>>>>>>>>

ANALYZING AND
REPORTING FINANCIAL
STATEMENTS

A
F
O
S
C
I
T
RIS
E
T
C
A
R
A
M
CH
E
T
S
Y
S
G
IN
T
R
O
P
E
R
GOOD

1. It identifies the variances of actual performance

from the budget according to the factors that
caused them and the organization unit
responsible;
2. It includes an annual forecast;
3. It includes an explanation of:

The reason for variances

The action being taken to correct any unfavorable
variances
The time required for any corrective action to be
effective

VARIAN

S
I
S
Y
L
A
CE AN

An important part of standard cost

accounting is a variance analysis, which
breaks down the variation between actual
cost and standard costs into various
components (volume variation, material
cost variation, labor cost variation, etc.) so
managers can understand why costs were
different from what was planned and take
appropriate action to correct the situation.

s
i
s
y
l
a
n
A
e
c
n
a
i
r
Va
s
s
e
c
o
r
P
Identify
questions

Receive
explanations

Conduct next
periods
operations

Analyze
variances
Begin

Take
corrective
actions

Prepare standard
cost performance
report

or
t
c
a
f
l
a
s
u
a
C
y
b
e
c
n
a
i
r
a
V
.
a

A variance analysis will be meaningful only if

variances are reported separately in terms of the
factors that caused them and the organization
unit responsible (revenue variances from cost variances; and
revenue variances from selling price variances, mix and volume
variances, mix variance, volume variance, & market penetration &
industry volume)

An effective report shows the causes for the

variances and the impact of each of them on
profits

b
e
c
n
a
i
r
Va

r
o
t
c
a
f
l
a
y Caus

Variances are analytical framework used to

conduct variance analysis which
incorporates the ff:

identify key causal factors that affect profits

break down overall profit variances by these key causal factors
try to calculate specific, impact of each causal factor by varying on
that factor while holding all others constant (spin one dial at a
time)
add complexity sequentially, one layer at a time, beginning at basic
level (peel the onion)
stop process when added complexity is not justified by added
useful insights into causal factors

t
s
a
c
e
r
o
F
l
a
u
b. Ann
Budget performance reports should, if
feasible, show a current annual forecast
for two following reasons:
- management needs to know the
significance of the variances;
- management needs an up-to-date
estimate of annual profits for planning
purposes

&
,
n
o
i
t
c
,A
s
n
o
s
a
e
c. R
Timing

If the budget performance report will be

the basis for controlling company
activities, it must know the reason for
significant variances, the action being
taken to correct unfavorable situations,
and the expected timing of each
corrective action.

:
e
c
n
a
i
r
Va
f
o
s
i
s
y
M
Anal
E
T
S
Y
S

T
S
O
C
I R E CT

D
A standard direct cost system is one that
assigns only variable manufacturing costs
to products, and fixed manufacturing costs
are charged as expenses of the current
period.

s
e
c
n
a
i
r
a
V
e
u
n
Reve
Price variance
[actual price standard price * (actual volume)]

Mix and volume variance

[actual volume budgeted volume * (budgeted unit contribution)]

Mix variance
[actual volume of sales (total actual volume of sales * budgeted
proportion) * budgeted unit of contribution)]

Volume variance
[(total actual volume of sales)(budgeted percentage) (budgeted
sales)][budgeted unit contribution]

s
e
c
n
a
i
r
a
V
e
u
n
Reve
Market penetration and industry volume
- separate mix and volume variance into amount caused
by differences in market share and amount caused by
differences in industry volume
o Market share variance
[actual sales industry volume] * budgeted market
penetration * budgeted unit contribution
o Industry volume variance
(actual industry volume budgetary industry volume) *
budgeted market penetration * budgeted unit contribution

s
e
c
n
a
i
r
a
V
t
s
Co
Fixed costs
- variances between actual and budgeted fixed costs can
be obtained simply by subtraction since these costs are
not affected by volume of sales or volume of production

Variable costs
- vary directly and proportionately with volume
- budgeted variable manufacturing costs may be
adjusted to actual volume of production
- volume used to adjust budgeted variable manufacturing
expense is manufacturing volume not sales volume
which was used in finding revenue variances

s
e
c
n
a
i
r
a
v
g
n
i
Report
Summary of variances only
Comparison of actual with budgeted costs

e:
c
n
a
i
r
a
V
f
o
s
i
s
y
l
a
An
Y S TE M

S
T
S
O
C
FULL

Under a full cost system, both the variable and fixed

manufacturing cost are assigned to the product
produced; both costs are included in inventory at
standard cost/unit
Price variance is computed the same with the direct cost
system; mix and volume variance is also the same
except that the standard unit gross profit is substituted
for the standard unit contribution.
Material and labor variances are also the same as in the
direct cost system, only the overhead expense variances
that are different

:
e
c
n
a
i
r
Va
f
o
s
i
s
y
Anal
YSTEM

S
T
S
O
C
FULL

Absorbed cost the amount of material, labor, and

overhead costs absorbed (included) in the cost of the
goods produced. These goods are transferred to
inventory at their full standard cost
Budgeted cost is the unit budgeted cost multiplied by
the units produced.

-spending variance spent more or less than the budgeted

overhead in production
-volume variance produced more or less than the standard
volume(revenue variances/cost variances)

e
c
n
a
i
r
a
V
f
o
e
Us
s
n
o
i
t
a
l
Calcu
Variances can be analyzed in such a way
as to identify the responsible
organizational unit and the causes of the
variance with a precision that is limited
only by the depth with which the original
budget was prepared.
For the management to know the causes
of variances and to take corrective actions
and how long it is going to take

F
O
S
N
O
I
LIMITAT
S
I
S
Y
L
A
N
A
E
C
N
A
VARI
although variances identify where a variance occurs, it doesn't tell
why the variance occurred or what is being done about it
decide whether a variance is significant
as performance reports become more highly aggregated, offsetting
variances might mislead the reader
as variances become more highly aggregated, managers become
more dependent on accompanying explanations
reports show only what has happened, they don't show future
effects of actions manager has taken
variances only measure what you set standards for (doesn't
measure morale)

Annual Profit Budget, 2013

Product A (1,200)
Unit
Sales

Total

Product B (1,200)
Unit

Total

Product C (1,200)
Unit

Total

Total profit budget

Annual

Monthly

P1.00

P1,200

P2.00

P2,400

P3.00

P3,600

P7,200

P600

Material

0.50

600

0.70

840

1.50

1,800

3,240

270

Labor

0.10

120

0.15

180

0.10

120

420

35

Variable overhead

0.20

240

0.25

300

0.20

240

780

65

0.80

960

1.10

1,320

1.80

2160

4,440

370

P0.20

240

0.90

1,080

1.20

1440

2,760

230

Standard Variable Cost

Total variable cost

Contribution
Fixed costs:
Fixed overhead

300

300

300

900

75

Selling expense

200

200

200

600

50

100

100

100

300

25

600

600

600

1,800

150

P(360)

P480

P840

P960

P80

Administrative
expense
Total fixed costs
Profit before taxes

013
2
,
y
r
a
u
n
r Ja
o
f
s
e
l
a
S
Actual
Product

Unit sales

Selling price

Peso sales

100

P0.90

P90

200

2.05

410

150

2.50

375

Total

450

P875

e
c
n
a
i
r
a
V
e
c
i
r
P
)
Sales
m
e
t
s
y
S
t
s
o
C
t
c
e
r
i
D
(
Product
A

Actual volume (units)

100

200

150

Actual price

P.90

P2.05

P2.50

Budget price

1.00

2.00

3.00

Actual over/(under) budget

(.10)

0.05

(0.50)

Favorable/(unfavorable) price variance

(10)

10

(75)

Total

(75)

e
c
n
a
i
r
a
ev
m
u
l
o
v
)
m
e
Mix and
t
s
y
S
t
s
o
C
t
c
(Dire
(1)

(2)

(3)

(4)

(5)

(6)

Product

Actual
volume

Budgeted
volume

Difference
(2) (3)

Contribut
ion

Variance
(4)x(5)

100

100

200

100

100

0.90

90

150

100

50

1.20

60

Total

450

300

P150

e
c
n
a
i
r
Mix va
)
m
e
t
s
y
S
t
s
o
C
(Direct
(1)

(2)

(3)

(4)

(5)

(6)

Product

Budgeted
proportion

Budgeted
mix at
actual
volume

Actual
sales

Difference
(3)-(4)

Unit
contributio
n

Variance

1/3

150

100

(50)

P.20

(10)

1/3

150

200

60

.90

45

1/3

150

150

450

450

Total

___
35

e
c
n
a
i
r
a
v
e
m
u
l
Vo
)
m
e
t
s
y
S
t
s
o
C
(Direct
(1)

(2)

(3)

(4)

(5)

(6)

Product

Budgeted
mix at
actual
volume

Budgeted
volume

Difference
(2)-(3)

Unit
contributio
n

Volume
Variance

150

100

50

P.20

P10

150

100

50

.90

45

150

100

50

1.20

60

Total

450

300

150

115

ce
n
a
i
r
a
v
Revenue uct
by prod
)
m
e
t
s
y
S
ost
C
t
c
e
r
i
(D
Product
A
Price variance

Total

P(10)

P10

P(75)

P(75)

(10)

45

35

Volume variance

10

45

60

115

Total

10

100

(15)

