Extended Variance

Analysis

Overview

Variance Analysis Review

Variance Analysis: Role in MA
Variance Analysis Applied
Variance Analysis Framework/Formula
Development
Extended Variance Analysis

Sales volume variance for multiple products

Input quantity variance for multiple inputs

Variance Analysis
1. Operating income variance
2. Sales volume variance
3. Flexible budget variance
4. Selling price and cost variances
5. Price/Rate/Spending and
quantity/efficiency variances

Variance Analysis Review

Level 1

Level 2

Level 3

Level 4

Operating income variance

Sales volume
variance

Flexible budget
variance

Selling price
variance

Cost
variance
Price
Variance

(rate/spending)

Quantity
Variance
(efficiency)

Cost Variances Defined

1. Operating income variance
2. Sales volume variance
3. Flexible budget variance
4. Selling price and cost variances
5. Price/Rate/Spending and
quantity/efficiency variances

Variances Defined
1. Operating income variance: the total
difference between actual and budgeted operating
income.

2. Sales volume variance: the total difference

between actual and budgeted sales

3. Flexible budget variance: the difference in

budgeted and actual sales and costs adjusted for
volume.

4. Selling price and cost variances

to follow)

5. Price/Rate/Spending and

(see slides

Sales Price and Volume

Variances Defined
Sales price variance: a measure of
the financial impact of the difference
between the actual price obtained and
the budgeted price.
Sales volume variance: the financial
impact due to the difference between
actual volume sold and that budgeted

Sales Mix and Yield

Variances Defined
Sales mix variance: impact of the difference
between budgeted and actual sales mix %
calculated on a PER PRODUCT basis, taking
into consideration the difference between that
products budgeted CM and the average
budgeted CM for ALL products.
Sales quantity variance: isolates the dollar
impact using budgeted average CM of the
difference between actual and budgeted
volume.

Sales Market Size and

Share Variances
Defined
Market size
variance: measures the impact
of changes in the size of the market.
Market share variance: measures the
impact of changes in a companys share of
the market

Cost Price and Quantity

Variances Defined
Price (rate/spending as with
labour/overhead) variance: measure of the
difference between price actually paid and
budgeted or standard price due to price
increases, new supplier, better quality, or
standard could be wrong.
Quantity (or efficiency as with labour &
overhead) variance: difference between
quantity of materials/labour used than was
budgeted for that level of production; can be
caused by poor workmanship, machine

Cost Mix and Yield

Variances Defined
Mix variance: a measure of the financial impact
of the actual mix of inputs used versus the
budgeted mix given the total quantity of actual
inputs used.
Yield variance: financial impact of the actual
outputs achieved given the actual sales mix
realized.

Variance Analysis
Role in Management Control
1. Planning

Budgets quantify targets to be achieved by management

both quantity and dollars
Timely variance analysis helps to identify problems with
assumptions or estimates on a timely basis so adjustments
can be made

2. Decision Making

Variances between planned and actual performance might

lead to adjusting business goals, objectives or strategies

3. Monitoring & Control

Actual results are analyzed and corrective actions are taken

Variance analysis plays a vital role in monitoring and
controlling cost and efficiency of routine processes as well as

Variance Analysis
Role in Management Control
3. Monitoring & Control (continued)
Facilitates management by exception; highlight deviations
from standards
Discloses relationships between different variances.
If not done regularly, issues may cause delay in management
action.

4. Accountability
Ability to assign responsibility and accountability
Responsibility accounting achieved by appraising the
performance of business units (e.g., manager, department,
division, etc.)
Helps to identify factors not within the responsible managers
control or influence

The Role of the

Management Accountant in
Variance Analysis
Frank, a financial analyst, not long out of
university, is hired by the decision support
department of a large courier company Carry-It
(CI).

He is asked by his manager, Ida, to prepare the

monthly variance analysis on surcharge revenue
(revenue charged above normal fees). Surcharge
revenue is revenue charged above normal fees to
cover increasing costs such as gas.

Analyst

Frank performs the computations correctly

He breaks down the variances between

rate and volume

Points out that the results are good news

and surcharge revenue is up compared to
last year

Manager

Ida, studies the monthly variances prepared

by Frank and notices:

Although the annual surcharge revenue is up,

volume has declined

She believes that the drop in volume is a sign

that CI has overpriced the surcharge compared
to competitors.

She advises her Director, Edward of her concerns

Director

Edward, does not want to jump to

conclusions

He requests that the variance analysis be

further broken down

by industry,
market segment and
Customer

Director

Edward saw something alarming in the

analysis by customer:

Overall sales volume from National accounts

was UP.

Overall sales volume from smaller accounts was

significantly DOWN.

He reported the issue to Patricia, his VP.

Vice President-Decision
Support

Patricia brought the issue up at an Leadership

Team meeting and discovered that VP of Sales
explained that they decided to only charge
surcharge revenue on accounts with total
revenue less than $500K.

This explained why National Sales volume was

up these large accounts were not paying the
surcharge.

But why was surcharge revenue up overall?

Vice President-Decision
Support
Patricia further discovered:
The surcharge had been implemented by the VP
of Sales half way through the previous fiscal year
without involving or notifying the leadership team
These results represented the first full year of
collecting this surcharge
This explained why surcharge revenue was up
compared to the prior year, but would begin to
decline going forward as we lose customers to
the competition.

Vice President-Decision
Support

Patricia realized that the high margin

small account business was being lost
due to the surcharge and proposed
the following alternatives:

Charge small accounts less surcharge

Charge ALL National accounts the full
surcharge
A combination (reduce the surcharge and
apply to all)

Leadership Team

Before making a decision, the leadership team

requested a competitive analysis from the marketing
department.
Marketing indicated the surcharge was double what
their competitors were charging
Armed with this information and risk of lost business,
the leadership team decided to immediately reduce
the surcharge to market levels.
The VP sales was told that he could no longer discount
the surcharge for National accounts and would phase
the charge back in during contract renewals.

Leadership Team

The Leadership team did further research and

discovered that this was not the only
example of pricing segmented by customers

They learned there was no mechanism for

identifying pricing differentials

As well, salespeople were compensated

based on revenue thus focused on that rather
than profits

CEO

After going through this experience, and

feeling they had dodged a bullet
The CEO realized that the compensation
was not aligned with the strategic direction
of the company and that the management
control system needed to be revisited.
He arranged an off-site meeting for the CFO
and Senior Vice Presidents to discuss the
issue of incentive, pricing policies, decision
making authority and strategic growth.

Variance Analysis Applied

Example using Material Price
Variance
Favourable variances:
An overall decrease in the market price level
Purchase of materials of lower quality than the
standard (this will be reflected in adverse material
usage variance)
Better price negotiation by procurement staff
Implementation of better procurement practices
(e.g., invitation of price quotations from multiple
suppliers)
Purchase discounts on larger orders

Variance Analysis Applied

Example using Material Price
Variance
Unfavourable variances:
An overall increase in the market price of materials
Materials purchased are of higher quality than the
standard (this will be reflected in favourable material
usage variance)
Increase in bargaining power of suppliers
Loss of purchase discounts due to smaller order sizes
Inefficient buying by the procurement staff
Insufficient lead time provided by production
management (premium for rush order)

Variance Analysis
Framework

Isolate one factor at a time while

holding other factors constant.
Once factor from actual
performance has been isolated, use
budgeted (or standard) data for
further variance analysis.

Variable Cost Variance

For any variable cost,
cost
cost variance

=
=

input price x input quantity

input
input
price
+ quantity
variance
variance

Input Price Variance

Input Price Variance: (A$ - S$) x A#
=

Actua
Standar
- d input
l
input
price
price

Actual
input
quantity
used

Input Quantity Variance

Input Quantity Variance: S$ x (A# S #)
Actual
Standar
Standar
input - d input
X
= d input
quantit
quantity
price
y used
allowed

Application of Framework
For variable cost variance analysis,
Let SP = standard input price
SQ = standard input quantity allowed
AP = actual input price
AQ = actual input quantity used
cost variance = AP x AQ SP x SQ

Variance Analysis Review

Level 1

Level 2

Level 3

Level 4

Operating income variance

Sales volume
variance

Flexible budget
variance

Selling price
variance

Cost
variance
Price
Variance

(rate/spending)

Quantity
Variance
(efficiency)

Price & Quantity Variances

Actual

Input
price

Price
varianc
e

Quantit
y
Standard
varianc
e

AP

SP

Input
AQ
quantit
y

SQ

Cost

SP x SQ

AP x
AQ

Price & Quantity Variances

Actual

Input
price

Price
varianc
e

Quantit
y
Standard
varianc
e

AP

SP

SP

Input
AQ
quantit
y

AQ

SQ

AP x
SP x
AQ(AP SP) x AQ AQ
Difference in price

SP x SQ
SP x (AQ SQ)
Difference in

Extended Variance
Analysis
Multiple products (e.g., car models)

1.

2.

