Intermediate Cost Analysis and Management 1 74 Why So Much 2 Terminal Learning Objective Action Calculate Spending and Efficiency Variances Condition You are training to become an ACE with access to ICAM course handouts readings ID: 731278
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Slide1
Calculate Spending and Efficiency Variances
Intermediate Cost Analysis and Management
1
7.4Slide2
Why So Much?
2Slide3
Terminal Learning Objective
Action: Calculate Spending and Efficiency
Variances Condition: You are training to become an ACE with access to ICAM course handouts, readings,
spreadsheet tools,
and awareness of Operational Environment (
OE) variables
and
actors
Standard: With at least 80% accuracy:Identify root causes of Spending and Efficiency VariancesIdentify and enter relevant scenario data into macro enabled templates to calculate Spending and Efficiency Variances
3Slide4
Why So Much?
The gas pump is a calculator that charges based onnumber of gallons * price per gallon
Higher gas bills are caused by an increase in one or both of these variablesIf you are
using m
ore gallons
than you should be you have an
unfavorable
efficiency varianceIf you are paying more per gallon then you have an
unfavorable spending variance
These are common situations where we dig deeper into the root cause of variable cost changes
4Slide5
Getting to the Root Cause
Imagine that in a normal week of driving you expect to use 20 gallons and you planned on spending $4 per gallon
Projected
Cost
Planned Resource Usage
20 gallons
*
Planned Price
$4/gallon
$80
5Slide6
You Actually Spent
You cut down on driving last week and the pump registered only 18 gallons, but the cost per gallon went up to $5Note that your total variance is $10 unfavorable
Actual
Cost
Actual Resource Usage
18 gallons
*
Actual Price
$5/gallon
$90
6Slide7
What if No Price Change?
If the price were still $4 per gallon your more efficient driving would have spent $72.
This is an Efficiency Variance of
$8 favorable
Projected
Cost
Efficiency Variance
Intermediate Product
Planned Resource Usage
Actual Resource Usage
20 gallons
18 gallons
*
Planned Price
*
Planned Price
$4/gallon
$4/gallon
$80
$8
$72
7Slide8
How Did Price Impact?
However, instead you paid $5 per gallon for the 18 gallons: a total of $18 more
This is a
Spending
Variance of
$18 Unfavorable
Intermediate Product
Spending Variance
Actual
Cost
Actual Resource Usage
Actual Resource Usage
18 gallons
18 gallons
Planned Price
Actual Price
$4/gallon
$5/gallon
$72
($18)
$90
8Slide9
Putting it All Together
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
20 gallons
18 gallons
18 gallons
*
Planned Price
*
Planned Price
*
Actual Price
$4/gallon
$4/gallon
$5/gallon
$80
$8
$72
($18)
$90
note that the net of efficiency and spending variance equals the total variance
9Slide10
Relating to Volume Variance
plan
sales volume
flexible
performance
actual
variance
plan
variance
results
units
fcst
=
actual
=
actual
price/unit
fcst
=
fcst
=
actual
sales
fcst
=
=
=
actual
variable/unit
fcst
=
fcst
=
actual
variable cost
fcst
=
=
=
actual
fixed costfcst=fcst=actual profitfcst===actualflex budgetefficiencyintermediatespendingactual resultsvariable costvarianceproductvariancevariable cost=∆= ∆=resource quantityresource quantityresource quantityshould have usedactually usedactually usedXXXprice per resourceprice per resourceprice per resourceshould have paidshould have paidactually paid
Efficiency and Spending Variances are going one level deeper in trying to understand the root cause of the variable cost change
10Slide11
Other Applications
There are many, many application of spending and efficiency variancesPeople cost is hours*rate/hourMaterial cost is parts*cost/part
Tank Maintenance is miles*cost/mileThere are many other types of varianceSome of which are useful in certain circumstances
All of which follow the same logic you have learned here
11Slide12
LSA #1 Learning Check
Q1. What does the efficiency variance reveal?
A1. It reveals the dollar amount that can be attributed to a change in usage of the resource.
Q2. The
spending variance is favorable but the efficiency variance is unfavorable. How would you describe the situation
?
A2.
The price per unit of resource was less than planned, but the usage level of the resource was greater than planned. Possibly the quality of the less expensive resource was poor, resulting in inefficiencies. Example: new employees work at a lower wage but are likely less efficient.
