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Module 2: Variance and customer profitability analysis
Overview
In Module 2, you learn how revenue and customer profitability affect decision making for planning and control by using the
variance analysis tools from your introductory management accounting course. You analyze the impact of revenue changes
on management decision-making, and determine revenue allocation for bundled products and services. You conclude your
work on the module by interpreting a customer profitability report and preparing an income statement variance analysis.
Test your knowledge
Begin your work on this module with a set of test-your-knowledge questions designed to help you gauge the depth of study
required.
Topic outline and learning objectives
2.1
Revenue allocation
Describe revenue allocation when products or services are
bundled. (Level 2)
2.2
Sales-volume variance
Determine components of sales-volume variance. (Level 1)
2.3
Mix-and-yield variances for
substitutable inputs
Calculate the mix-and-yield variances for substitutable inputs.
(Level 2)
2.4
Activity-based costing and
variance analysis
Evaluate the results of cost variances analysis in an activitybased costing system. (Level 1)
2.5
Customer profitability analysis
Evaluate the results of a customer profitability analysis. (Level 1)
2.6
Full income-statement variance
analysis
Evaluate the results of a full income-statement variance analysis.
(Level 1)
Module summary
Print this module
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2.1 Revenue allocation
Learning objective
●
Describe revenue allocation when products or services are bundled. (Level 2)
Required reading
●
Chapter 16, pages 625-632
LEVEL 2
Companies sometimes bundle products or services and sell them for a single price (for example, computer companies bundle
software applications; telephone companies offer free or discounted phones when customers opt for multi-year contracts;
telecommunications companies bundle phone, TV, and Internet services.) Two methods are used to determine the exact
timing and allocation of revenues for bundled products or services — the stand-alone method and the incremental method.
●
Stand-alone
The stand-alone method of revenue allocation uses individual prices and costs to determine allocation of revenues.
Several methods of allocation, however, can be used under the stand-alone method, each yielding a different
allocation of revenues.
●
Incremental
This method of revenue allocation requires the company to rank the bundled products as primary product, then first
incremental product, second incremental product, and so on. This ranking can be determined based on either
customer survey, sales revenue of individual products, or management judgment.
The following example demonstrates revenue allocation for large kitchen appliances bundled for sale at Larry’s Appliances Ltd.
Example 2.1-1: Larry’s Appliances Ltd. – Revenue allocation
Larry’s Appliances bundles a fridge and stove package for $1,200. Each fridge sells for $800 and has a manufacturing cost of
$400, and each stove has a manufacturing cost of $450 and sells for $600. Revenues and costs can be allocated as follows:
1. Stand-alone (based on individual prices)
Fridge
=
× $1,200 = $685
$800
$800 + $600
Stove
=
× $1,200 = $515
$600
$800 + $600
Similar calculations can be made by identifying the manufacturing costs, physical units, or stand-alone total revenues
for the year. Unit-selling weights often represent the best available external measure of benefit received by the
company. This type of allocation is justified on the basis of ease of use, or because information on other measures is
limited.
2. Incremental
Assume that the fridge is designated as the primary product, and the stove as the first incremental product. The
fridge would be allocated the full $800 and the stove would be allocated the difference ($1,200 – $800 = $400).
Product
Fridge
Stove ($1,200 – 800)
Revenue allocated
$800
$400
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Cumulative revenue
$800
$1,200
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$1,200
Alternatively, assume the fridge sells an average of 3 units for each stove sold. Management may conclude that the
bundled prices are mainly driven by fridge sales, and decide to weight the fridge sales as follows:
Fridge (if primary):
Stove (if primary):
Stove
$400
$600
Fridge
$800
$600
Fridge
= ($800 × 3 + $600 ×1)
(3 + 1)
=
$3,000
4
=
$750
Stove
= ($600 × 1 + $400 × 3)
(3 + 1)
=
$1,800
4
=
$450
Total:
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2.2 Sales-volume variance
Learning objective
●
Determine components of sales-volume variance. (Level 1)
Required reading
●
Chapter 16, pages 632-640
Notes on the textbook reading
●
●
●
Page 637: The second line of the market-size variance calculation should read" = [4,000,000 units (cases) –
3,560,000] × 0.25 × 0.5880." The first bracket is missing.
Page 640: In the textbook solution to Problem 2 for self-study, the second market-share variance calculation should
be: "Market-Size Variance = $4,250,000U."
If you find terms in the required readings for this topic that you are unfamiliar with, refer to the cost classifications
definitions on page 642.
