Lecture Notes on Cost Variance Analysis

Introduction:

The two major objectives of budgeting are planning and control. Control is achieved through the adoption
of Standard Costs that serve as benchmark or framework for the budget. Any variance (deviation or difference) of
the actual results from the standard cost will merit management attention. Thus we apply the concept of
management by exception in this case.

Key Terminologies:

Standard Cost – also known as the price standard is a generic term indicating price or rate.

Quantity Standard – generic term indicating volume or activity.

Favorable Variance – actual cost is less than standard cost. A favorable variance account shows a credit balance.

Unfavorable Variance – actual cost is greater than standard cost. An unfavorable variance account shows a debit
balance.

I. Materials Variances

Actual Cost (Actual Quantity x Actual Unit Cost)

------- Materials Price Variance
AQ X BP (Actual Quantity x Standard Unit Cost)
------- Materials Usage Variance
Standard Cost (Standard Quantity x Standard Unit Cost)

Causes of Price Variance

1. Random fluctuations in market prices

2. Materials substitution
3. Market shortages or excesses
4. Failure to take cash discounts
5. Unexpected price increases or decreases

Causes of Usage Variance

1. Change in product specifications

2. Materials substitution
3. Breakage during the handling of materials in movement and processing
4. Improper use of materials by workers
5. Waste and Pilferage

Example:
A printed circuit used in the production of fuel-injected engines has a standard cost of P300 per unit. The standard
calls for one printed circuit per engine. Last month, Caper Automotive purchased 15,000 printed circuits at a cost of
P291 per unit and 3,000 circuits at a cost of P315 per unit. The Production Department required 18,000 printed
circuits to produce 17,850 engines.

Required: Determine the materials price and usage variances.

1
II. Labor Variances

Actual Cost (Actual Hours x Actual Rate)

------ Labor Rate Variance
AQ X BP (Actual Hours x Standard Rate)
------ Labor Efficiency Variance
Standard Cost (Standard Hours x Standard Rate)

Causes of Labor Variances:

1. Use of lower-skilled or higher-skilled workers

2. Changes in production methods and scheduling
3. Installation of new equipment
4. Delays in routing work, materials, tools or instructions
5. Effects of a learning curve

Illustration:

Hamburger Palace is a large fastfood restaurant in the South. Standards indicate that each hamburger cook
should make 100 burgers per hour and that the labor rate is P37.50 per hour. This month, 272,500 burgers were
cooked in 2,300 hours. Payroll records show that P92,000 were paid as wages to all the hamburger cooks.

Required: Determine the Labor Rate Variance and Labor Efficiency Variance.

Fill in the blanks for each of the following independent situations relating to direct labor.

Alpha Bravo Charlie Delta

Units Produced 4,000 ? 3,000 ?
Actual Hours Worked 1,900 4,200 ? ?

Standard hours for 2,000 ? ? 6,000

production
Standard hours per unit ? 0.5 2 3

Standard rate per hour P12 P10 P4 ?

Actual labor cost ? P41,800 ? P24,500

Rate variance P310 U ? P300 U P300 F
Efficiency Variance ? P1,000 U P600 F P800 U

2
 MATERIAL AND LABOR VARIANCES

PURE DADS

Price = Difference * Actual

Usage = Difference * Standard

Rate = Difference * Actual

Efficiency = Difference * Standard

III. Factory Overhead Variances

Actual Cost vs. Budgeted Cost vs. Standard Cost

Actual Cost – defined as the exact outcome or result of the period’s costs

Budgeted Cost– defined as the “planned” outcome or result of the period’s activities usually based on normal
capacity. (level of capacity derived from years of experience). Also, budgeted figures are usually expressed on a
total basis.

Standard Cost– defined as the predetermined rate usually based on the budgeted activities. Usually, standard costs
are expressed on a per unit basis.

Actual Hours vs. Normal Hours vs. Standard Hours

Actual Hours– defined as the exact outcome or result of the period’s activities.

Normal Hours– defined as the “planned” hours of the period’s activities usually based on normal capacity. (level of
capacity derived from years of experience). Also known as the budgeted hours expressed on a total basis.

Standard Hours – often expressed on a per unit basis, computed at Normal Hours/ Budgeted Output

Illustration:

Refer to previous problem of Hamburger Palace. The summary of information that can be obtained are:

Actual Cost P92,000 Budgeted Cost P93,750

Actual Output 272,500 Budgeted (Expected) Output 250,000
Actual Hours 2,300 Normal Hours 2,500 :
Actual Cost per hour P40

Standard Output per hour: 100 units per hour

Standard Cost per hour: P37.50
Standard Hours based on Expected Output: 2,500
Standard Hours based on Actual Output: 2,725

3
 IMPORTANT NOTE: Total Standard Cost can be defined as the:

Standard Cost x Standard hours based on Actual Output

Note: Students normally tend to be overwhelmed by the concepts of variance analysis especially with the various
formulae being used. In essence, variance analysis simply breaks down the cost components and finds the reasons
behind such differences. But at the end of the day, the variance analysis, no matter how many ways it is done all
boils down to the following basic formula

Actual Cost
Less Standard Cost
--------------------------
Total Variance
=============

A. Factory Overhead Variance - Flexible budgeting

Take note! These analyses will be used when data are available for the determination of the variable and/or fixed
overhead rates.