Sales volume variance

Multiple inputs substitutable

(e.g., ingredients in fruit salad or
tomato varieties in ketchup)

Input quantity variance

Sales Volume Variance

Sales volume variance
Budgeted
= CM per
X
unit

Actu
Budgete
al
- d sales
sales
units
units

Multiple Products
Sale Volume Variance Product i
Sales volume variancei

Sales mix variancei

Sales quantity variancei

Total sales quantity variance

Market share variance Market size variance

Sales Volume Variance

For companies with multiple products
Let BCMi = budgeted contribution margin per unit
for
product i
BTQTY = budgeted total sales quantity (units)
BMIXi = budgeted sales mix for product i
ATQTY = actual total sales quantity (units)
AMIXi = actual sales mix for product i

Sales Mix & Quantity

Variances
Flexible
Budget

Mix
Variance

Quantity Master
Variance Budget

BCMi

BCMi

AMIXi

BMIXi

ATQTY

BTQTY

Sales Mix & Quantity

Variances
Flexible
Budget

Mix
Variance

Quantity Master
Variance Budget

BCMi

BCMi

BCMi

AMIXi

BMIXi

BMIXi

ATQTY

ATQTY

BTQTY

BCMi x (AMIXi - BMIXi) x ATQTY BCMi x BMIXi x (ATQTY BTQTY

Sales Mix: Difference in mix

Total Sales Quantity: Difference in

Total Sales Quantity

Variance
Total Sales Quantity Variance
= {BCM x BMIXi x (ATQTY BTQTY)}
= {BCM x BMIXi} x (ATQTY BTQTY)

Total Sales Quantity

Variance
Total Sales Quantity

Refer to in-class
Variance example for
clarification

= {BCMi x BMIXi x (ATQTY BTQTY)}

= {BCMi x BMIXi} x (ATQTY BTQTY)
Weighted
= average
budgeted
CM

Actual
Budgete
total
- d total
sales
sales
quantity
quantity

Market Share & Size

Variances
Let WABCM = weighted average
budgeted
contribution
margin
BSIZE = budgeted market size
BSH = budgeted market share
ASIZE = actual market size
ASH = actual market share

Market Share & Size

Variances
Market Share
Variance

Market Size
Variance

WABCM

WABCM

ASH

BSH

ASIZE

BSIZE

Market Share & Size

Variances
Market Share
Variance

Market Size
Variance

WABCM

WABC
M

WABCM

ASH

BSH

BSH

ASIZE

ASIZE

BSIZE

WABCM x (ASH - BSH) x ASIZE

WABCM x BSH x (ASIZE BSIZE)

Multiple Inputs (Substitutable)-Input j

Input Quantity (Efficiency)
Variance
Variable cost variancej

Input price variancej

Input quantity (efficiency)

variancej

Input mix variancej

Input yield variancej

Input Quantity Variance

For products with multiple inputs that are
substitutable
Let SPj = standard input price for input j
BTQTY = budgeted total quantity of all inputs
BMIXj = budgeted mix for input j
APj = actual input price for input j
ATQTY = actual total quantity of all inputs
AMIXj = actual mix of input j

Input Mix & Yield Variance

Actual

Price
Varianc
e

Mix
Varianc
e

Yield
Varianc
e

Flexible
Budget

APj

SPj

AMIXj

BMIXj

ATQTY

BTQTY

Input Price Variance

Actual

Price
Varianc
e

Mix
Varianc
e

Yield
Varianc
e

Flexible
Budget

APj

SPj

AMIXj

AMIXj

BMIXj

ATQTY

ATQTY

BTQTY

(APj

SPj) x AMIXj x ATQTY

SPj

Input Price Variance

Actual

Price
Varianc
e

Mix
Varianc
e

Yield
Varianc
e

Flexible
Budget

APj

SPj

AMIXj

AMIXj

BMIXj

ATQTY

ATQTY

BTQTY

(APj

SPj) x AMIXj x ATQTY

SPj

SPj x (AMIXj x ATQTY

- BMIXj x BTQTY

Input Mix & Yield Variance

Actual

Price
Varianc
e

Mix
Varianc
e

Yield
Varianc
e

Flexible
Budget

APj

SPj

SPj

AMIXj

AMIXj

BMIXj

BMIXj

ATQTY

ATQTY

ATQTY

BTQTY

SPj x (AMIXj - BMIXj) x ATQTY

SPj

SPj x BMIXj x (ATQTY BTQTY)

Class Sales Variance

Example-Toyota

Class Cost Variance

Example-LARS