LEVEL 1
Sales-volume variances are the differences that arise from fluctuations in the contribution margin (CM) and/or the level of
actual sales and the expected (budgeted) sales. Sales-volume variance calculations are similar to the variance analysis
components introduced in earlier management accounting courses, which focus on the difference between the flexible budget
and actual results for variable and fixed costs. The variances provided here are part of the income statement, and include the
differences between the static budget, flexible budget, and actual results.
Exhibit 16-4 on page 638 shows a summary of the relationships between the sales-volume variances and the sales mix and
quantity variances, and between the market-share and market-size variances. The information provided for Spring
Distribution Company is based on an activity-based system with cost classifications defined on page 642. The following
example demonstrates calculation of sales volume variance for Electra Company’s products.
Example 2.2-1: Electra Co. – Sales-volume variance
Budgeted data for the year for Electra Co., which makes and sells lamps and phones, are as follows:
Unit sales
Sales mix
Sales price
Variable cost
Contribution
margin
Lamps
400,000
0.4
$50
$40
$10
Static budget
Phones
Total
600,000
1,000,000
0.6
1.00
$24
$34,400,000
$18
$6
$7,600,000
Lamps
357,200
0.38
$50
$38
Actual results
Phones
Total
582,800
940,000
0.62
1.00
$22
$30,681,600
$18
$12
$4
The static-budget variance is the difference between actual contribution margin results and budgeted CM.
Static-budget variance
=
=
=
Actual results − Static-budget amount
$6,617,600 − $7,600,000
$982,400 U
U = Unfavourable
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F = Favourable
The flexible-budget variance is the difference between the actual results and the flexible budget, based on actual sales mix
percentage and actual against budgeted contribution margin.
Flexiblebudget
=
Actual sales
×
Actual
×
Actual CM
variance
in units
sales mix
per unit
Lamps
= (940,000 × 0.38)
× ($12 – $10)
Phones
= (940,000 × 0.62)
× ($4 – $6)
Flexible-budget variance ($714,400 F + $1,165,600 U)
− Budgeted CM
per unit
= $714,400 F
= $1,165,600 U
= $451,200 U
A loss of $451,200 was recognized as a result of the lower CM on the phones, which was reduced by the gain on the
increased margin on the lamps. The sales-volume variance is somewhat of a misnomer, as it identifies the difference in sales
but is computed based on the contribution margin, not sales.
Sales-volume
Actual sales quantity in
Static budget sales
= units
− quantity in units
×
variance
Lamps
= (357,200
− 400,000)
× $10
Phones
= (582,800
− 600,000)
×$6
Sales-volume variance ($428,000 U + $103,200 U)
Budgeted CM per
unit
= $428,000 U
= $103,200 U
= $531,200 U
By not selling as much as expected, a loss of $531,200 is recognized. The proof of the static-budget variance is as follows:
Static-budget variance
$982,400
= Flexible-budget variance
= $451,200
+ Sales-volume variance
+ $531,200
Sales-mix and quantity variances
The sales-volume variance can be further subdivided into these two components: Any difference between budgeted sales and
actual sales (flexible budget), will arise from either a difference in the sales mix compared to anticipated levels or a difference
in the quantity of sales compared to anticipated levels (static budget).
You may notice a difference between this approach and the approach used in your introductory management accounting
course, as there are no set GAAP procedures and rules for managerial accounting as there are for financial accounting. The
textbook approach identifies the difference in volume variance as made up of these two possibilities:
●
●
The sales quantity may be greater or less than budgeted.
The actual sales mix may differ from that budgeted. If this happens, the total level of sales will differ from anticipated
(budgeted) as each unit or product is likely to have a different contribution margin.
Sales-mix
variance
Actual units of all
=products sold
Actual sales-mix
× percentage
Lamps
= 940,000
× (0.38 – 0.40)
Phones
= 940,000
× (0.62 – 0.60)
Sales-mix variance = ($188,000 U + $112,800 F)
–
Budgeted
sales-mix
percentage
×
Budgeted CM
per unit
× $10 = $188,000 U
× $ 6 = $112,800 F
= $75,200 U
Electra Co. lost $75,200 in margin due to the change in sales mix from the expected 60-40 split in sales-mix percentage to
the actual sales mix. Sales of lamps were down, with a higher budgeted contribution margin, and this had a negative overall
impact on contribution margin.
