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Sales Variances ( one product)

Consider the following :


actual Flexible budget Static Budget
Units sold 650 ? 600
Sales Revenue JD 3575 ? JD 2100
Variable cost JD 2575 ? JD 1200
Fixed costs JD 700 ? JD 600
Required:
• Complete the missing numbers.
• Compute the following variances using sales revenue, contribution
margin and net profit :
• Static budget variance .
• Flexible budget variance ( or standard variance) .
• Volume variance.
Determine sales variances :
• Static budget variance = (Actual sales Quantity × Actual price ) -
(Budgeted sales Quantity × standard price ). This variance is
composed of Sales volume variance and Flexible-budget variance,
(sales price variance).
• Sales Volume variance = (Actual sales Quantity - Budgeted sales
Quantity) × standard price .
• Flexible-budget variance = (Actual sales price - Budgeted sales price)
× Actual sales Quantity . The summation of sales volume variance
and Flexible-budget variance should equal static budget variance.
Rules :

• Variances are the differences between actual revenues (or contribution


margin or net profit) and the total standard revenues (or contribution
margin or net profit) .
• The variance is expressed in dinars not on a per unit bases.
• When actual revenues (or contribution margin or net profit) exceed
standard revenues (or contribution margin or net profit) the variance is
favorable .
• To interpret a variance, you must analyze its components.
Example :

Actual Budget
Units 42000 40000
Sales price 5 5.5
Variable costs 2 3
Fixed costs 7000 7200
Required: using sales revenue, contribution margin and net profit compute the following :
• Static budget variance .
• Flexible budget variance ( or standard variance) .
• Volume variance.
Sales Variances ( more than one product)
• Consider the following :
Actual data Budgeted data
Product (A) Product (B) Product (A) Product (B)
Units 756 144 712 178
Sales price 12.5 14 13 13.5
Variable costs 6 7 5 7.5
Market-size 4000 3560

• Using contribution margin compute : Static budget variance and its


components.
• Static budget variance = (Flexible-budget variance and Sales Volume
variance. The Sales Volume variance is composed of sales mix variance
and sales quantity variance.
• Sales mix variance = (Actual sales quantity from all products ×(Actual
percentage - Budgeted percentage) × Standard price .
• Sales quantity variance = (Actual sales quantity from all products -
Budgeted sales quantity from all products ) ×Budgeted percentage ×
Standard price . The Sales quantity variance is composed of Market-share
variance and Market-size variance .
• Market-share variance =Actual Market-size × (Actual market percentage
– Budgeted market percentage)× weighted average budgeted price.
• Market-size variance = (Actual Market-size - Budgeted Market-size ) ×
Budgeted market percentage × weighted average budgeted price.
The contribution margin :

Actual data Budgeted data


Product (A) Product (B) Product (A) Product (B)
Sales price 12.5 14 13 13.5
Variable costs 6 7 5 7.5
Contribution margin 6.5 7 8 6
Solution :
• Static budget variance =
• Product (A)= (756 × 6.5) - (712 × 8) = 782 (U).
• Product (B)= (144 × 7) - (178 × 6) = 60 (U).
• Total Static budget variance = 842 ( U).
• Flexible-budget variance =
• Product (A) = (6.5 - 8) × 756 = 1134 (U).
• Product (B)= (7 - 6) × 144 = 144 (F)
• Total Flexible-budget variance = 990 (U).
• Sales Volume variance :
• Product (A) = (756 - 712) × 8 = 352 (F).
• Product (B)= (144 - 178) × 6 = 204 (U).
• Total Sales Volume variance = 148 (F).
• In order to analyze volume variance to its components ( Sales mix
variance and Sales quantity variance ) we should compute the
following percentage :
Percentage :

Actual data Budgeted data


Product (A) 756 84% 712 80%
Product (B) 144 16% 178 20%
total 900 100% 890 100%
• Sales mix variance =
• Product (A) = 900 ×(84% - 80%) × 8 = 288 (F)
• Product (B) = 900 ×(16% - 20%) × 6 = 216 (U)
• Total Sales mix variance = 72 (F)
• Sales quantity variance
• Product (A) = (900 - 890) × 80% × 8 = 64 (F)
• Product (B) = (900 - 890) × 20% × 6 = 12 (F)
• Total quantity variance = 76 ( F )
• In order to analyze quantity variance to its components (Market-
share variance and Market-size variance) we should compute :
• the following percentage:
Actual data Budgeted data
Company total sales 900 0.225 890 0.25
Market total sales 4000 3560

