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Variance 1

Variance-1

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nikhil tiwari
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0% found this document useful (0 votes)
14 views6 pages

Variance 1

Variance-1

Uploaded by

nikhil tiwari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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I.

Introduction

Organizations strive to meet stakeholder needs through tactical objectives and strategic goals.

Budgeting and variance analysis are crucial for production control and cost management.

SingaDeli Bakery in Singapore illustrates the use of budgets and variances in a real-world context.

The case highlights the importance of aligning employee empowerment with accountability.

II. SingaDeli Bakery Background

SingaDeli produces pastries and festive items like moon cakes.

During the Mid-Autumn Festival, SingaDeli hired chefs specifically for moon cake production.

Chefs were empowered to order raw materials but lacked accountability for quality.

Incentive payments based on favorable price variance led to the purchase of cheaper, lower-quality
materials.

A significant percentage (20%) of moon cakes were of poor quality, impacting sales.

III. Static Budgets and Variances

A. Static Budgets

Based on a planned level of output at the start of the budget period.

Serves as a point of reference for comparisons.

B. Variances

The difference between actual results and expected (budgeted) performance.

Assist managers in implementing strategies by enabling management by exception.

Highlight areas that deviate most from expectations, allowing managers to focus efforts.

Used in performance evaluation and to motivate managers.

Can suggest changes in strategy if large negative variances occur.

C. Webb Company Example

Manufactures and sells jackets.

Budgeted variable cost per jacket: $88.

Budgeted fixed costs: $276,000.

Budgeted selling price: $120 per jacket.

Budgeted production and sales: 12,000 jackets.

Actual production and sales: 10,000 jackets.

Static-Budget Variance: The difference between the actual result and the corresponding budgeted
amount in the static budget.
Favorable (F): Increases operating income relative to the budgeted amount.

Unfavorable (U): Decreases operating income relative to the budgeted amount.

D. Static-Budget Variance Formula

Static-budget variance = Actual amount - Static budget amount

IV. Flexible Budgets

A. Definition

Calculates budgeted revenues and costs based on the actual output in the budget period.

A hypothetical budget prepared after the actual output is known.

B. Key Considerations

Budgeted selling price remains the same as in the static budget.

Budgeted unit variable cost remains the same.

Budgeted total fixed costs remain the same (within the relevant range).

C. Steps to Prepare a Flexible Budget

1. Identify the Actual Quantity of Output: Determine the actual number of units produced and sold.

2. Calculate Flexible Budget for Revenues: Multiply the budgeted selling price per unit by the actual
quantity of output.

3. Calculate Flexible Budget for Costs:

Multiply the budgeted variable cost per unit by the actual quantity of output.

Include the budgeted fixed costs.

V. Flexible-Budget Variances and Sales-Volume Variances

A. Sales-Volume Variance

The difference between a flexible-budget amount and the corresponding static-budget amount.

Arises solely from the difference between the actual quantity sold and the quantity expected to be
sold in the static budget.

B. Flexible-Budget Variance

The difference between an actual result and the corresponding flexible-budget amount.

C. Sales-Volume Variance Formula

Sales-volume variance = Flexible-budget amount - Static-budget amount

D. Flexible-Budget Variance Formula

Flexible-budget variance = Actual result - Flexible-budget amount

E. Reasons for Unfavorable Sales-Volume Variance

1. Decreased overall demand.


2. Increased competition.

3. Failure to adapt to customer preferences.

4. Poorly set sales targets.

5. Quality problems.

VI. Flexible-Budget Variances (Detailed)

A better measure of operating performance than static-budget variances.

Compare actual revenues and costs to budgeted revenues and costs for the same level of output.

A. Selling Price Variance

Arises solely from the difference between the actual selling price and the budgeted selling price.

B. Selling Price Variance Formula

Selling-price variance = (Actual selling price - Budgeted selling price) Actual units sold

C. Variable Cost Variance

Unfavorable if:

Greater quantities of inputs were used than budgeted.

Higher prices per unit were incurred for the inputs than budgeted.

D. Fixed Cost Variance

Reflects unexpected increases in the cost of fixed indirect resources.

VII. Price Variances and Efficiency Variances for Direct-Cost Inputs

Subdivide the flexible-budget variance for direct-cost inputs into two more-detailed variances.

1. Price Variance: Reflects the difference between an actual input price and a budgeted input price.

2. Efficiency Variance: Reflects the difference between an actual input quantity and a budgeted
input quantity.

A. Obtaining Budgeted Input Prices and Quantities

1. Past Data: Analyze historical data for trends.

2. Data from Similar Companies: Use competitive benchmarks.

3. Standards Developed by the Company: Carefully determined prices, costs, or quantities used as
benchmarks.

B. Standard Cost

A carefully determined cost of a unit of output.