75

Mix variance

try
s
u
d
n
i
d
an
n
o
i
t
a
r
t
ene
p
e)
t
m
e
k
u
l
r
o
a
v
M
s
ale
S
(
e
m
u
l
m)
vo
e
t
s
y
S
t
os
C
t
c
e
r
i
D
(
Product
A

Total

Estimated industry volume (units):

Annual
Monthly
Budgeted market penetration

10,000

6,000

20,000 36,000

833

500

1,667

3,000

12%

20%

6%

10%

1,200

1,200

1,200

3,600

100

100

100

300

Budgeted volume (units):

Annual
Monthly

ry
t
s
u
d
n
i
and
n
o
i
t
a
r
t
ene
)
p
s
t
e
e
l
k
a
r
s
a
l
M
a
ctu
A
(
e
m
u
l
)
m
vo
e
t
s
y
S
ost
C
t
c
e
r
i
(D
Product
A
Industry volume
Actual sales
Market penetration

Total

1,000

1,000

1,000

3,000

100

200

150

450

10%

20%

15%

15%

e
c
n
a
i
r
a
v
n
o
i
t
a
r
t
e
en
p
t
)
e
k
m
r
e
a
t
s
M
y
S
t
s
o
C
t
c
e
(Dir
Product
A

Total

(1) Actual sales (units)

100

200

150

450

(2) Budgeted penetration at industry volume

120

200

60

380

(3) Difference (1-2)

(20)

90

70

(4) Unit contribution (budget)

0.20

0.90

1.20

___

(4.00)

108.00

104

(5) Variance due to market penetration

(3 x 4)

ce
n
a
i
r
a
v
e
m
u
l
o
v
)
m
e
t
Industry
s
y
S
t
s
o
C
t
c
e
(Dir
Product
A

Total

1,000

1,000

1,000

3,000

(2) Budgeted industry volume

833

500

1,667

3,000

(3) Difference (1-2)

167

500

(667)

12%

20%

6%

20

100

(40)

(6) Contribution unit

0.20

0.90

1.20

(7) Total (5 x 6)

4.00

90.00

(48.00)

(1) Actual industry volume

(4) Budgeted market penetration

(5) (3 x 4)

P46

es/
c
n
a
i
r
a
v
st
es
c
n
a
i
r
Fixed-co
a
v
nse
e
p
x
E
g
n
turi
c
a
f
m)
u
e
t
n
s
a
y
M
S
t
os
C
t
c
e
r
i
D
(
Actual

Budget

Favorable/
(unfavorable)
variance

Fixed overhead

P75

P75

P-

Selling expense

55

50

(5)

Administrative expense

30

25

(5)

160

150

(10)

Total

Product

Total

Actual

Favorable/
(unfavorable)
variances

P75

P84

P300

P459

P470

(P11)

Labor

15

18

20

53

65

(12)

Overhead (variable)

30

30

40

100

90

10

120

132

360

612

625

(13)

Material

Total

SUMMARY PERFORMANCE REPORT, January 2013

Actual profit

P132

Budgeted profit

80

Division variance

52

Analysis of variance favorable/(unfavorable)

Revenue variances:
Price
Mix

P(75)
35

Volume
Net revenue variances

115
75

Variable-cost variances:
Material

(11)

Labor

(12)

Variable overhead
Net variable cost variances:

10
(13)

Fixed-cost variances:
Selling expense

(5)

Administrative expense

(5)

Net fixed-cost variances

Division variance

(10)
52

PERFORMANCE REPORT (Direct cost system)

Actual
Sales
Standard variable cost of sales

Budget

Actual better/ (worse)

than budget

P875

P950

P(75)

570

570

Material variance

11

(11)

Labor variance

12

(12)

(10)

10

Variable overhead variance

Total variable cost

583

570

(13)

Contribution

292

380

(88)

75

75

217

305

(88)

Selling expense

55

50

(5)

Administrative expense

30

25

(5)

132

230

P(98)

Fixed manufacturing cost

Gross profit

Profit at actual volume and mix

Mix variance

P35

Volume variance

115

Division variance

52

PERFORMANCE REPORT (Full cost system)

Actual

Budget

Actual better/
(worse) than
budget

Sales

P875.00

950.00

P(75.00)

Standard cost of sales

682.5+

682.5+

Spending variances

(13.00)

(13.00)

Volume variance (overhead)

42.5

42.5

Gross profit

222.00

267.50

(45.50)

Selling expense

55.00

50.00

(5.00)

Administrative expense

30.00

25.00

(5.00)

Profit

P137.00

P192.50

(55.50)

Mix variance

35.00

Volume variance (revenue)

77.50

Net variance

P57.00

>>>>>>>>
THE PROFIT BUDGET IN THE
CONTROL PROCESS

s
a
t
e
g
d
Profit bu
m
s
i
n
a
h
c
e
m
l
o
r
t
n
Co

It functions as early warning devices so

management can take appropriate actions
when necessary
The budget system is used to help
management appraise the performance of
the individual manager