Two Way Variance Analysis (ABS-CV)

FIXED VARIABLE

Actual Cost Actual Hours Actual Hours

Actual Rate Actual Rate
------ Budgeted/Controllable Variance
BASH (Budget Allowance based on Standard Hours)
Normal Hours Standard Hours
Standard Rate Standard Rate
------ Volume/ Capacity Variance
Standard Cost (Standard Quantity x Standard Unit Cost)
Standard Hours Standard Hours
Standard Rate Standard Rate

Points to Consider:
1. The Controllable Variance as the term implies, can be regulated at certain level. Thus, rate variances
or the amount spent, are the focus of this variance section.

2. Volume Variance as the term implies, is the difference in volume or hours used up in production.
Normal Hours (what is generally expected)
less Standard Hours (what is expected based on the actual output)

4
Illustration: Turvy Enterprise manufactures different types of aluminum products for different industries. Standard
cost accounting system is used. The following data are available:

Actual total factory Overhead P40,000

Actual Fixed Overhead Cost P12,000
Budgeted Fixed Overhead Cost P10,200
Total overhead application rate per hour P2.50
Actual hours 13,980
Normal activity in hours 12,000
Standard hours allowed 15,000

Required: Compute the Controllable and Volume Variances.

Three Way Variance Analysis (SEC)

FIXED VARIABLE

Actual Cost Actual Hours Actual Hours

Actual Rate Actual Rate
------ Spending Variance
BAAH (Budget Allowance based on Actual Hours)
Normal Hours Actual Hours
Standard Rate Standard Rate
------Variable Efficiency Variance
BASH (Budget Allowance based on Standard Hours)
Normal Hours Standard Hours
Standard Rate Standard Rate
------ Volume/ Capacity Variance
Standard Cost (Standard Quantity x Standard Unit Cost)
Standard Hours Standard Hours
Standard Rate Standard Rate

5
Points to Consider:

1. Three-way variance analysis simply breaks down the Controllable Variance into two components namely
Spending Variance and Efficiency Variance.

Controllable Variance = Actual Rate x Actual Hours

Less Standard Rate x Standard Hours

Spending Variance + Variable Efficiency Variance

(Fixed + Variable)

2. Spending Variance as the term implies is a difference in the amount spent (variance in rates).
(Actual Rate – Standard Rate) x Actual Hours

3. Spending Variance is composed of Variable Spending and Fixed Spending Variances. Most textbooks
would refer to spending variance as variable spending variance while fixed spending variance as
budget variance.

4. Variable Efficiency Variance as the term implies is the difference in the use of hours (level of
efficiency).
(Actual Hours – Standard Hours) x Standard Variable Overhead Rate

Illustration: Use the given data above and compute for Overhead Variance Using three way variance analysis.

6
 Four Way Variance

FIXED VARIABLE

Actual Cost Actual Hours Actual Hours

Actual Rate Actual Rate
------ Spending Variance

Split Spending Variance into:

a. Fixed Spending Variance = Fixed (Actual – BAAH)

b. Variable Spending Variance = Variable (Actual – BAAH)

BAAH (Budget Allowance based on Actual Hours)

Normal Hours Actual Hours
Standard Rate Standard Rate
------Variable Efficiency Variance
BASH (Budget Allowance based on Standard Hours)
Normal Hours Standard Hours
Standard Rate Standard Rate
------ Volume/ Capacity Variance
Standard Cost (Standard Quantity x Standard Unit Cost)
Standard Hours Standard Hours
Standard Rate Standard Rate

The Four Variances computed above are:

1. Variable Spending Variance

2. Fixed Spending Variance
3. Variable Efficiency Variance
4. Volume/ Capacity Variance

Illustration: Use the previous given and compute Overhead Variance using the Four Way Method:

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B. Factory Overhead Variance Analysis (Fixed/ Static Budget)

Take Note!

This analysis is used only when no data are available for the determination of the variable and or fixed
overhead rates.

1. Budget / Spending Variance – indicates spending more or less than what is allowed by the budget for a specific
period.
Actual Overhead
Less BASH

This variance is equal to Fixed Spending Variance + Variable Spending Variance.