• The weighted average of the budgeted contribution margin per unit =


( 712 × 8 + 178 × 6 ) ÷ 890 = 7.6
• Market-share variance = 4000 × (0.225 – 0.25 ) 7.6 = 760 (U)
• Market-size variance = (4000 - 3560) × 0.25 × 7.6 = 836 (F)
Costs variances
• Direct materials
• Direct labor.
• Manufacturing overhead.
• Variable manufacturing overhead.
• Fixed manufacturing overhead.
Rules about costs variances :
• Variances are the differences between actual costs and the total
standard costs.
• When actual costs exceed standard costs the variance is unfavorable .
It suggests that the company paid too much for one or more of the
manufacturing costs elements or that it used the elements
inefficiently.
• When actual costs are less than standard costs the variance is
favorable . A favorable variance has a positive connotation. It suggests
efficiencies in incurring manufacturing costs and in using direct
materials, direct labor and manufacturing overhead.
• The standard for each element is derived from the standard price to
be paid and the standard quantity to be used.
Direct material

The standard direct materials cost per unit is the standard direct
materials price times the standard direct materials quantity. Suppose
each unit produced needs two kilos of raw material and the cost of
each kilo is JD 5 , so the standard cost per unit produced is JD 10 ( 5
times 2).
Determine direct materials variances.
• Static budget variance = (Actual Quantity × Actual price ) - (Budgeted
Quantity × standard price ). This variance is composed of (Volume variance
and standard variance (Flexible budget variance).
• Volume variance = (Standard Quantity allowed - Budgeted Quantity )
standard price ).
Where :
• Standard quantity allowed : the quantity that should be used to produce the actual
production .
• Standard costs allowed : the cost that should be expensed to produce the actual
production. So the standard costs for the actual production can be calculated as
follows :
Actual units produced times standard quantity allowed times standard price)
• standard variance = (Actual Quantity × Actual price ) - (Standard Quantity
allowed × standard price ). The summation of volume variance and
standard variance should equal static budget variance.
• The standard variance is composed of Price variance and Quantity
variance.
• Price variance = (Actual price - standard price) Actual Quantity .
• Quantity variance = (Actual Quantity - standard Quantity allowed ) standard
price .

• Joint Price-efficiency variance = (Actual price- standard price)


(Actual quantity - standard quantity allowed ).
Example : one material.
Budgeted Actual
Units produced 5000 4800
Quantity for each unit produced 2 kilos 2.2 kilos
Price for each kilo JD 5 JD 4.9

Required :
Static budgeted variance and its components.
• When more than one material used to produce the product then :
• The Quantity variance is composed of Material mix variance and Yield
variance.
• Material mix variance = total actual quantity used from all material ( actual percentage –
standard percentage ) standard price.
• Yield variance = (total actual quantity – total standard quantity allowed ) standard
percentage × standard price.
Example: more than one material.
• The budgeted and actual data:
Budgeted data Actual data
Units produced 550 500
Quantity :
Material (A) 9 kilos per unit In total 5183 kilos
Material (B) 3 kilos per unit In total 2117 kilos
Kilo price Material (A) JD 4 per kilo JD 4.2 per kilo
Material (B) JD 6 per kilo JD 5.6 per kilo

• Required : static budget variance and its components.


Direct labor
• The direct labor price standard is the rate per hour that should be
incurred for direct labor. The direct labor price standard is also called
the direct labor rate standard.
• The direct labor quantity standard is the time that should be required
to make one unit of the product, and it is also called the direct labor
efficiency standard.
• The standard direct labor cost per unit is the standard direct labor
rate times the standard direct labor hours. Suppose each unit
produced needs three hours and the rate per hour is JD 7 , so the
standard labor cost per unit produced is JD 21( 7 times 3).
Determine direct labor variances.
• Static budget variance = (Actual hours × Actual rate) - (Budgeted hours ×
standard rate). This variance is composed of (Volume variance and
standard variance (Flexible budget variance).
• Volume variance = (Standard hours × standard rate) - (Budgeted hours ×
standard rate).
Where :
• Standard hours : hours that should be used to produce the actual production .
• Standard costs : the cost that should be expensed to produce the actual production.
So the standard costs for the actual production can be calculated as follows :
Actual units produced times standard hours per unit times standard rate)
• standard variance = (Actual hours × Actual rate ) - (Standard hours ×
standard rate ). The summation of volume variance and standard variance
should equal static budget variance.
• The standard variance is composed of Rate variance and Time
variance.
• Rate variance = (Actual rate - standard rate) Actual hours.
• Time variance = (Actual hours - standard hours) standard rate

• Joint rate-efficiency variance = (Actual rate - standard rate) = (Actual hours -


standard hours)
Example: one kind of labor.
• Consider the following :

Budgeted Actual
Units produced 3000 2800
Hours per each unit produced 3 hours 2.5 hours
Rate per hour JD 6 JD 6.5

• Required : static budget variance and its components.


