Variance analysis investigates and analyzes the variance to find causes, to ascertain whether the firm needs to take corrective steps, and to reward or penalize employees, when appropriate.
Variance analysis investigates and analyzes the variance to find causes, to ascertain whether the firm needs to take corrective steps, and to reward or penalize employees, when appropriate.
Variance analysis investigates and analyzes the variance to find causes, to ascertain whether the firm needs to take corrective steps, and to reward or penalize employees, when appropriate.
1. A variance is simply the difference between a predetermined norm or standard and the actual results. 2. The standards themselves may be biased. 3. Systematic reasons
costs is the difference between the actual costs
and the budgeted costs. Price Variance = Actual Fixed Manufacturing Costs - Budgeted Fixed Manufacturing Costs Key Points
1. Reasons for conducting variance
analyses. Variance analysis investigates and analyzes the variance to find causes, to Reasons for Materials Price and Efficiency ascertain whether the firm needs to take Variances corrective steps, and to reward or penalize employees, when appropriate. 1. purchase discounts 2. How to use the budget for performance 2. allow for material defects, evaluation. Accountants compare actual 3. inexperienced workers who ruin results achieved with budgets to derive materials, variances for performance evaluation. 4. improperly used materials 3. Different types of variances between 5. bought inferior materials, actual results and the flexible budget. 6. ordered the wrong materials a. purchasing and production variances, Reasons for Labor Price and Efficiency b. marketing and administrative cost Variances variances, c. sales price variance, 1. wage rate change d. and sales volume variance. 2. motivation 4. Responsibility Centers for Variances 3. poor materials, a. Marketing - Sales volume, sales price, 4. faulty equipment, and marketing cost variances 5. poor supervision, b. Management Administrative costs 6. and scheduling problems. c. Purchasing materials variances d. Production - fixed manufacturing cost VARIABLE OVERHEAD PRICE AND EFFICIENCY variance and the remaining variable VARIANCES manufacturing cost variances not assigned to purchasing 1. cost per machine hour is either more or 5. Describe the role of variance analysis in less than the standard cost allowed per service organizations. Service organizations machine hour 2. the machine hours required to make the use profit variance analysis but define output based on services provided, such as billable actual production output exceed the standard machine hours allowed to make hours in consulting firms or patient-days in hospitals. that output Production Volume Variance is the difference between the budgeted and applied fixed costs. Production Volume Variance = Budgeted Fixed Manufacturing Costs - Applied Fixed Manufacturing Costs Price Variance (sometimes called the spending variance) for fixed manufacturing
6. Explain the difference between price
and efficiency variances. The price variance is the difference between the budgeted (or standard) price and the actual price paid for each unit of input. The efficiency variance measures the efficiency with which the firm uses inputs to produce outputs. 7. Identify the relation between actual, budgeted, and applied fixed manufacturing costs. Companies frequently
use a predetermined overhead rate to apply
fixed overhead to units produced. The price variance is the difference between the actual fixed overhead and the budgeted fixed overhead. The production volume variance is the difference between the budgeted fixed overhead and the applied fixed overhead.
more responsive and informed decision making,
and (3) it uses worker skills and knowledge.
9. Explain how to compute the mix
variance When companies use multiple inputs to produce output, the efficiency variance can be divided into mix and yield components to demonstrate how much of the variance was 8. Explain why an effective performance caused by a deviation in input mix from the measurement system requires employee standard and how much was caused by the involvement. Worker involvement is important over- or underuse of inputs, holding the mix for three reasons: (1) It increases commitment constant. to the organization and its goals, (2) it leads to