The sales mix is based on a composite unit (or hypothetical mixed-unit cost) for a fictitious unit of sales:
Budgeted CM per Actual sales-mix
unit
percentage
Lamps $10.00
0.38
Budgeted
CM per
Budgeted CM per
composite
unit for actual
Budgeted sales-mix for budgeted
mix
percentage
mix
$3.80
0.40
$4.00
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Phones $6.00
$3.72
0.60
$7.52
Sales-mix variance = 940,000 (actual units) × ($7.52 – $7.60) = $75,200 U
0.62
$3.60
$7.60
Budgeted
SalesActual
units
Budgeted CM per
Budgeted salesquantity
=
units of
−
× mix percentage ×
all
unit
variance
all products sold
products sold
Lamps
= (940,000 − 1,000,000)
× 0.40
× $10 = $240,000 U
Phones
= (940,000 − 1,000,000)
× 0.60
× $6 = $216,000 U
Sales-quantity variance = $240,000 U + $216,000 U
= $456,000 U
The reduction of actual sales compared to budgeted sales caused an overall loss of $456,000. This is the reduction in
contribution margin from lower than anticipated sales, given the budgeted percentages and contribution margins, which
isolates the impact of the reduction of sales exclusively. Proof is as follows:
Sales-volume variance
$531,200 U
= Sales-mix variance
= $75,200 U
+
+
Sales-quantity variance
$456,000 U
Market-share and market-size variances
In addition to sales-mix and quantity variances, sales would be affected if the total market size (all sales by all competitors)
were to shift relative to expected levels. A company would also determine its expected level of market share based on the
total size of the market. For example, an increase in the price of gas could decrease the total size of the market for large
SUVs, or emergence of a new, more fuel-efficient model could mean that anticipated market share might differ from the
static budget expectations that were estimated at the beginning of the year.
Assume that Electra Co. based its static budget for lamps on achieving a 10% market share of the industry’s total expected
sales of $4,000,000 ($4,000,000 × 10% = $400,000 budgeted level of sales). Assume also that the actual sales total for the
industry was $4,465,000 and the company actually achieved a market share of 8% of the actual market ($4,465,000 × 0.08
= $357,200).
Marketshare
variance
= Actual market
size in units
= 4,465,000
×
Actual market share
× (0.08 − 0.10)
Budgeted
− market
× Budgeted CM per composite
share
unit for budgeted mix
× $4.00 = $357,200 U
The market-share variance shows that the company did not achieve the 10% expected levels of 4,000,000 units, but
achieved 8% of the larger market of 4,465,500 units of sales.
Market-size
variance
= Actual market size
in units
= (4,465,000
− Budgeted market × Budgeted
market share
size in units
4,000,000)
× 0.10
Budgeted CM per
× composite unit for
budgeted mix
× $4.00 = $186,000 F
The market-size variance is positive, as the total size of the market was greater than expected. If Electra Co. had achieved its
desired market share and contribution margin of the larger market, contribution margin should have been greater by
$186,000. That is, the company should have sold an additional 46,550 units (465,500 units × 10%) and each of these
additional units should have provided a CM of $4.00 or $186,000.
Sales-quantity variance
$171,200 U
= Market-share variance
= $357,200 U
+ Market-size variance
$186,000 F
This analysis is for the lamps only. The remaining sales-quantity variances would occur from differences in the phone market
size and share.
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2.3 Mix-and-yield variances for substitutable inputs
Learning objective
●
Calculate the mix-and-yield variances for substitutable inputs. (Level 2)
Required reading
●
Chapter 16, Appendix pages 650-654
LEVEL2
Many manufacturing and production operations require mixing different ingredients or inputs to achieve the output product.
In this situation, mix-and-yield variances — differences between the flexible budget and actual results — arise from the
following sources.
The flexible budget consists of a pre-determined mix of product and price. The variances arise from differences in actual price
versus anticipated. In the Appendix example on page 650 and Exhibit 19-9, the actual cost of Caltoms and Flotoms differed
from the anticipated amount, resulting in a $10,400 U total price variance. Efficiency of production caused a $4,450 U
variance that had the following components:
●
●
The inputs were expected to be 0.50 Latoms, 0.30 Caltoms, and 0.20 Flotoms, while the actual inputs were
0.50 Latoms, 0.35 Caltoms, and 0.15 Flotoms. This could be due to a change in the price of Flotoms, which caused
the company to change the level of inputs to reduce the amount of Flotoms and increase the amount of Caltoms. This
resulted in a $3,250 F mix variance because of the lower cost of Caltoms relative to Flotoms.