Determined by the standard quantity of the input required for one unit of output and the standard
price per input unit.
C. Price Variance Formula

Price variance = (Actual price of input - Budgeted price of input) Actual quantity of input

D. Efficiency Variance Formula

Efficiency variance = (Actual quantity of input used - Budgeted quantity of input allowed for actual
output) Budgeted price of input

E. Possible Causes for Price Variances

Skillful negotiation by the purchasing manager.

Change to a lower-price supplier.

Ordering larger quantities to obtain discounts.

Unexpected decrease in direct material prices.

Poorly set budgeted purchase prices.

Acceptance of unfavorable terms on factors other than price.

F. Possible Causes for Efficiency Variances

Hiring underskilled workers.

Inefficient work scheduling.

Poor machine maintenance.

Poor quality of materials.

Poorly set time standards.

VIII. Journal Entries Using Standard Costs

Unfavorable variances are debits (decrease operating income).

Favorable variances are credits (increase operating income).

Variances are isolated at the earliest possible time.

At the end of the fiscal year, variances are written off to cost of goods sold (if immaterial) or
prorated among inventory accounts (if material).

IX. Implementing Standard Costing

Modern information technology promotes the increased use of standard costing systems.

Companies use ERP systems to track standard, average, and actual costs.

X. Management Uses of Variances

Evaluate performance.

Trigger organizational learning.

Make continuous improvements.

Serve as an early warning system.


A. Multiple Causes of Variances

Causes of variances in one part of the value chain can result from decisions made in another part.

Managers must understand the root causes of variances.

B. When to Investigate Variances

Based on subjective judgments or rules of thumb.

Consider the cost-benefit of investigating variances.

C. Performance Measurement Using Variances

Effectiveness: The degree to which a predetermined objective is met.

Efficiency: The relative amount of inputs used to achieve a given output level.

D. Organization Learning

The goal of variance analysis is to understand why variances arise, to learn, and to improve future
performance.

Variance analysis should not be used to "play the blame game."

E. Continuous Improvement

Create a virtuous cycle by repeatedly identifying causes of variances, initiating corrective actions,
and evaluating results.

Use kaizen budgeting to target reductions in budgeted costs.

F. Financial and Nonfinancial Performance Measures

Use a combination of financial and nonfinancial measures.

Nonfinancial measures are often used for control purposes.

XI. Benchmarking and Variance Analysis

Benchmarking: Comparing performance levels against the best levels of performance in competing
companies.

Used to develop standards.

Helps identify areas for improvement.

XII. Key Terms Glossary

Benchmarking: The continuous process of comparing the levels of performance in producing


products and services and executing activities against the best levels of performance in competing
companies or in companies having similar processes.

Budgeted Performance: The expected performance, which is a point of reference for making
comparisons.

Effectiveness: The degree to which a predetermined objective or target is met.

Efficiency: The relative amount of inputs used to achieve a given output level.
Efficiency Variance: The difference between actual input quantity used and budgeted input
quantity allowed for actual output, multiplied by budgeted price.

Favorable Variance: A variance that, when considered in isolation, increases operating income
relative to the budgeted amount.

Flexible Budget: A budget that calculates budgeted revenues and budgeted costs based on the
actual output in the budget period.

Flexible-Budget Variance: The difference between an actual result and the corresponding flexible-
budget amount.

Input-Price Variance: Same as Price Variance.

Management by Exception: The practice of focusing management attention on areas that are not
operating as expected and devoting less time to areas operating as expected.

Market-Share Variance: The difference in budgeted contribution margin for actual market size in
units caused solely by actual market share being different from budgeted market share.

Market-Size Variance: The difference in budgeted contribution margin at budgeted market share
caused solely by actual market size in units being different from budgeted market size in units.

Price Variance: The difference between actual price and budgeted price, multiplied by actual input
quantity.

Rate Variance: Same as Input-Price Variance.

Sales-Volume Variance: The difference between a flexible-budget amount and the corresponding
static-budget amount.

Selling-Price Variance: Arises solely from the difference between the actual selling price and the
budgeted selling price.

Standard: A carefully determined price, cost, or quantity that is used as a benchmark for judging
performance.

Standard Cost: A carefully determined cost of a unit of output.

XIII. Appendix: Market-Share and Market-Size Variances (Advanced Analysis)

A. Market-Share Variance Formula

Market-share variance = (Actual market share - Budgeted market share) Actual market size
Budgeted contribution margin per unit

B. Market-Size Variance Formula

Market-size variance = (Actual market size - Budgeted market size) Budgeted market share
Budgeted contribution margin per unit

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