. ............................. -- ............................. ............................... 9@ ................. O"erhead O"erhead spending. spending............... ............................. .............................. ............................. ............................. .............................. ............................. ............................. ............................. -............................. *:,9:+ ...................... ....... Total Total "ariances "ariances............... .............................. ............................. ............................. ............................. ............................. .............................. ............................. ............................. -.............................. *@:,?............................ >+ ............. Hross margin, margin, actual............ actual.......................... ............................. .............................. ............................. ............................. ............................. ............................. ;2.............................. =,=:: ............................. ;1>>,=............................ ?2 .............. tandard gross margin increased by ;2,:: because of a ; per unit higher margin on 8roduct AM but a shift in product mi! toward lower-margin 8roduct 4 more than eliminated this gain. The production cost "ariances are self-e!planatory, e!cept for the o"erhead "olume "arianceM this ;9@ represents the amount our predetermined predetermined standard o"erhead cost per unit o"ercharg o"ercharged ed products products for o"erhead, o"erhead, because our










Problem 21'! nman Compan%

a

Compar Compariso ison n of 6aster 6aster 4udget 4udget and 'le!ib 'le!ible le 4udg 4udget et 0o"ember 'le!ible 4udget at 1?,::: 7nits Variable 6aster per 7nit 'i!ed Total 4udget ifference ales re"enue........ re"enue...................... ............................. .............................. ............................. ;2 ............................. : .............................. ............................. ;9>:............................. ,::: ; ............................. ::,::: ............................. ;*2:,.............................. :::+ ........................ ......... Costs irect irect material.... material................... ............................. ............................. .............................. ............................. 9 ............................. .............................. =,............................. ::: ;............................. @:,::: ............................. 9,:............................. :: ......................... .......... irect irect labor............ labor........................... ............................. ............................. .............................. 9............................. ............................. .............................. =,:............................. :: @............................. :,::: ............................. 9,::.................................... : ...................... 6anufacturi 6anufacturing ng o"erhead....... o"erhead..................... ............................. ............................. .............................  .............................. ; :,:::............................. 12@,............................. ::: .............................. 19:,::: ................................................... ,:: .................................... : elling and administration.............................................................................................................................................................. 2 @:,::: ?>,::: 1::,::: 2,::: Total Total costs.............. costs............................. .............................. ............................. ............................. ;12............................. ;1............................. 1:,::: .............................. 99>,::............................. : 9............................. :,::: .............................. 12,:::.................................... ..................... Operating Operating income....... income...................... .............................. ............................. ............................. .............................. ............................. ............................. ; 2,:::............................. ; :............................. ,::: .............................. ; *>,:::+................................ .................












b.

*1+

ales "olume "ariance Act. "ol. 5 bdgtd. margin 1?,::: units ! *;2: - ;12.:N+ 4dgt. "ol. 5 bdgtd. margin 2:,::: units ! *;2: - ;12.:+ 7nfa"orable sales "olume "ariance

< <

;12,:: 1:,::: ; =,::7

N4udgeted mfg. o"erhead per unit < ;19:,::: ÷ 2:,::: < ;@.:M this plus budgeted direct material *;9.::+ and direct labor *;9.::+ gi"es a budgeted unit cost of ;12.:.

*2+ 7nit 7nit margi margin n "arian "ariance ce Act. "ol. 5 act. margin 1?,::: units ! *;1?N - ;12.:+ Act. "ol. 5 bdgtd. margin *from l abo"e+ 7nfa"orable unit margin "ariance

< < <

;129,:: 12,:: ; 1? 1?,:::7

N;9@1,::: re"enues ÷ 1?,::: units < ;1?

*9+ irect irect materia materiall *net+ *net+ "arian "ariance ce 4udgeted ;9 ! 1?,::: units < ;=,::: Actual Actual *gi"e+........... *gi"e+.......................... ............................. ............................. .............................. ............................. ............................. 2,::: ............................. ............................. .............................. ............... 7nfa"orable direct material "ariance............................................................................................................. ;1,:::' *+ irect irect labor labor *net+ "ariance "ariance 4udgeted ;9 ! 1?,::: units < ;=,::: Actual Actual *gi"en+....... *gi"en+...................... .............................. ............................. ............................. .............................. ............................. =@,:::............................. ............................. ............................. .................... ..... 7nfa"orable direct labor "ariance.................................................................................................................. ;1?,:::7 *+ 6anufactur 6anufacturing ing o"erhead o"erhead *net+ *net+ "arian "ariance ce Absorbed ;@.: ! 1?,::: units < ;129,:: Actual *gi"en+ < 19:,::: 6anufacturing o"erhead "ariance.................................................................................................................. ;@,::7 *@+ elling elling ant administ administratio ration n *net+ "arianc "ariance e










