THE CPA BOARD EXAMS OUTLINES by theMahatma
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MANAGEMENT ADVISORY SERVICES
VARIANCE
ANALYSIS
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DEFINITIONS Variance analysis involves pinpointing differencesof an entity’s
actual performance from its standards, investigating themand
devising ways to mitigate such deviations. It covers only
manufacturing costs (materials, labor, overhead)
Standard costsrepresent those amounts that should have been incurred for a particular actuallevel of activity, usually represented
in a per unit(not total) amount
Budgeted costs, in comparison, represent those amounts that shouldbeincurredfor a particular budgeted futurelevel of activity,
usually represented in a totalamount. Thus, if the company
budgets Php 100,000 for materials for production of 5,000 budgeted units, it has a standard cost of Php 20/unit
Standard costs are basically estimates of entity specialists based
on attainable performance, set as a control measure and to promote motivation among personnel. Variance data always comes with the description as to their nature – unfavorable or favorable
THE MATERIALS, LABOR BASIC VARIANCES (TWO-WAY)
The basic materials variances(spending, efficiency) can be quickly
derived using the ‘AAS’ formula, as follows:
Actual quantity used x Actual price/unit = A
Actual quantity used x Standard price/unit = B
Standard quantity used* x Standard price/unit = C
*(actual units made x standard quantity/unit)
The difference of A and B represents the materials spending/price
variance. If A is bigger, there is an unfavorablevariance
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efficiency/usage variance. If B is bigger, there is an unfavorable variance. The labor variancesfollow the same ‘AAS’ matrix as materials
variances, making use of course of labor data and standards such
as hours worked and the rate. Labor time excludes any idle time
Materials spending variancemay be based on actual quantities
used(see ‘AAS’ formula) and on actual quantities purchased. If
silent, it shall be based on the quantity purchased
THE OVERHEAD VARIANCES (TWO-, FOUR-WAY)
Analysis of manufacturing overhead variances is divided into two:
on the variable and fixed overhead. This also makes use of labor
data and standards. If the overhead variances are joined together,
the result would be the under-(unfavorable) or over-applied
(favorable) overhead, to be closed to ‘Cost of Goods Sold’
In the two-wayoverhead variance, the controllable(partly variable
and fixed) and volume(purely fixed) variances are computed, as
follows:
CONTROLLABLE = Actual total OH – Budgeted overhead
VOLUME = Budgeted fixed OH – Standard hours @ standard Fxd OH rate)
Controllable variancesums up the variable spending and efficiency variances, and the fixed spending variance (there is no such thing
as fixed efficiency variance). If the actual total overhead is higher
than budgeted overhead, there is an unfavorablevariance, and vv
Volume/capacityvarianceoccurs due to the company’s failure to
meet its budgeted level of activity, referred to as the denominator
level. This is usually the normal capacity of the entity, at 100%. Alternatively, this variance can be computed as follows:
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The ‘level’ may be expressed in hours worked, output produced orotherwise. If the actual level is lessthan the denominator level,
there is an unfavorablevariance, and vice versa.
The fixed overhead rateis derived by dividingthe budgeted fixed overhead cost for the period with the denominator level Due to plant expansions, the denominator level/capacity of the
entity might increase. In such case, only the volume variancewould
be affected out of the other overhead variances
The analysis of variableoverhead (for a four-wayoverhead
variance) follows that of the ‘AAS’ formula, using labor figures. For fixedoverhead, the ‘ABS’ formula is used:
Actual fixed overhead = A
Budgeted production x (Standard hours x Standard rate) = B
Standard hours* x Standard rate/hour = C
*(actual hours x standard hours/unit)
The difference of A and B represents the fixedspendingvariance. If
A is bigger, there is an unfavorablevariance
Similarly, the difference of B and C is the volume/capacity
variance, as noted above. If B is bigger, there is an unfavorable variance
Q&A: IS BUDGETED OVERHEAD THE SAME AS APPLIED OVERHEAD?
The budgeted overheadfigure is merely used for planning
purposes. Applied overheadis actually used in the costing
process: it is the amount debited to ‘Work In Process’ together with materials and labor costs
However, the two can be derived from each other. When budgeted
overhead is divided with budgeted labor hours (or some other basis), the predetermined/standard overhead rate results. When
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this is multiplied with actual hours (or some other actual basis), applied overhead emerges. Also, any over- (under-) application of overhead can be deducted (added) from the budgeted overhead for the applied overheadTHE MIX AND YIELD VARIANCES
These variance apply when there are several material inputs to be
mixed/combined for processing the final product. They can also be used for labor. When combined with materials purchase price
variance, the three make up the three-way materials variance
Mix variance is obtained as follows:
MIX VAR = Actual input @ standard price – Actual input @ ASIC*
*Average Standard Input Cost (ASIC): standard input units @ standard price ÷ standard input units for one product
A positive mix variance is unfavorable, which means the entity used
more input units than is necessary to produce a certain quantity of the product
On the other hand, the yield variance is calculated as follows:
YIELD VAR = Actual input @ ASIC – Actual output @ ASOC*
*Average Standard Output Cost (ASOC): standard input units @ standard price ÷ actual input units for one product
Just as with mix variance, a positive yield variance is unfavorable,
which imply that the input units resulted to less output than is expected of them
OTHER NOTES
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“under-absorbed” or “debit” (“credit” for favorable variance) Management by exception gives attention and focus only to large
variances as determined by the entity
ILLUSTRATION (CPAR FIRST PRE-BOARD EXAM 2016 ITEM) The
Pangit A Co. has made the following information available for the month of June. Fixed overhead was estimated at 19,000 machine hours for the production cycle. Actual machine hours were 18,900 for the period, which generated 3,900 units. The following are also available:
Material purchased (80,000 pieces) Php 314,000
Material quantity variance Php 6,400 U
Machine hours used 18,900
VOH spending variance Php 50 U
Actual fixed overhead Php 60,000
Actual labor cost Php 40,120
Actual labor hours 5,900
Standard direct material 20 piece @ Php 4/piece
Standard direct labor 1.5 hours @ Php 6/hour
Standard VOH 4.8 hours @ Php 2.50/hour
Standard FxdOH 4.8 hours @ Php 3/hour
Solve for: (a) materials price variance, (b) conversion cost efficiency variance, and (c) fixed overhead non-controllable variance
SOLUTIONS AND EXPLANATIONS:
(A) Since silent, the materials variance is one of materials purchase variance. Thus: MPV = (3.925 – 4.000) 80,000 units = 6,000 U
(B) Conversion cost efficiency variance is actually composed of labor efficiency variance and the variable OH efficiency variance. Thus: 750 U
LEV = (5,900 – 5,850) 6 = 300 U VOEV = (18,900 – 18,720) 2.5 = 450 U
(C) This is the volume variance. Thus: (19,000x3) – (3,900 x 4.8 x 3) = 840 U
