the interrelationships of the variances in a particular chapter, comprehensive coverage of variances in the entire textbook is lacking. In other words, there is typically no discussion of how variances covered in earlier chapters may be incorporated with the variances covered in the later chapters. Thus, many students fail to see how they are related, as well as the similarities between the computational aspects of some of the variances.

In my senior/graduate-level Advanced Cost/Managerial Accounting course, I use two cases to help students better understand variance analysis. The cases allow students to see the big picture without being overly complex. While students are required to calculate all variances typically presented in cost/ managerial textbooks, they are continuously reminded of the numerous similarities in the computational aspects of these variances. Furthermore, they learnand understandalternative methods for computing variances and presenting their solutions. The first case requires students to calculate all the traditional sales variances and the flexible budget variances for the Fernandez Company, which manufactures three types of fine pool cues: good, better, and best. The only difference is the materials used in their production. The second case requires the calculation of materials price, mix, and yield variances for the Roger Company, which uses materials X, Y, and Z to manufacture Product NRV. The exercise concludes with a summary of the variances in both cases. THE FERNANDEZ COMPANY The Fernandez case has five parts. Part 1 requires students to make several detailed calculations in a table similar to those usually included in textbook coverage of flexible budgeting. The Fernandez Company table, however, has additional columns to incorporate the sales mix variance and rows for both variable and fixed operating expenses. Because accurate completion of this table is vital for students to fulfill and better understand the remaining requirements, I provide check figures and help as necessary to ensure successful completion. Students may complete the table manually, but I encourage them to use a spreadsheet package so they may clearly observe the computational similarities of each number and, thus, are better prepared to understand the differences. Students comfortable with a spreadsheet package tend to use the copy command and then revise the formulas as needed. The completed table appears in Table 2. Sales Volume, Sales Mix, and Sales Quantity Variances Part 2 of the Fernandez case requires students to detail the calculation of the variances. The sales volume variance is equal to the difference of contribution margin between the flexible budget (based on actual sales mix) and the static budget (based on original budgeted sales mix). In Table 2, it is simply the difference between the contribution margins (and incomes) in the third column (actual mix at budgeted dollars) and the seventh column (the static budget). The volume variance may be broken down into a mix variance (column three minus column five) and the quantity variance (column five minus column seven). Some students calculate the respective weighted average contribution margins of $39.60 per unit (actual) and $36.00 per unit (budgeted). Using this information, the solution of the volume variance, mix variance, and quantity variance is presented in Table 3. The amounts, of course, agree with those in the solution to Part 1. Students observe that all variable items (sales and all variable costs) increase by 10% because the quantity increases by 10%. Some students will explain the mix variance in a little more detail, noting that the $6.00 ($106.00 $100.00) increase in the average budgeted sales price times 110,000 units equals the $660,000 sales difference. The variable operating expenses increase of $0.60 (for the 10% sales commissions based on the higher average price) times 110,000 equals the $60,000 variable operating expense difference; and the $1.80 increase in the average budgeted cost of materials due to the change in sales mix times 110,000 equals the $198,000 increase in materials cost. These differences account for the $3.60 per unit increase ($6.00 $0.60

$1.80) in average budgeted contribution margin. Table 4 shows another approach; it is not necessarily simpler, but it gives students a better view of the underlying cause of the mix variance. Sales Price Variance The sales price variance is the $341,000 at the top of the flexible budget variance column in Table 2. It is the difference between the actual sales (in the actual mix at the actual prices) and the budgeted sales (in the actual mix at the budgeted prices). Students are provided with the actual average selling price ($109.10) and the average budgeted selling price based on the actual mix ($106). The $341,000 sales price variance comes from the difference between these two averages ($3.10) multiplied by 110,000 units. You could also require students to calculate this variance by multiplying the individual differences in actual and budgeted sales prices times the actual number of units sold and then have them prove the mathematical equivalency of the two approaches. Materials and Labor Variances The total materials variance may be broken down between price and efficiency (quantity) differences. While most textbooks present these horizontally, I typically present them vertically, with the actual quantity and prices on top (using the same format as with the sales mix and quantity variances.) Because the calculations involve costs, positive differences reflect unfavorable variances, and negative differences reflect favorable variances. The unfavorable material variance in Table 2 ($87,725) is explained in Table 5. The labor variance can be presented using the same format as the material variances. Table 6 illustrates the $33,000 favorable labor variance. Variable Overhead Variances When manufacturing overhead is allocated on the basis of direct labor hours, the variable overhead efficiency variance will be consistent with the labor efficiency variance. A quick way to calculate the overhead efficiency variance is to multiply the labor efficiency variance by 7/25 (the budgeted variable overhead per hour divided by the budgeted labor rate per hour). In this case, the answer would be a favorable $38,500 ($137,500 7/25). Table 2 shows the total variable overhead variance is $13,750 unfavorable. Thus, the variable overhead spending variance must be $52,250 unfavorable. The variable overhead variances can be shown in a format similar to the materials and labor variances as in Table 7. Fixed Overhead Variances The fixed overhead spending variance is typically the easiest to compute because both the actual amount and budgeted amount are known; it is simply a matter of subtracting. In the Fernandez case, the actual fixed overhead is $2,150,000, and the budgeted fixed overhead is $2,000,000. The difference of $150,000 is the unfavorable fixed overhead spending variance. The fixed overhead volume variance represents the under (over) applied fixed overhead. It can be calculated easily by multiplying the budgeted fixed overhead by the percentage difference in the number of actual units sold and the original number of units originally predicted. If units produced exceed the original budget, the variance is favorable (more fixed overhead costs allocated than planned) and vice versa. Thus, the fixed overhead volume variance in this case is $200,000 favorable ($2,000,000 x 10%). Because the volume variance in this case would be closed to cost of goods sold (or gross margin), this variance does not reflect a difference in the actual income and the static budget income.