E
H
T
F
O
NS
O
I
T
A
T
I
LIM
T
E
G
D
U
B
PROFIT

As a basis for performance appraisal

Profits are affected by so many complex variables
that it is impossible to provide an exact answer to the
question: How much should this profit earn this year?
In arriving at a profit budget, it is necessary to predict
the conditions that will exist during the coming year,
some of w/c are entirely beyond the control of the
profit center manager economic climate and the
competitive situation

g
n
i
t
c
e
f
f
A
Factors
l
a
s
i
a
r
p
p
A
e
c
n
a
m
r
Perfo

The degree of discretion that the divisional

manager can exercise;
The degree to which the critical performance
variables can be influenced by the divisional
manager;
The degree of uncertainty that exists with
respect to the critical performance variables;
The time span of the impact of the managers
decisions.

T
E
G
D
U
B
T
I
F
O
PR
N
O
I
T
A
R
T
S
I
N
I
M
D
A
Tight Control
*The profit goal of a divisional manager is considered to
be a firm commitment against w/c he/she will be
measured and evaluated
Loose Control
*The budget is used essentially as a communication and
planning tool
Modified Administration
*A continuum between entirely tight and entirely loose
control

l
o
r
t
n
o
C
y
ta r
n
e
m
e
l
p
Sup
e
u
q
i
n
h
c
e
T
Organization Arrangements
Appropriate staff offices may be assigned the
responsibility for monitoring divisional activity in their
respective fields
Have a several members of senior executive groups,
each division having one executive from the group
A committee of senior executives, w/o line of authority,
may review divisional activity periodically
Divide the company into groups of divisions, each
headed by a group executive responsible for the
operations of the divisions within groups

l
a
i
c
n
a
n
i
F
c
i
d
o
i
r
Pe
n
o
i
t
a
u
l
a
v
E
1. A time period adequate for fair evaluation
should be established for each profit center
where evaluation took place at the end of this
period;
2. When a manager leaves a division, a terminal
evaluation would normally be made;
3. Whenever top management becomes
concerned about a particular profit center, an
evaluation of performance could be requested;
4. Have a periodic evaluation.

res
u
s
a
e
m
l
ncia
950s)
1
,
y
Non fina
n
a
p
c Com
i
r
t
c
e
l
E
l
(Genera
Management by Objectives
1. It is a formal system in that each manager is required to take certain
prescribed actions and to complete certain written documents
2. The process involves 5 steps:
a. The manager discusses with the subordinate the subordinates
description of his own job;
b. The manager and the subordinate agree to short-term performance
targets;
c. The manager and the subordinate discuss periodically the progress
made toward meeting the targets;
d. The manager and the subordinate agree to a series of checkpoints that
will be used to measure progress;
e. At the end of a defined period (usually one year), the manager
discusses with the subordinate an assessment of the results of the
subordinates efforts.

LYSIS:
CASE ANA
RING
ANUFACTU

BONDSVIL

LE M
COMPANY

PRINCIPAL CHARACTERS:
James Smith Bondsvilles president
William Haywood Bondsvilles controller
Frederick Strong Manager of the Budget Department

PRODUCT LINES:

Cotton textiles
Knitted goods
Artificial fibers
Woolen goods
Artificial leathers

S
E
N
I
L
T
PRODUC
Each line was produced in a separate plant
and was marketed by a separate organization
headed by one divisional manager.
The
corporate staff specifically the Sales staff vice
president and manufacturing vice president
were responsible only for helping the divisions
when needed though they had been operating
managers for several years and consequently,
they exercised considerable direct control over
their functional areas in the division.

E
C
I
F
F
O
S
R
E
L
L
O
R
CONT
Basic accounting records were maintained at the
divisional office
Divisional balance sheet and profit and loss
accounts were submitted to the central office
monthly
The central office prescribes the companys
accounting systems, consolidated all the
accounts, and published a company wide balance
sheet and profit
Each division has its own accounting office
Each plant manager had a cost analyst
The company used a standard cost system to
control material and labor and a flexible budget

N
O
I
T
A
R
A
P
E
R
P
T
E
BUDG
Each divisional manager was responsible for
preparing and submitting a profit budget in
December to cover the succeeding year
Sales department first prepared an estimate of
annual sales to be approved by the divisional
manager, and everyone reporting to the divisional
manager are responsible for preparing the
budgets based on the indicated volume of sales
The plant budget was based on standard costs for
material and direct labor, and the flexible budget
for manufacturing overhead
The budget then will be submitted for the
approval of the approval committee

BU D

S
T
R
O
P
E
GET R

Each month a report was prepared for

each division showing actual profits
compared to budget and will be submitted
to the central staff for review of the
corporate budget department where a
brief analysis of each report indicating
points to be brought to managements
attention was prepared.