Cases

Case 21-1: Campar Industries, Inc. ote! This case is unchanged from the Twelfth Edition . Approach

This problem set can be completed in one class session. Alpha is a straightforward calculation of gross margin margin "aria "ariance nces. s. 4eta 4eta introd introduce ucess the the gross gross margin margin mi! "arian "ariance. ce. Hamma Hamma gi"es gi"es the stude student nt the the opportunity to apply the mi! concept to raw materials. elta is a re"iew problem, containing both margin and production cost "ariances. Alpha Division

7nit margin, budgeted...................................................................................................................................................... ;=2 - ;9 < ;2? 7nit margin, margin, actual......... actual........................ .............................. ............................. *;1,@>,2: ............................. G 22,:::+ .............................. - ;9 ............................. < ;=.9> -............................. ;9 - ;92.9> ............................. ............................. ............................. .............. 7nit margin "ariance < ∆ 7nit margin N Actual "olume < *;92 *;92.9 .9> > - ;2?+ ;2?+ N 22 22,::: ,::: < ;= ;=,9 ,9@: @: ' ales "olume "ariance < ∆ Volume N 4dgt. unit margin < *22, *22,:: ::: : - 2,: 2,::: ::++ N ;2? ;2? < ;>, ;>,:: ::: :7 0et gross margin "ariance "ariance < Act. gross margin B 4dgt. 4dgt. gross margin < 22,: 22,::: :: N ;92 ;92.9 .9> > - 2,: 2,::: :: N ;2? ;2? < ;1@ ;1@,9 ,9@: @: ' Chec$ ;=,9@: ' D ;>,::: 7 < ;1@,9@: ' The unfa"orable "olume "ariance is more than o"ercome by the fa"orable unit margin *also often called selling price+ "ariance. # point out to students how this problem illustrates the importance of calculating margin "ariances rather than re"enue "ariances. eta Division on following page. !amma Division "i# variance$ %&tandard "i#'

(

Actual )uantity*

&tandard + "i# ariance Price 6aterial 6aterial F........................ F....................................... *@,:............................. :: ............................. .............................. ,::+ ............................. N............................. ;............................. 1.@? ............................. < .............................. ; > '............................. .......................... ............ 6aterial 6aterial ........................ ....................................... *,:............................. :: ............................. .............................. ,::+ ............................. N............................. ;............................. 2.9 ............................. < .............................. 1,1=: 7............................. .......................... ............ ; 92 7

NActual uantity used at budgeted proportion *@:G:+.

'










Actual cost tandard cost 0et "ariance

< < <

?,?:: lbs. N ;1.?

<

;2:,@>: 1?,9: ;1,9=7










eta Division Division

4dgt. Vol. 5 4dgt 6i! 5 4dgt. 6argin

Act. Vol. 5 4dgt. 6i! 5 4dgt. 6argin

ales Vol. Var.

8dt. 1

2

9 Total

Act. Vol. 5 Act. 6i! 5 4dgt. 6argin

8dt. 6i! Var.

Act. Vol. 5 Act. 6i! 5 Act. 6argin

7nit 6argin Var.

9,2:: 5 ;12 < ;9>,::

;1,9@ 7

9,:=2 5 ;12 < ;9@,>@

;2,@@ 7

2,>: 5 ;12 < ;9,2::

;@> '

2,>: 5 ;12.2 <;9,>>

1,=:: 5 ;1.@: < ;2@,2:

;1,:@1 7

1,@92 5 ;1.@: < ;2,?

;19,1 '

2,:: 5 ;1.@: < ;9?,:::

;1,2: 7

2,:: 5 ;1.1: < ;9=,=:

;2,2:9 7 ;,>:: 7

,>?@ 5 ;1:.>: < ;2,>== D

;@,?== 7 ;9,?:: '

,2: 5 ;1:.>: < ;,?:: D

;1,:2: 7 ;1,>@ 7

,2: 5 ;1:.@ < ;,>>: < ;2,>@ 7 0et

,1:: 5 ;1:.>: < ;,:>:

Chec$ ?,@:: ! ;12.21 B 1:,::: ! ;12.:: < ;2,>@ 7. The analysis indicates that if 4eta e!plicitly changed its mar$eting program in order to produce the actual results, this was not a good mo"e. The shift toward a richer mi! did not generate enough additional margin to o"ercome the unfa"orable sales "olume and unit margin impacts.