2. Capacity / Volume Variance – using more or less hours than what has been budgeted; similar to Idle Capacity
Variance
(Normal Hours – Actual Hours) x Standard Overhead Rate

3. Efficiency Variance – using more or less hours than what has been allowed for a given production

(Actual Hours – Standard Hours) x Standard Overhead Rate

Exercise
The overall manufacturing variance reported last period for Bates Company amounted to P12,250. The
company produces and sells a single product. The standard cost card for the product follows:

Standard Cost - Per Unit

Direct Materials 4 yards at P3.50 per yard P14
Direct Labor 1.5 direct labor hours at P12 per direct labor hour P18
Variable Overhead 1.5 direct labor hours at P2 per direct labor Hour P3
Fixed overhead, 1.5 direct labor hours at P6 per direct labor hour P9
Standard Cost per unit P44
The following additional information is available for the year just completed:
3. The company manufactured 20,000 units of product during the year.
4. A total of 78,000 yards of material was purchased during the year at a cost of P3.75 per yard. All of
this material was used to manufacture the 20,000 units. There were no beginning or ending inventories
for the year.
5. The company worked 32,500 direct labor hours during the year at a cost of P11.80 per hour.
6. Overhead cost is applied to products on the basis of direct labor hours. Data relating to manufacturing
overhead costs follow:
Normal Activity level (direct labor hours) 25,000
Budgeted fixed overhead costs P150,000
Actual Fixed Overhead P148,000
Actual variable overhead P 68,250

Required:
1. Compute the direct material price variance and the quantity variances for the year.
8
2. Compute the direct labor rate and efficiency variances for the year

3. Compute the Overhead variances.

A. Two Way Variance

B. Three Way Variance

C. Four Way Variance

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 Mix and Yield Variances

Mix Variance – a variance resulting from the mixing or combining of basic materials in a RATIO DIFFERENT
from standard materials specifications. This may also apply to a mix in the use of labor with differential pay rates.

Yield Variance – defined as the amount of difference from the expected output based on the input from the actual
output.

To fully appreciate accounting for mix and yield variances, a comprehensive example will be used. Mix and Yield
Variances do not drastically vary from the previous discussion on standard cost variances. The difference lies only
in the number of raw material inputs involved.

Illustration:

1. Pirates Corp. produces 100 g pack of mixed cornick and chichacorn. Standard and actual information are as
follows:

Standard quantities and costs (100 g pack)

Cornick 50 g at P30 per kilogram P1.50

Chichacorn 50 g at P40 per kilogram P2.00

Actual quantities and costs for April when production was 140,000 100 g packs were

Cornick 7,473 kilograms at P29 per kilogram

Chichacorn 6,617 kilograms at P42.50 per kilogram

Determine the materials variances using the QUANTITY MIX approach.

Actual (AQ X AP) % Qty. Unit Cost Total

Cornick 53% 7,473 29.00 216,717.00
Chichacorn 47% 6,617 42.50 281,222.50
14,090 497,939.50

AQ X BP – Match
Cornick 53% 7,473 30.00 224,190
Chichacorn 47% 6,617 40.00 264,680
14,090 488,870

AQ (total) X BMix X BP – Match

Cornick 14,090 * 50% 7,045 30.00 211,350
Chichacorn 14,090 * 50% 7,045 40.00 281,800
14,090 493,150

Standard (BQ (total) X Bmix x BP match)

Cornick 14,000 * 50% 7,000 30.00 210,000
Chichacorn 14,000 * 50% 7,000 40.00 280,000
14,000 490,000

10
Summary:

Materials Price Variance = 497,939.50 – 488,870 = 9,069.50 Unfavorable

Materials Mix Variance = 488,870.00 –493,150 = (4,280) Favorable

Materials Yield Variance= 493,150 – 490,000 = 3,150 Unfavorable

Alternative Solution:

Using the WEIGHTED AVERAGE PRICE (WAP) MIX Approach

Actual (AQ X AP) Qty. Unit Cost Total

Cornick 7,473 29.00 216,717.00
Chichacorn 6,617 42.50 281,222.50
14,090 497,939.50

AQ X BP – Match
Cornick 7,473 30.00 224,190
Chichacorn 6,617 40.00 264,680
14,090 488,870

AQ X BP Mix
Cornick 7,473 35.00 261,555
Chichacorn 6,617 35.00 231,595
14,090 493,150

Std Cost 490,000

BP = ------------- ------------------ 35.00
Std Qty. 14,000

Standard (BQ (total) X BP Mix

Cornick 7,000 30.00 210,000
Chichacorn 7,000 40.00 280,000
14,000 490,000
OR

Standard (BQ X BP) 14,000 35.00 490,000.00

Summary:
Materials Price Variance = 497,939.50 – 488,870 = 9,069.50 Unfavorable

Materials Mix Variance = 488,870.00 –493,150 = (4,280) Favorable

Materials Yield Variance = 493,150 – 490,000 = 3,150 Unfavorable

( 14,090 – 14,000)= 90 * 35
11
 2. Fantasy Inc. is a building contractor firm. The firm employs both structural and civil engineers. The
average hourly rates for structural engineers are P40 and for civil engineers are P20. For the Burgundy
Building project, the standard was set at 750 hours of structural engineer time and 1,250 of civil engineer
time. Actual hours worked on this project were:

Structural Engineer 1,000 hours at P42.50 per hour

Civil Engineer 1,000 hours at P21.00 per hour

Required: Determine the labor variances for this project.

