ITSM

University of Computer Studies $ Business

Application
Area

Business Application Area

Variance Analysis

Accounting & Marketing Group

Department of Information Technology Supporting and Maintenance

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ITSM Objective $ Business
Application
Area

To identify the differences between the standard and actual costs

To identify the standard deviation in budgeted numbers over a period of

time

To identify standard cost variances and to explain the reasons for their
occurrences

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ITSM Variance Analysis $ Business
Application
Area

Budget Vs Actual
Variance
• Favourable (F)
• Adverse (A)

Total Costs = Variable Cost + Fixed Cost

D-materials, D-labour, D-expense(Variable Cost) Fixed Cost

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ITSM Variance Analysis $ Business
Application
Area

unit cost = Revenue/unit

e.g 1000 units $50000
1 unit ?
= 1/1000× 50000
= $50

Net Profit = Revenue(Sales)-Total Costs

Actual Cost< Budget Cost (Favourable)

Actual Revenue> Budget Revenue(Favourable)
Actual Cost>Budget Cost (Adverse)
Actual Revenue< Budget Revenue(Adverse)

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ITSM Variance Analysis $ Business
Application
Area

Eg:1. Knee Lin Pte(s) has come up with the following figures for their diskette
manufacturing division at Taiwan.

Draw up the profit /loss account and identify the variances.

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ITSM Variance Analysis $ Business
Application
Area

Solution
Budgeted Actual Variance
Sales Unit (4000 units) (4000 units)

Revenue 30,000 32,500 2,500 (F)

Direct:
Materials 10,450 10,000 450 (F)
Labour 10,000 10,000 _
Fixed Overheads 3,000 3,500 500 (A)
Total cost 23,450 23,500

Net Profit 6,550 9,000 2,450 (F)

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ITSM Variance Analysis $ Business
Application
Area

Eg:2. A firm that uses budgetary control techniques has devised the following budgeted
profit and loss account, and has now obtained the actual profit/loss details in order to
make comparisons. Devise a flexible budget for 12000 units and calculate any variances.
Budgeted Units Actual Units
Sales 10,000 12,000
$ $
Revenues 25,000 31,000
Materials 6,000 7,440
Direct Labour 4,500 5,760
Production Overheads 3,000 2,750
Sales and distribution Overheads 3,800 3,800
Administration Overheads 4,200 4,400
Finance Overheads 750 750

Net Profit 2,750 6,100

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ITSM
Variance Analysis $ Business
Application
Area

Solution
Budgeted Price per Unit Flexible Budget Actual Variance
Sale Unit (10,000 (Unit cost) (12,000 units) (12,000
units) $ $ units)
$ $
Revenue 25,000 2.5 30,000 31,000 1,000 (F)
Materials 6,000 0.6 7,200 7,440 240 (A)
Direct Labour 4,500 0.45 5,400 5,760 360 (A)
Production overheads 3,000 3,000 2,750 250 (F)
Sales & 3,800 3,800 3,800 _
Distribution(OH) 4,200 4,200 4,400 200 (A)
Administration(OH) 750 750 750 _
Finance Overheads

Total Cost 22,250 24,350 24,900

Net Profit 2,750 5,650 6,100 450 (F)
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ITSM Variance Analysis $ Business
Application
Area

Eg:3. A firm has estimated that it will be able to sell 10,000 units in the coming year. The
selling price per unit has been set at $12. Materials will cost $3 per unit and Labour $2.50
per unit. The firm has identified Variable Overheads of $1.50 per unit and also predicts
Fixed Overheads of $4,000 for the year.

