LO 17-1 Explain how to prorate variances to inventories and cost of goods sold.
LO 17-2 Use market share variances to evaluate marketing performance.
LO 17-3 Use sales mix and quantity variances to evaluate marketing performance.
LO 17-4 Evaluate production performance using production mix and yield variances.
LO 17-5 Apply the variance analysis model to nonmanufacturing costs.
LO 17-6 Determine which variances to investigate.

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© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Additional Topics in Variance AnalysisChapter 17Learning ObjectivesLO 17-1 Explain how to prorate variances to inventories and cost of goods sold.LO 17-2 Use market share variances to evaluate marketing performance.LO 17-3 Use sales mix and quantity variances to evaluate marketing performance.LO 17-4 Evaluate production performance using production mix and yield variances.LO 17-5 Apply the variance analysis model to nonmanufacturing costs.LO 17-6 Determine which variances to investigate.Profit Variance AnalysisLO 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. LO 17-1Profit Variance AnalysisSales (units)Sales revenueLess: Variable costs Variable manufacturing costs Variable selling and administrativeContribution marginFixed costs: Fixed manufacturing overhead Fixed selling and administrative costsProfit$28,890 U $28.890 U 4,500 F $24,390 UMfg.Variances(based on90,000 unitsproduced)$ 4,000 F$ 4,000 F 7,680 F$11,680 FMarketingand Admin.VariancesActual 80,000$840,000 332,890 68,000$439,110 195,500 132,320$111,290$40,000 F $40,000 F $40,000 FSalesPriceVariance 80,000$800,000 304,000 72,000$424,000 200,000 140,000$ 84,000FlexibleBudget$200,000 U 76,000 F 18,000 F$106,000 U -0- -0- $106,000 U SalesActivityVariance 100,000$1,000,000 380,000 90,000$ 530,000 200,000 140,000$ 190,000MasterBudgetBayou DivisionProfit Variance Analysis (when units produced do not equal units sold)Total variance from flexiblebudget = $27,290 FTotal variance from master budget = $78,710 ULO 17-1Manufacturing Variances Based on 90,000 Units Produced Variable manufacturing costs: Actual quantity produced (AP –SP) 90,000 × ($4.121 - $3.800) = $28,890 U Fixed manufacturing costs = $4,500 FLO 17-1Closing ProductionCost Variance to COGSCost of Goods Sold 24,390Fixed Overhead Price Variance 4,500 Variable Production Cost Variance 28,890To close production cost variances to Cost of Goods Sold. Journal entry to close production variance to cost of goods sold:LO 17-1Prorating ProductionCost VariancesCost of Goods Sold 21,680Fixed Overhead Price Variance 4,500Finished Goods Inventory 2,710 Variable Production Cost Variance 28,890To close production cost variances to Finished Goods andCost 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. Journal entry to prorate production variance to cost of goods sold and finished goods inventory:LO 17-1Reconciling Variable Costing and Absorption CostingUsing variable costing, the entire fixedproduction cost of $195,500 is expensed. Using standard full absorption costing, a portion of the fixed overhead remains with the 10,000 units in inventory. Standard Full Absorption CostingAllocation to Inventory 10,000 × $2.00 = $20,000Amount to Expense $195,500 – $20,000 = $175,500LO 17-1Standard Costs for MaterialsStandard costs: 4 pounds per frame @ $.055 per pound = $2.20 per frameFrames produced in August 80,000Actual materials purchased and used: 328,000 pounds @ $0.60 per pound = $196,800 In addition, assume instead that 350,000 pounds were purchased in August at $0.60 per pound and 328,000 pounds were used. What are the variances?LO 17-1Direct Materials Variance:No Materials Inventory(1)Actual(2)Actual Inputs atStandard Prices(3)Flexible ProductionBudgetActual materials price(AP = $0.60)× Actual