Labor Variances:
Using QUANTITY MIX Approach
Actual Labor Cost

Structural 1,000 hours at P42.50 per hour P 42,500

Civil Engineer 1,000 hours at P21.00 per hour 21,000
----- ------------
2.000 hours P 63,000

AQ x BP – Match

Structural 1,000 hours at P40.00 per hour P 40,000

Civil Engineer 1,000 hours at P20.00 per hour 20,000
----- ------------
2.000 hours P 60,000

AQ X BMix x BP-Match

Structural 2,000 * 37.5% = 750 at P40.00 per hour P 30,000

Civil Engineer 2,000 * 62.5% = 1,250 at P20 per hour 25,000
----- ------------
2.000 hours P 55,000

Standard (BQ X BP – Matched)

Structural 750 hours at P40.00 per hour P30,000.00

Civil Engineer 1,250 hours at P20 per hour 25,000.00
----- ------------
2,000 hours P55,000.00

Summary:

Labor Rate Variance = 63,000 – 60,000 = 3,000 Unfavorable

Labor Mix Variance = 60,000 – 55,000 = 5,000 Unfavorable

Labor Yield Variance= 55,000 – 55,00.00 = 0

12
 Alternative Solution
Using WEIGHTED AVERAGE PRICE (WAP) MIX Approach
Actual Labor Cost

Structural 1,000 hours at P42.50 per hour P 42,500

Civil Engineer 1,000 hours at P21.00 per hour 21,000
----- ------------
2.000 hours P 63,000

AQ x BP – Match

Structural 1,000 hours at P40.00 per hour P 40,000

Civil Engineer 1,000 hours at P20.00 per hour 20,000
----- ------------
2.000 hours P 60,000

AQ X BMix

Structural 1,000 at P27.50 per hour P27,500

Civil Engineer 1,000 at P27.50 per hour 27,500
----- ------------
2.000 hours P 55,000

Total Cost P55,000

BP Mix = ------------- = ----------- = P27.50
Total Qty. 2,000 hours

Standard (BQ X BP – Matched)

Structural 750 hours at P40.00 per hour P30,000.00

Civil Engineer 1,250 hours at P20 per hour 25,000.00
----- ------------
2,000 hours P55,000.00

OR

2,000 hours at P27.50 = P55,000

Summary:

Labor Rate Variance = 63,000 – 60,000 = 3,000 Unfavorable

Labor Mix Variance = 60,000 – 55,000 = 5,000 Unfavorable

Labor Yield Variance= 55,000 – 55,00.00 = 0

13
Exercise:

Hamburger Palace decided to expand its operations to include selling of hamburger patties at 1 lot at 100 kilos per
pack containing beef, chicken and pork combination. To some extent, these materials could be substituted for the
other. In addition, it is assumed that the company now uses two categories of laborers identified as Experienced and
New Hires. There is a labor rate differential between these two classifications. The following information was
provided for the current month.

Standard Bill of Materials for one lot (100 packs of 1 kilo packages)

Beef 30 kilos at P36.00 per kilo P1,080.00

Pork 45 kilos at P22.50 per kilo P1,012.50
Chicken 25 kilos at P25.00 per kilo P 625.00
---------- ------------
100 kilos P2,717.50

Labor standards for one lot (100 packs of 1 kilo packages)

New hires 10 hours at P5 P50.00

Experienced 5 hours at P7 per hour 35.00
--------- --------
15 hours P85.00

Actual Production and cost data for the current period:

Production 40 lots

Materials purchased and used:

Beef 1,142 kilos at P37.50 per kilo P42,825.00

Pork 1,824 kilos at P22.00 per kilo P40,128.00
Chicken 1,042 kilos at P24.80 per kilo P25,841.60
------- -------------
4008 kilos P108,794.60

Payroll records show:

New Hires 450 hours at P5.30 per hour P2,385.00
Experienced 194 hours at P7.20 per hour 1,396.80
----- ------------
644 hours P3,781.80

Required: Prepare a Materials and Labor Mix and Yield Variance Analysis.

14
 PRIMER ON FLEXIBLE BUDGETING and VARIANCE ANALYSIS

Introduction:
The two major objectives of budgeting are planning and control. Control is achieved through an evaluation
of the actual performance of the current period compared to the prescribed budget as set out in the master budget.