Another change was in the quantity of input relative to output. The company expected to use a total of 6,400 tonnes
of input to achieve the desired 4,000 tonnes of output, but in reality used 6,500 tonnes of input to achieve the
desired output, resulting in a $7,700 U yield variance.
The graphic on page 654 summarizes the output of Exhibits 16-9 and 16-10.
Mix-and-yield variances can also be illustrated in the production of beer. If the prices of certain ingredients were to increase,
the company could alter the percentages of barley and hops and still produce a beer. Changing the inputs (that is, mix
variance) could save the company money, but it may affect the yield or output achieved. The company would also be aware
that this could alter the flavour of the beer, which could affect customer sales (which would then be reflected in sales
variances); in other words, changing the input mix may affect quality.
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2.4 Activity-based costing and variance analysis
Learning objective
●
Evaluate the results of cost variances analysis in an activity-based costing system. (Level 1)
Required reading
●
Chapter 8, pages 304-308
LEVEL 1
Activity-based costing classifies costs into four activities in a cost hierarchy: unit-level, batch-level, product-sustaining level,
and facility-sustaining level. Variance analysis related to variable and fixed manufacturing overhead focuses on batch,
product, and facility-sustaining level activities. Understanding this relationship helps managers to further analyze costs in
production. The following analysis is based on the scenario given in the text reading. Analyzing the variable costs of setups
per batch requires the following steps:
Step 1: Using the budgeted batch size, calculate the number of batches that should have been used to produce the
actual output.
151, 200 units ÷ 150 per batch = 1,008 batches.
Step 2: Using budgeted setup-hours per batch, calculate the number of setup-hours that should have been used.
1,008 batches × 6 hours per batch = 6,048 hours.
Step 3: Using the budgeted variable cost per setup hour, calculate the flexible budget for variable setup overhead
costs.
6,048 hours × $20 per hour = $120,960.
Exhibit 8-5 on page 306 presents calculations of the spending and efficiency variances for setup costs. Spending variances
arise from the differences of actual cost per hour ($21) against budgeted ($20), and efficiency variances arise from the
smaller batch size (140 per batch versus 150), which requires more batches.
Fixed-overhead costs are also computed using traditional fixed-overhead spending and production-volume variances as
follows:
Step 1: Choose the time period for the budget (20X7).
Step 2: Select the cost-allocation base for allocating fixed overhead costs to the cost object(s).
Budgeted setup hours for 20X7 are 7,200 hours.
Step 3: Identify the fixed overhead costs associated with the cost-allocation base.
Budgeted fixed setup cost for 20X7 is $216,000.
Step 4: Compute the rate per unit of the cost-allocation base used to allocate fixed overhead costs to the cost object
(s).
$216,000 ÷ 7,200 hours = $30 per hour
Exhibit 8-6 on page 308 summarizes the spending variance ($4,000 U, due to higher costs than anticipated), and productionvolume variance ($34,560 U, due to the inefficient use of the facilities). The company had expected to produce 180,000 units
but produced only 151, 200 units, and therefore did not use the facilities to anticipated levels.
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2.5 Customer profitability analysis
Learning objective
●
Evaluate the results of a customer profitability analysis. (Level 1)
Required reading
●
Chapter 16, pages 640-649
Note on the textbook reading
●
Page 641: Line 3 of the spreadsheet on page 641 should read "Units Sold" instead of "Cash Sold."
LEVEL 1
Not all customers generate the same revenue or cost the same to service, which you learned when you looked at activitybased costing (ABC) in your introductory management accounting course. This topic looks at how the concepts of ABC are
used to determine customer profitability.
The first table on page 641 shows how different price discounts can have an impact on the revenues generated per customer
(for example, quantity discounts for customers purchasing in large dollar volumes, discounts offered to attract certain
customers or to move products during a sale). Customer-cost analysis also requires ABC techniques. Differences in costs —
arising from variables such as distance from warehouse, number of sales representative visits, size of orders, frequency of
orders (some might order daily, as in just-in-time, while others order every two weeks, and so on), product handling fees,
and rush deliveries — all affect customer profitability.
Steps in profitability analysis
1. Identify costs according to unit-level, batch-level, customer- or product-level sustaining, and corporate-level
sustaining costs. This is similar to ABC, in which different levels depend on the type of business.
2. Determine the cost driver for each cost pool. Calculate total cost in cost pools and total output for each cost driver.