quantity(AQ = 328,000 pounds)of direct materialsStandard materials price(SP = $0.55)× Actual quantity(AQ = 328,000 pounds)of direct materialsStandard materials price(SP = $0.55)× Standard quantity(SQ = 320,000 pounds)of direct materialsallowed for actual outputAP × AQ = $196,800SP × AQ = $180,400SP × SQ = $176,000Total variance= $16,400 + $4,400 = $20,800 UPrice variance$196,800 – $180,400= $16,400 UEfficiency variance$180,400 – $176,000= $4,400 ULO 17-1Direct Materials Variance:Materials Inventory(1)Actual(2)Actual Inputs atStandard Prices(3)Flexible ProductionBudgetActual materials price(AP = $0.60)× Actual quantity(AQ = 350,000 pounds)of direct materialsStandard materials price(SP = $0.55)× Actual quantity(AQ = 350,000 pounds)of direct materialsStandard materials price(SP = $0.55)× Standard quantity(SQ = 320,000 pounds)of direct materialsallowed for actual outputAP × AQ = $210,000SP × AQ = $192,500$0.55 × 320,000pounds allowed = $176,000Efficiency variance:$180,400 – $176,000 = $4,400 UPrice variance:$210,000– $192,500= $17,500 U$0.55 × 328,000pounds used = $180,400SP × SQPurchaseComputationsUsageComputationsLO 17-1Materials: Standard Costing SystemMaterials Inventory 192,500Material Price Variance 17,500 Accounts Payable $210,000To record the purchase of 350,000 pounds of material with an actualprice of $0.60 per pound and a standard price of $0.55 per pound.Journal entry to record purchase of materials:Work-in-Process Inventory 176,000Material Efficiency Variance 4,800 Materials Inventory $180,400To record the use of 328,000 pounds of material with a standard priceof $0.55 per pound. Standard use is 320,000 pounds.Journal entry to record materials used:LO 17-1Market Share Variance andIndustry Volume VarianceLO 17-2 Use market share variances to evaluate marketing performance.Industry Volume Variance Portion of the sales activity variance due to changes in industry volumeMarket Share Variance Portion of the activity variance due to changes in the company’s proportion of sales in the markets in which the company operatesLO 17-2Market Share Variance(500,000 – 400,000) × 25%= 25,000 additional frames(16% – 25%) × 500,000= 45,000 fewer framesDifference betweenactual andbudgeted sales volume= 20,000 fewer framesIndustryvolumeMarketshareLO 17-2Sales Activity VarianceIndustry volume varianceMarket share varianceSales activity variance($10.00 – $4.70) × 25,000 F($10.00 – $4.70) × 45,000 U($10.00 – $4.70) × 20,000 U$132,500 F 238,500 U$106,000 UBayou DivisionSales Activity VarianceAugustLO 17-2Sales Activity VariancesLO 17-3 Use sales mix and quantity variances to evaluate marketing performance.Sales Mix Variance Variance arising from the relative proportion of different products soldSales Quantity Variance Variance occurring in multiproduct companies from the change in volume of sales, independent of any change in sales mixLO 17-3Sales Mix and Sales QuantityCustom ElectronicsSales Mix and Sales Quantity VariancesFebruaryStandard selling priceStandard variable costsStandard contribution margin per unitBudgeted sales quantityBudgeted sales mixBudgeted contribution marginActual sales mixActual sales quantityBudgeted contribution margin at actual quantitiesSales activity variance$ 15.00 8.00$ 7.00 10,000 20%$70,000 23% 9,200 $64,400a$ 5.00 2.00$ 3.00 40,000 80%$120,000 77% 30,800 $ 92,400b 50,000 $190,000 40,000 $156,800 $ 33,200 UcIndustrialStandardTotala $7 per unit × 9,200 units b $3 per unit × 30,800 units c $156,800 – $190,000LO 17-3Sales Mix and Sales QuantitySales Activity VarianceFlexible Budget(SCM × AQ)Master Budget(SCM × SQ)(SCM × ASQ)Mix VarianceQuantity VarianceIndustrial$7 × 9,200= $64,400$7 × (0.2 × 40,000)$56,000$7 × 10,000= $70,000Activity variance = $5,600 U$8,400 F$14,000 UStandard$3 × 30,800= $92,400$3 × (0.8 × 