Master Budget is a FIXED or STATIC Budget. It is based on a pre-determined level of activity. This budget is
prepared at the start of the period to serve as guide post for activities and expenditures for the current period.

Flexible Budget is a VARAIABLE budget. It is prepared at the end of the period with the purpose of comparing
actual results to the planned results or output. it is “FLEXED” to accommodate ACTUAL level of production. It
usues costs (variable and fixed) and revenue formulas from static budgets.

The difference between the results of the master budget and flexible budget is known as VARIANCE.

1. Spending Variances - The differences between the flexible budget and the actual performance
are due to differences in selling price per unit for revenue and spending per unit for expenses.

2. Activity Variances The differences between the static and flexible budgets are due to the
difference between planned (static) activity and actual (flexible) activity

Actual Spending Flexible Activity Static

Performance Variances Budget Variances Budget

Unit Volume Actual No Variance Actual Cause of Planned

Activity
Variance
AQ X AP AQ X BP BQ X BP
Revenue Actual Selling Caused by Actual volume Volume Planned volume
Price x Actual differences in x Planned difference x x Planned
Volume actual and selling price Planned Selling selling price
planned selling Price
prices
AQ X AP AQ X BP BQ X BP
Expenses Actual volume x Caused by Actual volume Volume Planned Volume
Actual variable spending x planned difference x x Planned
Costs + Actual differences on variable costs + Variable Cost Variable Costs
Fixed Costs variable cost per Planned Fixed Per unit + Planned Fixed
unit and total Costs Costs
fixed costs
Exercise:

1. A partially completed flexible overhead budget for Sample Company is shown below:

Activity Level in Units

Cost Formula 8,000 12,000 16,000
Variable Overhead:
Supplies 108,000.00
Utilities 60,000.00
Repairs 24,000.00
Total Variable Overhead 192,000.00

Fixed Overhead
Depreciation 15,000.00
Salaries 96,000.00
Rent 44,000.00
Total Fixed overhead 155,000.00
Total Overhead 347,000.00

2. Fill in the missing data

ACTUAL RESULTS BUDGET FLEXIBLE SALES VOLUME STATIC

ACTUAL PRICES VARIANCES BUDGET VARIANCES BUDGET
Units 80,000 72,000

Sales 6400 F - 720,000

Variable Cost 496,000 480,000
Contribution Margin
Fixed Costs 8,000 U 192,000
Operating Income
 Lesson Plan on Sales Variances

Introduction:

In developing Sales Variances, we try to understand why there are changes in the sales figures of the
company whether they are favorable or unfavorable. However, please note that we will be using the
Contribution Margin Approach in analyzing sales variance.

Two main factors that instigate changes in sales are changes in Sales Price and changes in Sales Volume.

Actual Sales (Actual Quantity x Actual CM)

------- Sales Price Variance
AQ X BP (Actual Quantity x Budgeted CM)
------- Sales Volume Variance
Budgeted Sales (Budgeted Quantity x Budgeted CM)

Illustration:

At the start of the year, Fujisan Corporation forecasted sales volume of 100,000 rolls of fabric for a target
sales figure of P10,000,000. At the end of the year, figures showed that sales volume reached 105,000 but
sales figures dropped to P9,975,000. In analyzing this situation, the following variances were determined:

Actual Sales (105,000 x P95) P 9,975,000

(P525,000) Unfavorable Sales Price Variance

AQ X BP (105,000 X P100) P10,500,000

P500,000 Favorable Sales Volume Variance

Budgeted Sales (100,000 x P100) P10,000,000
--------------
Total Variance (P25,000) Unfavorable Variance.
========

Multi-Product Sales Variances

In multi-product companies, sales variances are composed of both sales price and sales volume variances.

Sales volume is affected by three factors:

a. Sales Mix – the distribution / composition of the products sold was not based on what was
planned or budgeted.

b. Market Share – either the company was able to stay competitive and grab a bigger share of the
market or was not able to compete well and thus lost a portion of the market

c. Market Size – either the market size has grown or has shrunk

1
I. Sales Price and Volume Variances

Actual Sales (Actual Quantity x Actual CM)

------- Sales Price Variance
AQ X BP (Actual Quantity x Budgeted CM)
------- Sales Volume Variance
Budgeted Sales (Budgeted Quantity x Budgeted CM)

Illustration:

The Odyssey Corporation manufactures two types of door panels catering to both residential and
commercial users. Budgeted and actual operating data for 200A are as follows:

Actual Budgeted
Commercial Residential Commercial Residential
Unit sales in pieces 25,200 58,800 20,000 60,000
% of Total 30% 70% 25% 75%
Contribution Margin P11,970,000 P24,696,000 P10,000,000 P24,000,000
Unit Contribution Margin P475 P420 P500 P400

Compute for the Sales Price and Sales Volume Variances:

Solution:
1. Sales Price and Volume Variances
Actual 25,200 x 475 = P11,970,000
58,800 x 420 = P24,696,000 P36,666,000
84,000
P546,000 F
AQ X BP 25,200 x 500 = P12,600,000
58,800 x 400 = P23,520,000 P36,120,000
84,000
P2,120,000 F
Standard 20,000 x 500 = P10,000,000
60,000 x 400 = P24,000,000 P34,000,000 ___________
80,000
Total Variance P2,666,000 F
==========
Sales Price Variance P 546,000 F
Sales Volume Variance P2,120,000 F
Total Variance P2,666,000 F
==========

II. Sales Mix and Sales Quantity Variances

Sales Mix and Sales Quantity Variances are simply a further division of the Volume Variance. Thus, our
focus of attention will only be on quantity factors but using the same budgeted CM all throughout the
computation.

Sales Mix Variance is defined as the difference in the distribution / composition of the total units sold.
Sales Quantity Variance would be the difference in the total quantity sold.

2
 Actual Sales (Actual Qty. x Actual Sales Mix x Actual CM)
------Sales Price Variance
AQ X BP (Match) (Actual Quantity x Budgeted CM - Matched)
------- Sales Mix Variance
AQ X BP (Mix) (Actual Quantity x Weighted CM)
------- Sales Quantity Variance
Budgeted Sales (Budgeted Quantity x Budgeted CM)

Illustration:

Using the same problem above, compute for the Sales Price, Sales Mix Variance and the Sales Quantity
Variance.

Sales Price and Volume Variances

Actual 25,200 x 475 = P11,970,000
58,800 x 420 = P24,696,000 P36,666,000
P546,000 F
AQ X BP(Match) 25,200 x 500 = P12,600,000
58,800 x 400 = P23,520,000 P36,120,000
P420,000 F
AQ X Bmix x BP(Match)
84,000 x 25%= 21,000 x 500 =10,500,000
84,000 x 75%= 63,000 x 400 =25,200,000 P35,700,00
84,000
P1,700,000 F
Standard 20,000 x 500 = P10,000,000
60,000 x 400 = P24,000,000 P34,000,000 ___________
80,000
Total Variance P2,666,000 F
==========
Sales Price Variance P 546,000
Sales Mix Variance 420,000
Sales Quantity Variance 1,700,000
Sales Volume Variance P2,666,000
========

Sales Price and Volume Variances

Actual 25,200 x 475 = P11,970,000
58,800 x 420 = P24,696,000 P36,666,000
P546,000 F
AQ X BP(Match) 25,200 x 500 = P12,600,000
58,800 x 400 = P23,520,000 P36,120,000
P420,000 F

AQ X BP (MIX) 25,200 x 425 = P10,710,000

58,800 x 425 = P24,990,000 P35,700,00
84,000 P1,700,000 F

Total Budgeted CM = P34,000,000 = P425

Total Budgeted Qty. 80,0000 ====

Standard 80,000 x 425 P34,000,0000

3
 -----------------
Total Variance P2,666,000 F
==========
Sales Price Variance P 546,000
Sales Mix Variance 420,000
Sales Quantity Variance 1,700,000
Sales Volume Variance P2,666,000
========

III. Market Share and Market Size Variances

The Quantity Variance can be further divided into two variances namely Market Share and Market Size
Variances.

These two variances try to explain why we were not able to sell as much as we planned or rationalize the
reasons why we have exceeded the planned sales level.

Actual Sales (Actual Qty. x Actual Sales Mix x Actual CM)

------Sales Price Variance

AQ X BP (Match) (Actual Quantity x Budgeted CM-Matched)

------- Sales Mix Variance

AQ X BP (Mix) (Actual Quantity x Weighted Budgeted CM)

------- Market Share Variance

AQ X Market Share x BP (Mix) (Actual Population x Budget Market Share x

Weighted Budgeted CM

------- Market Size Variance

Budgeted Sales (Budgeted Quantity x Weighted Budget CM)

Take Note:

Market Size - total “population of the industry.

Market Share - % of the population served

Both additional information need to be provided in the problem:

4
Illustration:

Using the same problem above but considering the additional information:

In late last year, a marketing research firm estimated the industry volume for commercial and residential
door panels in 200A at 800,000 rolls. Actual industry volume for 200A was 700,000 pieces. Compute for
the Market Share and Market Size Variance.