3. Apply the cost to customers, based on the actual use of each cost.
Certain costs (at the corporate-sustaining level or, in the case of this example, distribution costs) are not allocated to the
customer but are used in a segment-margin approach to determine overall profitability, which is separate from customer
profitability.
Exhibit 16-5 on page 643 shows the application of these steps to determine customer-level operating income. These costs
are directly applicable to management of individual customers and should be considered for short-term decisions. As in
relevant costing, fixed costs of production are often considered sunk costs and not relevant to decisions. Costs associated
with the distribution center (for example, warehouse costs, management salaries) and corporate-level costs do not filter
down (that is, are not allocated) to individual customer levels. These are considered costs of capacity — the ability to sell
products to customers — not customer-level costs.
This point is made clear in Exhibit 16-6 on page 645, where distribution-channel operating costs and corporate-sustaining
level costs are excluded from the customer profitability analysis. These costs are considered in the overall long-term viability
and corporate-level decisions but not at the customer profitability level. However, some accountants advocate including
distribution costs and corporate-sustaining level costs for overall long-term pricing decisions to ensure long-term
profitability. Exhibit 16-7 shows the cumulative customer profitability analysis, which is determined by calculating the
profitability of each individual customer and then calculating an overall, cumulative profitability.
Individual customer profitability is determined by dividing customer-level operating income into total customer revenue. This
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is then ranked to determine which customers are the most profitable. This information helps managers determine whether
excessive discounts are being offered, and decide where resources should be allocated in customer relations. Customerprofitability analysis also includes non-quantitative information (for example, a new customer maybe more costly to manage
than well-established customers). Managers should also consider the following factors:
●
●
●
●
●
Short-run and long-run customer profitability
Customer retention likelihood
Customer growth potential
Increases in overall demand from having high-profile customers
Ability to learn from customers
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2.6 Full income-statement variance analysis
Learning objective
●
Evaluate the results of a full income-statement variance analysis. (Level 1)
LEVEL 1
Variance analysis is essential in good management accounting reporting. Detailed analysis of variances allows management
to better understand the operating realities of the organization. The following computer illustration requires you to work
through a detailed variance analysis, using Excel to analyze the actual-to-budget variances.
Computer Illustration 2.6-1: Actual-to-budget variances
Conclusion: Now that you have calculated all the variances, further analysis is required. For example, in looking at the sales
variances, you need to determine whether the increase in volume sold is due to an increase in the market for the product. If
so, did Becker & Clarke keep pace with the growth in the market or did it lose market share? Was the reason for the gained
sales volume due to the lower prices? Did the lower prices affect profitability? Positive variances also need to be analyzed,
and the underlying situation should be assessed, to make sure other potentially serious problems aren’t being overlooked.
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Module 2 summary
Describe revenue allocation when products or services are bundled
●
●
●
There are two overarching methods: Stand-alone and incremental revenue allocation.
Stand-alone uses the unbundled prices and costs and the allocation methods are based on
❍
selling prices
❍
manufacturing costs
❍
physical units, and
❍
stand-alone total revenues for the year.
Incremental revenue allocation uses a product ranking system.
Determine components of sales-volume variance
●
●
●
●
●
●
●
●
Static-budget variance = Actual results
Static budget amount.
Sales-volume variance = (Actual sales quantity in units
unit.
Static budget sales quantity in units) × budgeted C/M per
Static-budget variance = Flexible-budget variance + Sales-volume variance.
Sales-mix variance = Actual units of all products sold × (Actual sales mix percentage
percentage) × Budgeted CM per unit.
Sales-quantity variance = (Actual units of all products sold
mix percentage × Budgeted CM per unit.
Budgeted units of all products sold) × Budgeted sales
Market-share variance = Actual market size in units × (Actual market share
CM per composite unit for budgeted mix.
Market-size variance = (Actual market size in units
Budgeted CM per composite unit for Budgeted mix.
Budgeted sales mix
Budgeted market share) × Budgeted
Budgeted market size in units) × Budgeted market share ×
Sales quantity variance = Market share variance + Market size variance.
Calculate the mix-and-yield variances for substitutable inputs
●
●
●
●
Mix variance for substitutable inputs = Actual total quantity of all inputs used × (Actual input mix percentage
Budgeted input mix percentage) × Budgeted price for the input.
Total mix variance for substitutable inputs = Sum of all individual mix variances.
Yield variance for specific substitutable input = (Actual total quantity of all inputs used
all inputs used) × Budgeted input mix percentage × Budgeted price.
Budgeted total quantity of
Total yield variance = Sum of all yield variances.
