In this chapter, we discuss additional variances to illustrate some of the ways the basic variance analysis model can be extended and adapted to specific circumstances. The basic principles are exactly the same as those we discussed in Chapter 16.

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Additional Topics in Variance AnalysisChapter 17Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinProfit Variance AnalysisL.O. 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 - *Profit 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 ULO117 - *Manufacturing Variances Based on 90,000 Units ProducedLO1 Variable manufacturing costs: Actual quantity produced (AP –SP) 90,000 × ($4.121 - $3.800) = $28,890 U Fixed manufacturing costs = $4,500 F17 - *Closing ProductionCost Variance to COGSLO1Cost 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:17 - *Prorating ProductionCost VariancesLO1Cost 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 GoodsSold and $2,710 (1/9 of the variance) is closed to FinishedGoods Inventory. Journal entry to prorate production variance to cost of goods sold and finished goods inventory:17 - *Reconciling Variable Costing and Absorption CostingLO1 Using variable costing, the entire fixed production 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. 10,000 × $2.00 = $20,000$195,500 – $20,000 = $175,50017 - *Standard Costs for MaterialsLO1Standard 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?17 - *Direct Materials Variance:No Materials InventoryLO1(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 U17 - *Direct Materials Variance:Materials InventoryLO1(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 × SQPurchaseComputationsUsageComputations17 - *Materials: Standard Costing SystemLO1Materials 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:17 - *Market Share Variance andIndustry Volume VarianceL.O. 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 company’s proportion of sales in the markets in which the company operates17 - *Sales Activity VariancesL.O. 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 mix17 - *Production Mix and Yield VariancesL.O. 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 inputs17 - *Variance Analysis inNonmanufacturing SettingsL.O. 5 Apply the variance analysis model to nonmanufacturing costs.Output Measures in Service Organizations OrganizationPublic accounting, legal, and consulting firms Professional staff hoursHotel Room-nights, guestsAirline Seat-miles, revenue-milesHospital Patient-days17 - *Variance and StandardsL.O. 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 - *End of Chapter 17Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin