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Additional Topics in
Variance Analysis
Chapter 17

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin

Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

LO
17-1

Profit Variance Analysis

LO 17-1

Explain how to prorate variances to

inventories and cost of goods sold.

Most companies close variances to Cost of Goods Sold.

Other companies prorate the variances.

17-3

LO
17-1

Profit Variance Analysis

Bayou Division
Profit Variance Analysis (when units produced do not equal units sold)

Actual
Sales (units)
Sales revenue
Less: Variable costs
Variable manufacturing costs
Variable selling and administrative
Contribution margin
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative costs
Profit

Mfg.
Variances
(based on
Marketing
90,000 units and Admin.
produced)
Variances

80,000
$840,000
332,890
68,000
$439,110

$28,890 U

195,500
132,320
$111,290

4,500 F

$28.890 U

$24,390 U

$ 4,000 F
$ 4,000 F
7,680 F
$11,680 F

Sales
Price
Variance

Flexible
Budget

Sales
Activity
Variance

Master
Budget

$40,000 F

80,000
$800,000

$200,000 U

100,000
$1,000,000

$40,000 F

304,000
72,000
$424,000

76,000 F
18,000 F
$106,000 U

380,000
90,000
$ 530,000

$40,000 F

200,000
140,000
$ 84,000

-0-0$106,000 U

200,000
140,000
$ 190,000

Total variance from flexible

budget = $27,290 F
Total variance from master budget = $78,710 U

17-4

LO
17-1

Closing Production
Cost Variance to COGS
Journal entry to close production
variance to cost of goods sold:
Cost of Goods Sold
24,390
Fixed Overhead Price Variance
4,500
Variable Production Cost Variance

28,890

To close production cost variances to Cost of Goods Sold.

17-5

LO
17-1

Prorating Production
Cost Variances
Journal entry to prorate production variance to
cost of goods sold and finished goods inventory:
Cost of Goods Sold
21,680
Fixed Overhead Price Variance
4,500
Finished Goods Inventory
2,710
Variable Production Cost Variance

28,890

To close production cost variances to Finished Goods and

Cost of Goods Sold. $21,680 (8/9 of the variance) is
closed to Cost of Goods Sold and $2,710 (1/9 of the
variance) is closed to Finished Goods Inventory.
17-6

LO
17-1

Direct Materials Variance:

No Materials Inventory
(1)

Actual

(2)
Actual Inputs at
Standard Prices

(3)
Flexible Production
Budget

Actual materials price

(AP = $0.60)
Actual quantity
(AQ = 328,000 pounds)
of direct materials

Standard materials price

(SP = $0.55)
Actual quantity
(AQ = 328,000 pounds)
of direct materials

Standard materials price

(SP = $0.55)
Standard quantity
(SQ = 320,000 pounds)
of direct materials
allowed for actual output

AP AQ = $196,800

SP AQ = $180,400

SP SQ = $176,000

Price variance
$196,800 $180,400
= $16,400 U

Efficiency variance
$180,400 $176,000
= $4,400 U

Total variance
= $16,400 + $4,400 = $20,800 U

17-7

LO
17-1

Direct Materials Variance:

Materials Inventory
(1)

Actual

(2)
Actual Inputs at
Standard Prices

(3)
Flexible Production
Budget

Actual materials price

(AP = $0.60)
Actual quantity
(AQ = 350,000 pounds)
of direct materials

Standard materials price

(SP = $0.55)
Actual quantity
(AQ = 350,000 pounds)
of direct materials

AP AQ = $210,000

SP AQ = $192,500

Standard materials price

(SP = $0.55)
Standard quantity
(SQ = 320,000 pounds)
of direct materials
allowed for actual output

Purchase
Computations
Usage
Computations

Price variance:
$210,000 $192,500
= $17,500 U
$0.55 328,000
pounds used = $180,400

SP SQ
$0.55 320,000
pounds allowed = $176,000

Efficiency variance:
$180,400 $176,000 = $4,400 U
17-8

LO
17-1

Materials: Standard Costing

System
Journal entry to record purchase of materials:

Materials Inventory
Material Price Variance
Accounts Payable

192,500
17,500
$210,000

To record the purchase of 350,000 pounds of material with an actual

price of $0.60 per pound and a standard price of $0.55 per pound.

Journal entry to record materials used:

Work-in-Process Inventory
Material Efficiency Variance
Materials Inventory

176,000
4,800
$180,400

To record the use of 328,000 pounds of material with a standard price

of $0.55 per pound. Standard use is 320,000 pounds.
17-9

LO
17-2

Market Share Variance and

Industry Volume Variance
LO 17-2

Use market share variances to

evaluate marketing performance.

Industry Volume Variance

Portion of the sales activity variance due to
changes in industry volume
Market Share Variance
Portion of the activity variance due to changes
in the companys proportion of sales in the
markets in which the company operates

17-10

LO
17-2

Market Share Variance

Industry
volume

(500,000 400,000) 25%

= 25,000 additional frames

Difference between
actual and
budgeted sales volume
= 20,000 fewer frames
Market
share

(16% 25%) 500,000

= 45,000 fewer frames

17-11

LO
17-3

Sales Activity Variances

LO 17-3

Use sales mix and quantity variances

to evaluate marketing performance.

Sales Mix Variance

Variance arising from the relative proportion of
different products sold
Sales Quantity Variance
Variance occurring in multiproduct companies from
the change in volume of sales, independent of any
change in sales mix

17-12

LO
17-4

Production Mix and Yield

Variances
LO 17-4

Evaluate production performance using

production mix and yield variances.

Product Mix Variance

Variance that arises from a change in the relative
proportion of inputs (a materials or labor mix variance)
Production Yield Variance
Difference between expected output from a given level
of inputs and the actual outputobtained from those inputs

17-13

LO
17-5

Variance Analysis in
Nonmanufacturing Settings
LO 17-5

Apply the variance analysis model to

nonmanufacturing costs.

Output Measures in Service Organizations

Organization
Public accounting, legal, and consulting firms
Hotel
Airline
Hospital

Output Measures
Professional staff hours
Room-nights, guests
Seat-miles, revenue-miles
Patient-days

17-14

LO
17-6

Variance and Standards

LO 17-6

Determine which variances to investigate.

Management by exception:
Approach to management requiring that reports
emphasize the deviation from an accepted base
point, such as a standard, a budget, an industry
average, or a prior period experience.

17-15

End of Chapter 17

17-16