Variance Analyis

Question: Describe about the Variance Analyis? Answer: Introduction A budget can be defined as the quantitative expression of a plan which is defined for a specific period of time. The strategic plans of the business units can be expressed in the form of a budget. It is used to forecast the future expenses and income (Maher, Weil and Stickney, 2015). Flexible Budget A flexible budget can be defined as the budget that will adjust with the changes in the volume of activity. The flexible budget restructures itself on the basis of the level of activity. Thus it serves as an effective tool for evaluating the performance of the managers. The model of flexible budget can be used to determine the financial results at the various activity levels (Smith, 2002). Difference between Flexible Budget and Static Budget A static budget does not change with the change in the actual volume of output. But a flexible budget can change with the change in the level of activity. A static budget is prepared assuming that all the other conditions affecting the budget will remain unaltered. But in case of flexible budget it can be prepared at the different levels of the activity (Oliver, 2015). The application of static budget is limited and it is an ineffective tool for controlling the cost. On the other hand, the flexible budget has wide application and serves as an effective tool for controlling cost (Berger, 2011). Types of Variance Analysis The variance analysis is done to investigate the variations in the financial performance from the standards that has been defined by the budget of the organization. The types of variance analysis are as follows Sales volume variance Sales mix variance Sales Price variance Sales Quantity variance Direct material price variance Direct material usage variance Direct labor rate variance Direct labor efficiency variance Variable overhead spending variance Variable overhead efficiency variance (Needles, Powers Crosson, 2011) Reasons for implementing flexible Budget of Manufacturing In a manufacturing organization, there is variance in the operational activities with the changes in the volume of production. The change in the volume of production will change the material volume, labor hours and cost of production. Thus for a manufacturing organization it is essential to use a flexible budget to meet with the changing need of the production (Davoren, 2015). Variance Analysis Direct Material Price Variance Budgeted cost of cakes Actual cost of cakes Flour $ 1.25 $ 1.05 Yeast $ 0.05 $ 0.05 Sugar $ 0.25 $ 0.25 Eggs $ 0.75 $ 0.55 Butter $ 0.15 $ 0.15 Frosting $ 0.95 $ 0.75 Production Payroll $ 4.50 $ 4.50 Total material cost $ 7.90 $ 7.30 Actual Quantity 2700 Budgeted Quantity 2500 Direct Material Price variance (Actual price - Standard Price ) * Actual Quantity $ (1,620.00) Favorable Direct Material Quantity Variance Budgeted cost of cakes Actual cost of cakes Flour $ 1.25 $ 1.05 Yeast $ 0.05 $ 0.05 Sugar $ 0.25 $ 0.25 Eggs $ 0.75 $ 0.55 Butter $ 0.15 $ 0.15 Frosting $ 0.95 $ 0.75 Production Payroll $ 4.50 $ 4.50 Total material cost $ 7.90 $ 7.30 Actual Quantity 2700 Budgeted Quantity 2500 DM Quantity Variance $ 1,580.00 UnFavorable Direct labor Rate Variance Budgeted cost of Labor per hour $9.00 Actual cost of labor per hour $9.25 Budgeted Hours of Production 1250 Actual Hours of Production 1400 Actual cost $12,950.00 Standard cost of actual hours $12,600.00 Variance Actual cost - Standard cost of Actual hours Unfavorable $350.00 Direct Labor Efficiency Variance Budgeted rate per hour of direct labor $9.00 Actual Hours 1400 Budgeted Hours 1250 Direct Labor Efficiency variance $1,350.00 Unfavorable Variable Overhead Spending Variance Actual Hours worked 1400 Actual overhead rate $ 1.79 Standard overhead rate $ 0.25 Variable overhead Spending Variance $ 2,150.00 Unfavorable Variable Overhead Efficiency Variance Standard direct labor hours allowed 1250 Actual direct labor hours 1400 Standard variable overhead rate $ 0.25 Variable Overhead Efficiency variance $ (37.50) Favorable References Berger, A. (2011). Standard Costing, Variance Analysis and Decision-Making (pp. 1-13). Davoren, J. (2015). The Advantages of a Flexible Budget. Small Business - Chron.com. Retrieved 12 February 2015, from https://smallbusiness.chron.com/advantages-flexible-budget-57105.html Maher, M., Weil, R., Stickney, C. (2015). Managerial Accounting: An Introduction to Concepts, Methods and Uses (pp. 300-500). Needles, B., Powers, M., Crosson, S. (2011). Principles of accounting. Mason, Ohio: Cengage Learning. Oliver, L. (2015). The Cost Management Toolbox: A Manager's Guide to Controlling Costs and ... (pp. 55-100). Smith, G. (2002). Managerial Accounting for Libraries and Other Not-for-profit Organizations (pp. 90-110).