At the end of the year the actual results are as follows:

Sales (11,500 units) $135,500

Materials $ 38,500
Labour $ 26,500
Variable Overheads $ 17,900
Fixed Overheads $ 4,200
Profit $ 48,400

Draw up a Flexible budget for the actual sales level and identify the variance. And briefly
suggest reasons for the variances.
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ITSM Variance Analysis $ Business
Application
Area

Solution
Budgeted Price per Unit Flexible Budget Actual Variance
Sale Unit (10,000 units) (Unit cost) (11,500 units) (11,500 units)

Sale Revenue 120,000 12/unit 138,000 135,500 2500(A)

Materials 30,000 3/unit 34,500 38,500 4000(A)
Labour 25,000 2.5/unit 28,750 26,500 2250(F)
Variable Overheads 15,000 1.5/unit 17,250 17,900 650(A)
Fixed Overheads 4,000 4,000 4,200 200(A)
Total Cost 74,000 84,500 87,100
Net Profit 46,000 53,500 48,400 5100(A)

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ITSM Variance Analysis $ Business
Application
Area

Reasons for variance

This project is inefficiency because the competitors have reduced their price and
supplier increased their prices.

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ITSM Variance Analysis $ Business
Application
Area

Eg:4. A firm had produces the following budget of the beginning of the year.
Sales 10,000 units
Revenue 200,000 ($)
Materials 35,000
Labour 40,000
Variable Overheads 17,500
Fixed Overheads 60,000
Net Profit 47,500
At the end of the year the sales amounted to 11,100 units and selling price per
unit had been $21.60. The costs of materials were actually $3.65 and labour was $3.90
per unit. Variable Overheads amounted to $16,800 and Fixed Overheads were $63,000.
Required: (i) Devise a flexible budget for the actual sales volume.
(ii) Draw up the profit /loss account for the actual results.
(iii) Calculate the main variances.
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ITSM Variance Analysis $ Business
Application
Area

Solution
Budgeted Price per Unit Flexible Budget Actual Variance
Sales Unit (10,000 units) (Unit cost) (11,100 units) (11,100 units)

Revenue 200,000 20 222,000 239,760 17,760(F)

(200,000/10,000) (11,100*20) (11,100*21.60)

Materials 35,000 3.5 38,850 40,515 (11,100*3.65) 1,665(A)

Labour 40,000 4 44,400 43,290 (11,100*3.90) 1,110(F)
Variable 17,500 1.75 19,425 16,800 2,625(F)
Overheads 60,000 60,000 63,000 3,000(A)
Fixed Overheads

Total Cost 152,500 162,675 163,605

Net Profit 47,500 59,325 76,155 16,830(F)

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ITSM Variance Analysis $ Business
Application
Area

Eg:5. A company manufactures and sells a microcomputer called the Mango. The
following information is available for a reporting period.
Budgeted Actual
Production of Mango 10,000 units 10,000 units
Sales of Mango 10,000 units 8,000 units
Sales revenue $7,000,000 $7,200,000
Raw materials consumed 8,000 kilos 9,000 kilos
Cost of raw materials $1,200,000 $ 1,260,000
Direct Labour hours 500,000 hours 550,000 hours
Direct Labour cost $ 2,000,000 $ 2,475,000
Administration Fixed costs $ 3,000,000 $ 3,260,000

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ITSM Variance Analysis $ Business
Application
Area

Solution
Budgeted Price per Unit Flexible Budget Actual Variance
(Unit cost)
Sales Units 10,000 8,000 units 8,000
Raw Materials units 9,000 kilos units
consumed 8,000 550,000 hr 9,000
Direct Labour hours kilos kilos
500,000 hr 550,000 hr
Revenues/ Sales 7,000,000 700 5,600,000 7,200,000 1,600,000(F)
Materials cost 1,200,000 150 1,350,000 1,260,000 90,000(F)
Direct Labour cost 2,000,000 4 2,200,000 2,475,000 275,000(A)
Administration Fixed 3,000,000 _ 3,000,000 3,260,000 260,000(A)
cost
Total Cost 6,200,000 6,550,000 6,995,000

Net Profit 800,000 (950,000) 205,000 1,155,000(F)

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ITSM Summary $ Business
Application
Area

To diverse of actual behavior versus forecasted or planned behavior in budgeting or

management accounting

To exercise cost control and cost reduction

To management the accounting system is applied through variance analysis

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ITSM
Reference $ Business
Application
Area

“Management Information System”, Kennth C. Laudon, Jone P. Laudon

http://study.com

https://www.accountingtools.com

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ITSM $ Business
Application
Area

Thank You

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