40,000)$96,000$3 × 40,000= $120,000Activity variance = $27,600 U$3,600 U$24,000 UTotal$156,800$152,000= $190,000Activity variance = $33,200 U$4,800 F$38,000 USCM = Standard contribution margin per unit.ASQ = Quantity of units that would have been sold at the standard mix.LO 17-3Production Mix and Yield VariancesLO 17-4 Evaluate production performance using production mix and yield variances.Product Mix Variance Variance that arises from a change in the relative proportion of inputs (a materials or labor mix variance)Production Yield Variance Difference between expected output from a given level of inputs and the actual output obtained from those inputsLO 17-4Production Mix and Yield Variances Jersey Chemicals makes EZ-Foam which requires two chemicals.C-30.D-12.$ 5$150.60.41.0DirectMaterialsStandard Priceper GallonStandard Number ofGallons of Chemical perGallon of Finished ProductThe standard cost per unit of finished product is as follows:C-30: 0.6 gallons @ $ 5 = $3D-12: 0.4 gallons @ $15 = 6 $9LO 17-4Production Mix and Yield VariancesUnits produced 100,000 gallons of finished productMaterials purchased and used: C-30 55,000 gallons @ $ 5.20D-12 49,000 gallons @ $14.00 104,000 gallonsJersey ChemicalsSeptember ProductionLO 17-4Production Mix and Yield VariancesC-30 0.6 × 104,000 = 62,400 gallonsD-12 0.4 × 104,000 = 41,600 gallons 104,000 gallonsJersey ChemicalsSeptember ProductionLO 17-4Production Mix and Yield VariancesEfficiency VarianceActual(AP × AQ)FlexibleProductionBudget(SP × SQ)(SP × AQ)PurchasePriceVarianceYieldVarianceC-30D-12TotalMixVariance$5.20 × 55,000= $286,000$5 × (0.6 × 104,000)$312,000$5 × 60,000= $300,000Efficiency variance = $25,000 F$11,000 U$37,000 F$5 × 55,000= $275,000$12,000 U$14 × 49,000= $686,000$15 × (0.4 × 104,000)$624,000$15 × 40,000= $600,000Efficiency variance = $135,000 U$49,000 F$111,000 U$15 × 49,000= $735,000$24,000 U= $972,000$936,000= $900,000Efficiency variance = $110,000 U$38,000 F$74,000 U= $1,010,000$36,000 U(SP × ASQ)LO 17-4Production Mix and Yield VariancesDecrease in C-30: (55,000 – 62,400) = 7,400 gallons @ $ 5 = $ 37,000 decreaseIncrease in D-12: (49,000 – 41,600) = 7,400 gallons @ $15 = $111,000 increaseNet effect in gallons -0-Net effect in dollars $ 74,000 increaseMaterial C-30: (62,400 – 60,000) = 2,400 gallons @ $ 5 = $12,000 UnfavorableMaterial D-12: (41,600 – 40,000) = 1,600 gallons @ $15 = 24,000 UnfavorableTotal $36,000 UnfavorableLO 17-4Production Mix and Yield VariancesWork-in-process inventory 900,000Material Price Variance: C-30 11,000Material Yield Variance: C-30 12,000Material Mix Variance: D-12 111,000Material Yield Variance: D-12 24,000 Material Price Variance : D-12 49,000 Material Mix Variance: C-30 37,000 Accounts Payable 972,000Journal Entry to record materials purchased and used: To record the purchase and use of 55,000 gallons of C-30, with an actual price of $5.20 per gallon and a standard price of $5.00 per gallon, and 49,000 gallons of D-12, with an actual price of $14 per gallon and a standard price of $15 per gallon. Standard usage to produce 100,000 gallons of EZ-Foam is 60,000 gallons of C-30 and 40,000 gallons of D-12.LO 17-4Variance Analysis inNonmanufacturing SettingsLO 17-5 Apply the variance analysis model to nonmanufacturing costs.Output Measures in Service OrganizationsOrganization Output MeasuresPublic accounting, legal, and consulting firms Professional staff hoursHotel Room-nights, guestsAirline Seat-miles, revenue-milesHospital Patient-daysLO 17-5Variance and StandardsLO 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.LO 17-6Mix Variances Impact: Likely monetary effect from an activity (such as a variance) Controllability: Extent to which an item can be managedLO 17-6Factors in Deciding How Many Variances to CalculateEnd of Chapter 17