• When two kinds of labor or more work in the company the time
variance analyze into labor mix variance and productivity variance
as follows :
• Labor mix variance = total actual hours ( actual percentage –
standard percentage ) standard rate .
• productivity variance = (total actual hours– total standard
hours) standard percentage × standard rate.

Example : two kinds of labor
Required : static budget variance and its components
Actual data Budgeted data
Units produced 900 1000
Trained workers 2800 hours 4 hours
Un trained workers 5200 hours 6 hours
Rate per hour : JD 4.2
Trained JD 8 JD 6
Untrained JD 4 JD 5
Manufacturing overhead.
• For manufacturing overhead, companies use a standard
predetermined overhead rate in setting the standard. This overhead
rate is determined by dividing budgeted overhead costs by an
expected standard activity index. ( the index may be direct labor
hours or standard machine hours).
• Ali’s company uses standard direct labor hours as the activity index.
The company expects to produce 13200 units during the year. Since it
takes two direct hours for each unit, total standard direct labor hours
are 26400 ( 13200 times 2 hours ). A 26400 overhead are expected to
be JD 132000. Of that amount, JD 79200 are variable and JD 52800
are fixed. The computation of the standard predetermined overhead
rate for Ali’s :
Budgeted Amount ÷ Standard direct = Overhead rate
overhead costs labor hours per direct labor
hour
variable JD 79200 26400 JD 3
fixed JD 52800 26400 JD 2
Total JD 132000 26400 JD 5
• The standard manufacturing overhead cost per unit is the
predetermined overhead rate times activity index quantity standard.
The standard manufacturing overhead cost per unit is JD 10 ( JD 5
times 2 ).
• The computation of actual overhead is comprised of a variable and a
fixed component.
• The total overhead variance is the difference between the actual
overhead costs and overhead applied based on standard hours
allowed for the amount of goods produced. Standard hours allowed
are the hours that should have been worked for the units produced.
• Overhead costs applied = standard hours allowed × predetermined
rate.
• Total overhead variance = Actual overhead - Overhead Applied
• Overhead Applied (Based on standard hours allowed).
Variable overhead costs.
• Standard variable overhead variance = actual variable overhead –
variable overhead applied at standard hours allowed.
• The standard variable overhead variance is composed of Spending
variance and Efficiency variance.
• Variable- overhead spending variance = (Actual variable-overhead rate -
standard variable-overhead rate) Actual hours.
• Variable-overhead efficiency variance = (Actual hours – standard process
hours) standard rate
Fixed overhead costs.
• Standard fixed overhead variance = Actual fixed overhead – Fixed
overhead applied at standard hours allowed.
• The standard fixed overhead variance is composed of Fixed-overhead
budget variance and Fixed-overhead volume variance .
• Fixed-overhead budget variance = Actual fixed overhead costs – Budgeted
fixed overhead costs.
• Fixed-overhead volume variance = ( Budgeted fixed overhead costs - Applied
fixed overhead allowed ). Where Applied fixed overhead = predetermined
fixed overhead rate × standard allowed hours.
• or it can be computed as follows : (Normal Capacity hours - standard hours
allowed ) = predetermined fixed overhead rate .
Remarks in computing overhead variances:
• Standard hours allowed are used in each of the variances.
• Efficiency variance generally pertains to variable costs.
• The volume variance pertains solely to fixed costs.
Exercise :
• Samir’s company has the following standards and flexible-budget
data:
Budgeted units 25000 units.
Standard quantity of direct labor 2 hours per unit of output
Budgeted variable overhead JD 305000.
Budgeted fixed overhead JD 100000

• Actual results for the year are as follows:


Actual output 20000 units
Actual variable overhead JD 320000
Actual fixed overhead JD 99000
Actual direct labor JD 50000 hours
Required :
• Use the previous formulas to compute the following variances.
Indicate whether each variance is favorable or unfavorable where
appropriate:
• Variable-overhead spending variance.
• Variable-overhead efficiency variance.
• Fixed-overhead budget variance.
• Fixed-overhead volume variance.

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