12Slide13
LSA #1 Summary
During this lesson, we discussed Spending and Efficiency Variances, it’s impact on price and how it relates to Volume Variance.
13Slide14
Exercises
Evaluate Efficiency and Spending Variances for each of the scenarios below:
Gas
Staff
Maint
Edits
Elect
Tele
Food
Planned Resource Usage
1000 gal
500 hrs
600 miles
200 pages
150
kw
400 min
2000 cal
Planned
price
$4
/ gal
$50 / hr
$20 / mile
$5 / page
$.3 / kw$.2 / min
$.05 / calActual resource usage1200 gal400 hrs
600 miles350 pages
120
kw
550 min
2500 cal
Actual
price
$3.9 / gal
$50 /
hr
$25 / mile
$6 / page$.5 / kw$.15 / min$.04 /
cal14Slide15
Gasoline Example
15
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
*
Planned Price
*
Planned Price
*
Actual PriceSlide16
Gasoline Example (Cont.)
16
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
1000 gallons
*
Planned Price
*
Planned Price
*
Actual Price
$4/gallon
$4000Slide17
Gasoline Example (Cont.)
17
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
1000 gallons
1200 gallons
*
Planned Price
*
Planned Price
*
Actual Price
$4/gallon
$3.9/gallon
$4000
$4680Slide18
Gasoline Example (Cont.)
18
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
1000 gallons
1200 gallons
1200 gallons
*
Planned Price
*
Planned Price
*
Actual Price
$4/gallon
$4/gallon
$3.9/gallon
$4000
($800)
$4800
$120
$4680Slide19
Staff Example
19
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
*
Planned Price
*
Planned Price
*
Actual PriceSlide20
Staff Example (Cont.)
20
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
500
400
400
*
Planned Price
*
Planned Price
*
Actual Price
$50
$50
$50
$25,000
$5,000
$20,000
0
$20,000Slide21
Maintenance Example
21
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
*
Planned Price
*
Planned Price
*
Actual PriceSlide22
Maintenance Example (Cont.)
22
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
600 miles
600 miles
600 miles
*
Planned Price
*
Planned Price
*
Actual Price
$20/mile
$20/mile
$25/mile
$12,000
0
$12,000
($3000)
$15,000Slide23
Editing Example
23
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
*
Planned Price
*
Planned Price
*
Actual PriceSlide24
Editing Example
24
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
200 pages
350 pages
350 pages
*
Planned Price
*
Planned Price
*
Actual Price
$5/page
$5/page
$6/page
$1000
($750)
$1,750
($350)
$2100Slide25
Electricity Example
25
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
*
Planned Price
*
Planned Price
*
Actual PriceSlide26
Electricity Example (Cont.)
26
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
150 kw
120 kw
120 kw
*
Planned Price
*
Planned Price
*
Actual Price
$.3/kw
$.3/kw
$.5/kw
$45
$9
$36
($24)
$60Slide27
Telephone Example
27
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
*
Planned Price
*
Planned Price
*
Actual PriceSlide28
Telephone Example (Cont.)
28
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
400 min
550 min
550 min
*
Planned Price
*
Planned Price
*
Actual Price
$.2/min
$.2/min
$.15/min
$80
($30)
$110
$27.50
$82.50Slide29
Food Example
29
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
*
Planned Price
*
Planned Price
*
Actual PriceSlide30
Food Example (Cont.)
30
Projected
Cost
Efficiency Variance
Intermediate Product
Spending Variance
Actual
Cost
Planned Resource Usage
Actual Resource Usage
Actual Resource Usage
2000
cal
2500
cal
2500
cal
*
Planned Price
*
Planned Price
*
Actual Price
$.05/
cal
$.05/
cal
$.04/
cal
$100
($25)
$125
$25
$100Slide31
Spreadsheet Exercises
31Slide32
TLO Summary
Action: Calculate Spending and Efficiency Variances
Condition: You are training to become an ACE with access to ICAM course handouts, readings,
spreadsheet tools,
and awareness of Operational Environment (
OE) variables
and
actors
Standard: With at least 80% accuracy:Identify root causes of Spending and Efficiency VariancesIdentify and enter relevant scenario data into macro enabled templates to calculate Spending and Efficiency Variances
32