Actual 25,200 x 475 = P11,970,000

58,800 x 420 = P24,696,000 P36,666,000
P546,000 F
AQ X BP(Match) 25,200 x 500 = P12,600,000
58,800 x 400 = P23,520,000 P36,120,000
P420,000 F
AQ X BP (MIX) 25,200 x 425 = P10,710,000
58,800 x 425 = P24,990,000 P35,700,00

Total Budgeted CM = P34,000,000 = P425

Total Budgeted Qty. 80,0000 ==== P5,950,000F

AQ X Budget Market Share x BP(MIX)

700,000 x 10% x P425 P29,750,000

Actual Market Share = 84,000 / 700,000 = 12%

Budgeted Market Share = 80,000 / 800,000 = 10%

Standard 20,000 x 500 = P10,000,000 (P4,250,000) U

60,000 x 400 = P24,000,000 P34,000,000 ___________

Total Variance P2,666,000 F

==========
In Summary:

Actual Sales P36,666,000

Budgeted Sales P34,000,000
Difference P 2,666,000
=========

Distribution:
Sales Price Variance: P 546,000 F
Sales Mix Variance P 420,000 F
Market Share Variance P5,950,000 F
Market Size Variance P4,250,000 U
Total Variance P2,666,000 F
==========

5
Exercise:

Supermarvel Inc. produces phone gadgets. Supermarvel markets three types of phone gadgets.
Phonepro is a souped- up version for the executive on the go. Phonemax is a consumer-oriented
version and Phonekid is a stripped down version for the young adult market. Clark Kent has just
been promoted as Supermarvel’s Senior Vice President of Marketing. The CEO has discovered
that the total contribution margin came in lower than budget and it is his responsibility to explain
to him why actual results are different than the budget. Budgeted and actual operating data for the
company’s third quarter are as follows:

Budgeted Operating Data, Third Quarter 200A

Selling Price Variable Cost per CM per unit Sales Volume in

unit units
PhonePro P379 P182 P197 1,250
PhoneMax 269 98 171 3,750
PhoneKid 149 65 84 5,000
Total 10,000

Actual Operating Data, Third Quarter 200A

Selling Price Variable Cost per CM per unit Sales Volume in

unit units
PhonePro P349 P178 P171 1,100
PhoneMax 285 92 193 4,400
PhoneKid 152 73 79 5,500
Total 11,000

Clark Kent was able to gather further the following information from the old files of the retired
SVP for Marketing Lex Luthor:

Luthor prepared the budget for the 3 rd quarter assuming a 25% market share. The total phone
gadget market was estimated by Krypton Research to reach sales of 40,000 units worldwide in that
period. However, actual sales were 50,000 units.

Knowing that you have just finished your class discussion on Sales Variances, Clark Kent
approached you for help in coming up with a Sales Variance Report to be presented to the CEO
after an hour. However, he needs to still come up with a revised marketing plan incorporating the
information you will provide and he estimates that it will take him 58 minutes to finish that task.

Required: Prepare a Detailed Sales Variance Analysis Report.

6
 Lesson Plan on Gross Profit Variation

Introduction

Gross Profit is defined as the excess of Sales over Cost of Sales. Any movement in the
components of Sales (sales price and sales volume) or Cost of Sales (materials, labor, overhead, volume of
production) can bring about changes in the gross profit. Thus, it is essential to have a sound knowledge in
GP Variations and factors causing these changes.

One of the areas of importance yet not given enough consideration in financial analysis and
planning is gross profit variation. Changes in gross profit may be brought about by any or a combination of
the following factors:

a. Change in selling price

b. Change in product cost
c. Change in volume sold

1. Physical number of units sold

2. Types of product sold often called product mix or sales mix

Knowledge of these changes can help managers identify key areas of improvements and evaluate the
changes or movements made on the sales price, product costing and sales volumes.

II. Terminology:

Key codes to be used in this topic

Actual – current period

Base – previous period

III. Evaluation Techniques

Several techniques can be employed depending on the available information provided:

A. Three Factor Method

This method is useful when the quantity sold, unit selling prices and unit costs for both periods may be
determined.

Increase (Decrease) in Gross Profit due to Change in SALES

a. Price Variance = Δ in Price x Qty. base

b. Quantity Variance = Δ in Qty x Price base

c. Price Quantity Variance = Δ in Price x Δ in Qty.

Increase (Decrease) in Gross Profit due to Change in COST

a. Cost Variance = Δ in Cost x Qty. base

b. Quantity Variance = Δ in Qty x Cost base

c. Cost Quantity Variance = Δ in Cost x Δ in Qty.

Illustration:

Hix Corporation provided the following partial income statements and detailed information for the past two
years
200B 200A Changes
Sales P132,000 P100,000 P32,000
Cost of Sales 75,600 60,000 15,600
Gross Profit P 56,400 P 40,000 P16,400

Unit selling price P110 P100

Unit cost P63 P60
Quantity sold 1,200 1,000

1
Increase in sales accounted for as follows:

Price Variance
Quantity Variance
Qty. Price Variance

Increase in cost of sales accounted for as follows:

Cost Variance
Quantity Variance
Qty. Cost Variance

Increase in Gross Profit

Interpretation:

The increase in sales and corresponding increase in cost is not attributable to a single factor but by
increases in cost/sales as well as increase in units sold and the combined effects of price/cost and quantity.

