Module 9: Variance Analysis in Management Accounting

Introduction to Variance Analysis

• Purpose: Understanding variance analysis through a real-life example.
• Example Context: Bill's hamburger restaurant and concerns about beef cost.

Key Concepts

• Variance Analysis: Technique to understand cost variances in business.
• Direct Materials Variance: Focuses on raw materials used in production.
• Standard Costs: Planned costs for materials or labor.

Bill's Scenario

• Initial Concern: Bill exceeded his beef budget.
• Beef Cost: Primary ingredient and most expensive component.
• Objective: Identify reasons for overspending on beef.

Standard Costs and Plan

• Plan: Each burger requires 200 grams (0.2 kg) of beef.
• Cost of Beef: $8 per kilogram.
• Target Cost per Burger: $1.60 per burger in beef.

Actual Costs and Variance

• Actual Purchase: 20 kg of beef at $7.50/kg totaling $150.
• Usage: 19 kg used for producing 80 burgers.
• Expected Cost: 80 burgers should cost $128 in beef.

Variance Analysis

1. Purchases Breakdown: Direct Materials Price Variance

   • Actual Quantity (AQ): 20 kg.
   • Actual Price (AP): $7.50/kg.
   • Amount Paid: 20 kg x $7.50 = $150.
   • Standard Price (SP): $8/kg.
   • Expected Cost: 20 kg x $8 = $160.
   • Price Variance: $10 Favorable (saved money).

2. Usage Breakdown: Direct Materials Quantity Variance

   • Actual Quantity Used: 19 kg.
   • Actual Quantity Used Cost: 19 kg x $8 = $152.
   • Standard Quantity for Output: 80 burgers x 0.2 kg = 16 kg.
   • Expected Usage Cost: 16 kg x $8 = $128.
   • Quantity Variance: $24 Unfavorable (overused beef).

Conclusion of Analysis

• Overall Variance: $14 Unfavorable (after considering both variances).
• Issues Identified: More beef used than planned.
  • Reasons could include spoilage, lower quality beef, or inefficiency in usage.
  • Options include adjusting the budget or improving kitchen efficiency.

Key Takeaways

• Understanding Variance: Helps in identifying cost overruns.
• Implications: Small variances can be significant for a new business.
• Future Learning: Focus on material, labor, and overhead variances in the upcoming sessions.