21->






There are two mista$es students freuently ma$e in this analysis. analysis. 'irst, some forget to change the order of subtraction in the gross margin mi! "ariance formula with the result that they show a fa"orable mi! "ariance. A little discussion uic$ly re"eals why it must be unfa"orable, and reminds them again that whethe whetherr a "arian "ariance ce is fa"ora fa"orable ble or unfa" unfa"ora orabl blee sho should uld be a matte matterr of common common sense sense *&ill *&ill the phenomenon described tend to increase or decrease profitP+ rather than algebraic sign. econd, some students calculate the mi! "ariance this way

F 

%&tandard "i# *,?: *9,?@:

( -

Actual )uantity* ,::+ ,::+

' N N

&tandard Price ;1.@? ;2.9

< <

; = ' 1,2@ 7 ; 2: 7

ince ,?: D 9,?@: < ?,?:: rather than 1:,:::, this approach changes both the mi! and the uantity between the terms in parentheses. Thus, this would gi"e a combined mi! and usage "arianceM note that in the correct calculation, the sum of the mi! and usage "ariance is in fact ;2: unfa"orable. Delta Division !ross margin variances$ 4udgeted unit margin, A < ;9:: - *;=2 D ;@2.: D ;=+ < ;?:.: 4udgeted unit margin, 4 < ;1> - *; D ;9=.: D ;+ < ;>.: Actual unit margin, A < *;99,=: G 1,=:+ - ;2:?.: < ;?.: Actual unit margin, 4 < *;@:1,2: G 9,2:+ - ;19@.: < ;>.:

ales "olume "ariance ;:. This can be determined by inspection because both actual and budgeted total "olumes "olumes were ,::: units. units. 6i! "ariance A *1,=: -1,?::+ N ;?:.: 4 *9,2: - 9,1::+ N ;>.:

7nit margin "ariance A *;?.: - ;?:.:+ N 1,=: 4 *by inspection+

< <

;19,= 7 =,2= ' ;@,9:: 7

<

; >,=:' :












0a1or variances$ tandard labor per unit. A A ;@2.: G ;2Ghr. < 2. hrs. hrs. tandard labor per unit, 4 ;9=.: G ;2Ghr. < 1. hrs.

3fficiency "ariance K*1,>:: N 2. D 9,9:: N 1.+ - ?,:L N ;2 < ;: Jate "ariance K;2 - *;299,>>: G ?,:+L N ?,: 0et labor "ariance

< <

Overhead variances$ pending "ariance ;?,::: D ;:.>: *299,>>:+ - ;92:,:::

Volume "ariance ;1.2: *299,>>:+ - ;2>1,1: 0et o"erhead "ariance um of all "ariances *profit "ariance+ ;2,:' D ;22,@>:7 D ;2,9= ,9=:' D ;9?,97

;2,9=: ' ;2,9=: '

<

;9>,>?@ 7

<

> 7 ;9?,9 7

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;=,2: ,2: 7

#elta #i$ision *tatement of "+dgeted and Act+al ,ross -argin










Case 21-2: Darius Company ote! This case is unchanged from the Twelfth Edition . Please see the printed Instructor2s 3esource !uide for the 4arvard Teaching .ote5 Case 21-3: 21- 3: Woodside Products, Inc. * ote! This case is unchanged from the Twelfth Edition . Approach

This case pro"ides pro"ides a good summaryQor summaryQor good e!amination e!aminationQof Qof income income "ariance "ariance analysis. analysis. &ea$er students are thrown off balance at first because none of the costs gi"en are labeled as being standard. %owe"er, because the tas$ at hand is to e!plain 1??2 results "is-a-"is those for 1??9, the 1??2 figures, although actual amounts, constitute the standards standards for analytical purposes. The case also as$s the student to prepare a fairly intuiti"e summary analysis for a board meeting. # use this part of the assignment to emphas emphasi)e i)e the import importanc ancee of commu communic nicati ating ng the resul results ts of uite uite compli complicat cated ed calcul calculati ation onss in a straightforward, easy-to-grasp way to nonaccountants. The detailed analysis and a suggested summary follow. A. Hross Hross 6argin 6argin Varian Variances ces ince in"entory was "alued at ; per unit in 1??2, this is the number used to determine the unit margins for these calculations 7nit margin "ariance < *;: - ;9?+ N >2,9: ales "olume "ariance a *>2,9: - >>,12+ N ;9? 0et gross margin 4. elli

and Administ Administrati" rati" Varia

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;?:,>:' 22,227 ;@>:,@2










Iabor rate "ariance < *;1@.:: - ;1@.>:+ N @,>@: Iabor efficiency "ariance < *@:,>2 2 - @,>@:+ N ;1@.:: 0at labor "ariance