Price Variance – change in gross profit due to change in Sales Price

Cost Variance – change in gross profit due to change in Cost
Quantity Variance – change in gross profit due to change in quantity sold

B. Two Factor Method

The two factor method can be used even if the available information are limited or are expressed in relative
change only and no information is provided on unit costs and details.

Change in SALES

Actual (Sales current period) Price Factor

Actual Qty. x Base Price
Base (Sales previous period) Quantity Factor

Change in COST
Actual (CGS current period) Cost Factor
Actual Qty x Base Price
Base (CGS previous period) Quantity Factor
_____________________
Change in GROSS PROFIT → net effect
====================

Using the same information above, prepare the gross profit variation analysis statement
Assuming that no unit costs were given but % of changes are provided as follows:

% Changes
Unit selling price 10%
Unit cost 5%
Quantity sold 20%

Changes in sales

Sales current period P132,000 P12,000 – Price

P132,000 / 110% OR 120,000

P100,000 X 120%
Sales previous period 100,000 P20,000 – Qty

Change in cost
Cost current period P 75,600 P3,600 - Cost
P75,600 / 105% OR
P60,000 X 120% 72,000
Cost previous period 60,000 P12,000 – Qty.
-------------
Increase in Gross Profit P16,400
========

2
When changes in Unit Sales Price or Unit Cost are provided, we use the Price or Cost Variance factors
since the change for these two items is related to unit sales price or unit cost.

When % change in Quantity is provided, we use the Quantity Variance factor since the change is related to
the quantity factor. It should be noted that the % change for both Sale Quantity factor and Cost
Quantity factor is the same.

Illustration:

Morena Skin Company had the following limited information gathered from their records:

200A 200B
Net Sale P192,500 P210,210
Cost of Sales 115,500 165,400
Gross Profit P 77,000 P 44,810
======== ========

The only additional data provided was that due to tough competition, sales prices had to be slashed by 22%.
Prepare a Detailed Gross Profit Variation Analysis from the limited data.

Sales Factor
Current year 210210
SQ X BP 210210 /.78 269500 (59,290)
Base Year 192500 77,000 (40%)

Cost Factor
Current Year 165400
SQ X BP 115500x 1.40 161700 3700
Base Year 115500 46200
GP Variation 32190

C. Four Factor Method:

When more than one product is sold, the four factor method is used.

1. Price factor – same as that of the two factor method

2. Cost factor – same as that of the two factor method

3. Quantity factor = Change in Gross Profit due to change in Volume

= Δ in Qty. x Ave GP Rate base (Total GP/ Total Units)

4. Sales Mix factor – also known as gross profit factor

- change in gross profit brought about by the change in product sales mix

= Actual Quantity x Actual Qty Mix% x Gross Profit Rate (base)

= Actual Qaunity x Base Qty Mix% x Gross Profit Rate (base)

OR

This year’s GP at last year’s price and cost

less Units sold this year at Average Gross Profit (AQ X BP)
----------------------------------------------------------
Sales Mix Factor

3
Illustration:
The following detailed information for Chico Sales Corp. are given below:

Statement of Gross Profit Variance Analysis

(Using the QUANTITY MIX Approach)

4
 ALTERNATE SOLUTION

(Using the Weighted Average Price Mix Approach)

5
Exercises on Gross Profit Variation

Crown Company manufactures three consumer products, Alpha, Beta and Charlie.
Sales and other information related to the said products are as follows:

200A Units Unit Price Total Sales Cost of Sales Gross Profit
Alpha 15,000 10.00 150,000 120,000 30,000
Beta 20,000 8.00 160,000 140,000 20,000
Charlie 5,000 6.00 30,000 22,500 7,500
------------------- -------------------- -----------------
340,000 282,500 57,500
========== =========== ==========

200B Units Unit Price Total Sales Cost of Sales Gross Profit
Alpha 20,000 12.00 240,000 180,000 60,000
Beta 20,000 9.00 180,000 150,000 30,000
Charlie 4,000 5.00 20,000 16,000 4,000
------------------- -------------------- -----------------
440,000 346,000 94,000
========== =========== ==========

Based on the information provided, an analysis of the gross profit would show the following changes:
1. Sales price factor
2. Cost price Factor
3. Sales Mix Factor
4. Quantity Factor

The president of Sure-thing Company after being informed that 200B selling price was 12.5% higher than 200A
would like to know other factors that changes the gross margin as shown below

200A 200B
Net Sales 1,000,000 1,237,500
Cost of Sales 800,000 950,000
------------------- --------------------
Gross Profit 200,000 287,500
========== ===========

5. Sales price variance amounted to ____________________.

6. Cost price variance amounted to_____________________
7. Sales quantity variance amounted to _________________.
8. Cost quantity variance amounted to __________________.
9. The % of change in volume is _______________________.
10. The % change in cost is __________________________.