Operating Expense Variances In this case, variable operating expenses were larger than anticipated because of higher sales commissions associated with higher sales prices. Because the sales commissions were 10% of sales prices, the unfavorable variable operating expense variance of $34,100 is equal to 10% of the favorable sales price variance of $341,000. The fixed operating expense variance is similar to the fixed overhead spending variance: It is calculated by subtracting the budgeted fixed operating expenses from the actual fixed operating expenses. In this case, the unfavorable fixed operating expense spending variance is $50,000 ($1,050,000 $1,000,000). Part 3 of the Fernandez case requires students to summarize Parts 1 and 2. As previously noted, the fixed overhead volume variance is the only one not used in reconciling the difference between actual income and static budget income. Market Size and Market Share Variances Part 4 of the Fernandez Company case provides information about the budgeted market size (1,000,000 units) and the actual market size (880,000 units). Students are asked to compute the market size and market share variances. Fernandez Company budgeted 100,000 units (10% of the budgeted market) but sold 110,000 units (12.5% of the actual market). Textbook solutions are traditionally much more complex than necessary. For example, using the data from this case, a typical solution would be: Market share = Actual market size (Actual market share Budgeted market share) Budgeted weighted average contribution margin per unit = 880,000 (0.125 0.10) $36.00 = $792,000 favorable Market size = (Actual market size Budgeted market size) Budgeted Market share Budgeted weighted average contribution margin per unit = (880,000 1,000,000) 0.10 $36.00 = $432,000 unfavorable Together the market share and market sizevvariances account for the $360,000 favorable quantity variance. I prefer to simplify it by focusing on the causes of each variance. For example, one way to present it is: Market share = (Actual sales in units 10% of actual market) $36.00 = (110,000 88,000) $36.00 = 22,000 $36.00 = $792,000 favorable Market size = (10% of actual market static budget units) $36.00 = (88,000 100,000) $36.00 = 12,000 $36.00 = $432,000 unfavorable Another way to present the variances is to note that the market size variance is simply 12% (the decline in market size) times $3,600,000 (the static budget contribution margin), or $432,000 unfavorable. The market share variance is 25% (the percentage increase in the market share from 10% to 12.5%) times $3,168,000 ($3,600,000 $432,000).

An even simpler presentation, representing just a minor modification, is: Actual units 110,000 Budgeted share of actual market (10% of 880,000) 88,000 Static budget units 100,000 The market share variance ($792,000 favorable) is simply the difference between the first two numbers (22,000) times the budgeted contribution margin ($36.00). Likewise, the market size variance is the difference between the second and third numbers times the budgeted contribution margin (-12,000 $36.00 = $492,000 unfavorable). Part 5 asks students to discuss computational similarities between the variances calculated and the calculations involved with strategic analysis of operating income (growth component, price recovery component, and productivity component). While strategic analysis is not variance analysis per se, certainly the computations involved in the growth and price recovery components, for example, are practically identical to the computations of the direct materials and direct labor efficiency and price variances. (I mention these again later when highlighting ways to increase or decrease the complexity of the cases.) THE ROGER COMPANY The Roger Company case (Table 8) is a straightforward problem involving the calculation of the materials price and efficiency variances, then breaking down the materials efficiency variance into the materials mix and yield variances. I primarily use this case to provide alternative approaches to solving these types of problems and to demonstrate computational similarities with the Fernandez Company case. The information provided for the Roger Company case can be used to create Table 9. In Table 9, the price variance is the difference between the total actual costs and the standard input costs for the actual mix: $56,732 $55,120 = $1,612 unfavorable. The efficiency variance is the difference between the standard cost of the actual input and the standard cost of the actual output: $55,120 $50,000 = $5,120 unfavorable. You can also calculate the total price variance by multiplying the actual input total by the difference in the actual and standard costs of the actual mix: 52,000 gallons times ($1.091 $1.060), or 52,000 $0.031 = $1,612. Of course, you can present the price variance in the more traditional fashion by multiplying each of the inputs by the difference in price, as shown in Table 10. The materials mix and yield variances can be calculated quite quickly by observing that the difference in the total input gallons and standard input gallons is 2,000 (52,000 50,000). Multiplying by the standard $1.00 average cost per gallon provides the unfavorable yield variance of $2,000. That means the mix variance must be $3,120 unfavorable ($5,120 efficiency $2,000 yield). The mix variance can also be calculated by simply multiplying 52,000 by the difference in the average budgeted cost of the actual mix and the standard average budgeted costs: 52,000 ($1.06 $1.00) = $3,120 unfavorable. The more complete approach, which includes the individual causes of the mix variance, is shown in Table 11. The more detailed approach to the mix variance is identical to the illustration of the detailed sales mix variance in the Fernandez Company case, and the calculations of the overall materials price variance is the same as for the sales price variance. The yield variance, using the weighted average standard budgeted cost per gallon, can be calculated in the same manner as the materials efficiency variances as shown in the Fernandez case.

After reading the article and both cases, answer the following questions.

Discussion Questions 1. What is meant by the total operating-income variance for a given accounting period? What alternative names are there to describe this variance. 2. What would be a first-level breakdown of the total variance described above in (1)? 3. How can the total flexible-budget variance be broken down (i.e., what are the constituent parts of this total variance)? 4. Explain the total sales volume variance for a period. How can this total variance be decomposed? 5. Explain the meaning of the joint price-quantity variance that is the basis for the discussion in the Roger Company case. (Question 5 is 2 points Extra Credit)