Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 18

Profit Variance Analysis

Refer to the data in Exercises 16-16 and 16-17. Prepare a profit variance analysis like the one in Exhibit 16.5.

Step 1 of 2

Fundamentals of Variance Analysis ; Profit Variance Analysis of W. Inc.

This question asks students to prepare profit variance analysis based on an illustration in the book solution. However the purpose behind profit variance analysis is to find out the reasons for variances in profit levels. Here it is important to note certain concepts.

Master Budget : Always keep in mind that master budget is prepared for a predetermined activity at predetermined cost structure. For example in this question, sales revenue is calculated at a predetermined quantity (i.e. 90000 units) at a predetermined price which is $ 36 per unit. Same calculations have been applied for variable cost.

Flexible budget ; this is always fine-tuned to accommodate the variations in activity level. For example here the flexible budget is prepared at the activity level of 92000 units sold. However important thing to consider here is that we will apply only budgeted cost and sales price structure to compare with the actual results. This helps in the performance evaluation and finding out the areas where the concern has not done well.

Sales Activity Variance : This variance just shows the difference between master budget and flexible budget. So in a way it shows the difference because of different activity levels.

Manufacturing Variance or Variable cost variance: This variance just shows the difference of what cost should have been incurred and what actually just happened. For example in the above given situation the variable cost variance is $ 248400 ( Unfavorable) because the actual cost incurred more as compared to what would have been at the activity level with standard cost.

PROFIT VARIANCE ANALYSIS (Figures in 000)
HEAD	Based on actual level of activity of 92000 units	Manufacturing variance	U/F	Sales Price Variance	U/F	Flexible Budget of 92000 units	sales activity variance	U/F	Master Budget of planned Activities
Sales Revenue	$3353.4			$41.4	F	$3312	$72	U	$3240
Less ; Variable Cost of	$1628.4					$1380	$30	U	$1350
Total Variable Cost	$1628.4		U			$1380	$30	F	$1350
Contribution Margin	$1725					$1932	$42	F	$1890
Fixed Costs	$900	$36	U			$900			$900
Total Fixed Costs	$900	$36	U			$900			$900
Operating Profit	$825					$1032	$42		$990