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; 1,>>>7 @,@:7 ;11@,>7

2

>1,1:: units N :.= hr.Gunit

. 8roduc 8roductio tion n O"erhe O"erhead ad Varian Variances ces These calculations are challenging 3nough information is gi"en to calculate e"ery "ariance e!cept the fi!ed o"erhead component of the o"erhead spending "ariance. %owe"er, this can be deduced from the other "ariances and the total production cost "ariance. O"erhead production "ariance < *>1,1:: - >>,12+ N ;1?.:: 9

<

;199,=7

9

This is the fi!ed o"erhead absorption rate *see Appendi! of Chapter 2:+

O"erhead spending "ariance, "ariable costs < *>1,1:: N ;.::+ - ;9?,:: O"erhead spending "ariance, fi!ed costs deri"ed as follows Cost of goods sold 5 std. < >2,9: N ; Cost of goods sold, incl. pdn. cost "ariances o total pdn. cost "ariances of which 6aterial "ariance I b i

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; 9,1::7 ; 2 2=,197

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;,2?,2: ,2,9>> ; =2 =2@,19>7

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1?9,?>:7 11@ >7










. . Our "ariable "ariable sellin selling g cost per per unit, howe"e howe"er, r, increased increased by ;:.2> ;:.2> *or *or @.9+, primar primarily ily because because of salespeople/s commissions related to the higher per-unit selling price. This increase caused preta! profit to decline by ;29,:>. @. Other sellin selling g costs and and administra administrati"e ti"e costs costs were were reduced by ;,: ;,:::, ::, with with a correspondin corresponding g fa"orable impact on preta! profit. =. #ncreases #ncreases in the purchas purchasee price of material materialss and labor labor rates caused caused preta! preta! profit profit to decline decline by ;9:2,9@>. &e were more efficient in using materials than last year, but our labor was less producti"eM the combined combined effect of material usage and labor efficiency decreased decreased preta! profit by ;>,:@:. >. Our factory factory wor$ed wor$ed at less less than its its usual "olum "olumee this year, year, which increase increased d the producti production on cost of each unit because fi!ed factory o"erhead was spread o"er a lower "olume. This had the effect of reducing preta! profit by ;199,=. ?. Our factory factory o"erhead o"erhead costs costs also increased increased consid considerably erably,, reducing preta! preta! profit profit by ;2>2,29 ;2>2,29.. 1:. To sum up, preta! preta! profit increased increased ;1,? for these these reasons #mpact of higher selling price.............................................................................................................................. ;?:,>: #mpact of lower sales "olume.............................................................................................................................. *1??,=::+ #mpact of lower production "olume..................................................................................................................... *199,=+ #mpact of all spending and efficiency changes.................................................................................................... *=:,=21+ 0et change in preta! income......... income................... .................... ..................... ..................... .................... .................... .................... ..................... ; ..................... 1,? .................... .................... ................ ...... KA really brief report would include only this ninth item.L










'le! the budget based on number of hours of good weather. 'le!ible

Controllable Variance *Actual - 'le! 4udget+

4udget

Actual

4udget

1>,:: :

12,:> :

1:>,1: :

1,?>:

Variable e!penses *: of re"enue+

?2,:::

@2,::

,::

*=,??:+

'i!ed e!penses

9,>2:

,:::

9,>2:

*1,1>:+

1,>2:

11=,::

1:=,>=:

*?,1=:+

9>,1>:

=,::

29:

@,>1:

Je"enue

Total e!penses 8rofit

i)e of the bonus pool <  9,::: D @>1 < 9,@>1 &hile this solution is simple and straightforward, it is far from the only possible solution to this case. tudents might well be as$ed to (udge whether 9ero is a possible correct answer to this case. #t is. Racues Van Jaemdonc$ might well conclude that no ad(ustments should be made for the uncontrollable












factor will depend on the order in which the factors are introduced into the analysis. This can be illustrated graphically as is shown in 'igure A










.ig+re A Hraphical Jepresentation of a Variance Analysis

'actor

4udget

*1+

*2+

*9+

*+

Actual

%ours of good weather

8

A

A

A

A

A

VehiclesGhr. Je"enueG"ehicle Variable costs 'i!ed costs

8 8 8 8

8 8 8 8

A 8 8 8

A A 8 8

A A A 8

A A A A

'igure A shows that the budget is based on planned assumptions about each of the factors that










Ad(usted Actua Act ual l 2

Controllable Variance *Ad(usted Actual - 4udget+

4udget

Actual

1>,:: :

12,:> :

211,2::

2=,2::

Variable e!penses *: of re"enue+

?2,:::

@2,::

1:,@::

*19,@::+

'i!ed e!penses

9,>2:

,:::

,:::

*1,1>:+

1,>2:

11=,::

1@:,@::

*1,=>:+

9>,1>:

=,::

:,@::

12,2:

Je"enue

Total e!penses 8rofit

Chap 021

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