Evaluate the results of cost variances analysis in an activity-based costing system
Using the cost hierarchy, unit level, batch-level, product-sustaining level, and facility-sustaining level, analyze all fixed and
variable costs.
●
Step 1 takes the activity-based budget numbers and creates a flexible budget based on actual performance.
●
Step 2 compares flexible budget to actual.
Evaluate the result of a customer profitability analysis
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●
Identify costs according to unit-level, batch level, customer, or product sustaining costs.
●
Determine the cost driver for each cost pool. Calculate total cost in cost pools and total output for each cost driver.
●
Apply the cost to customers based on actual usage.
●
Compare revenues and costs to determine profitability of each customer.
●
Analyze information to determine actionable opportunities to improve profit.
Evaluate the results of a full-income statement variance analysis
●
●
●
Incorporates variance analysis into the income statement by providing for each item data associated with the static
budget, flexible budget, and actual results.
This format allows capturing planning variances and operating variances.
In turn, these variances are broken down into their elementary components (price, rate, spending, budget, usage or
efficiency, and volume variances).
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Computer Illustration 2.6-1: Actual-to-budget variances
*Last updated on September 24
Becker & Clarke Inc. created a budget for the 20X8 fiscal year. It is now January, 20X9, and the finance department must
analyze the results of the year’s operations.
Material provided
File MA2M2P1 containing two partially completed worksheets, M2P1 and M2P1Var, and the two solution worksheets, M2P1S
and M2P1VarS. If you have trouble creating the formulas for the variances, review variance analysis in your introductory
management accounting course or review Chapters 7 and 8 of the text.
Procedure
1. Open the file MA2M2P1 from the data folder
2. Go to tab M2P1 and study the layout of the spreadsheet. The data table is contained in section A6 to H43. Below this
is the area for completing the budget, flexible budget, and actual income statements.
3. Use column C, starting at row 55 and working to row 68, to complete the actual income statement by referencing
information in the data table. Row 52 has been completed to illustrate the method.
4. Use column E, starting at row 55 and working to row 68, to complete the flexible budget income statement by
referencing information in the data table.
5. Use column G, starting at row 55 and working to row 68, to complete the original budget income statement by
referencing information in the data table.
6. In column D, calculate the variance between the flexible budget and the original budget.
7. In column F, calculate the variance between the original budget and the flexible budget.
8. Next go to tab M2P1Var and study the layout. This tab is used to do the detailed variance analysis. The sales analysis
is completed in section A5 to H12.
9. Row 8 has been completed to illustrate the method. Have a good look at the formula in cell H8:
=IF((D8-E8)*F8 = M2P1!F52, M2P1!F52, FALSE)
This formula confirms that the variance analysis as done on sheet M2P1Var comes up with the same number as on
sheet M2P1. That is, the straight-forward calculation of the difference between the original budget and the flexible
budget is explained by the analysis done in cells D8 to H8.
10. Now complete row 11 for the price variance.
11. In section A13 to H88, the variance analysis for Cost of goods sold should be completed. Complete the following rows
for the identified variances.
Direct-material variances
Row Description
17 Volume variance
20 Price variance
26 Efficiency variance
28 Total flexible budget
Direct-labour variances
Row Description
33 Volume variance
37 Price
42 Efficiency
44 Total flexible budget
Variable-overhead variances
Row Description
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49
55
59
61
Volume
Spending
Efficiency
Total flexible budget
Use the same logic as was used for the sales section. Note that cells H28, H44, and H61 have already got formulas.
For H28 the formula is:
=IF(H26 + H21 = M2P1!F55,M2P1!F55,FALSE)
Remember that the Volume variance calculated in row 17 is the difference between the original budget and the
flexible budget. Then note that the difference between the flexible budget and the actual results can be broken down
into two variances, the price variance and the efficiency variance. This formula then confirms that the total of the two
variances as calculated equals the value calculated by comparing the flexible budget to actual. If summing the two
variances does not come up with the same value, the cell will display an error message.
12. A63 to H74 contains the analysis of the variable overhead variance based on the activity-based method. Enter the
appropriate formulas in cells H66, H68, and H70. In section A72 to H74, the variance is compared with the variance
calculated in F57 in sheet M2P1.
13. A76 to H85 is used to calculate the fixed overhead variances for Cost of goods sold. In row 80, enter the formulas
and calculate the production-volume variance. In row 85, enter the formulas and calculate the spending variance.
14. Section A89 to H103 is used to analyze the variances for the other expenses.
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