After studying this chapter you will be able to understand: Flexible budgets a performance evaluation tool, variance analysis direct materials, variance analysis direct labor, variance analysis manufacturing overhead. | CHAPTER © jsnyderdesign / iStockphoto 6 PERFORMANCE EVALUATION VARIANCE ANALYSIS THE BUDGET PLAN FOR 4TH QUARTER Sell in 4th quarter: 70,000 pants 25,000 jerseys 9,000 award jackets Control inventory Manage cash WHAT’S UP? C&C sold more award jackets than budgeted. Managers thought that would be a good thing. Turns out, workers took too long to make the extra jackets. And they were paid overtime to meet customer delivery dates. Net income was $144,800 lower than budgeted, even though more jackets were sold. FLEXIBLE BUDGETS A PERFORMANCE EVALUATION TOOL Unit 6 1 . Unit Unit © Tomwang112 / iStockphoto Unit TOTAL VARIANCE Actual results achieved Budgeted (expected) results Variance A variance is any difference between what you expected and what you achieved. Actual Static Budget Variance Sales $2,457,525 $2,335,000 $122,525 F Cost of goods sold 1,724,150 1,582,757 141,393 U Gross margin 733,375 752,243 (18,868) U Selling and administrative expenses 385,139 360,753 24,386 | CHAPTER © jsnyderdesign / iStockphoto 6 PERFORMANCE EVALUATION VARIANCE ANALYSIS THE BUDGET PLAN FOR 4TH QUARTER Sell in 4th quarter: 70,000 pants 25,000 jerseys 9,000 award jackets Control inventory Manage cash WHAT’S UP? C&C sold more award jackets than budgeted. Managers thought that would be a good thing. Turns out, workers took too long to make the extra jackets. And they were paid overtime to meet customer delivery dates. Net income was $144,800 lower than budgeted, even though more jackets were sold. FLEXIBLE BUDGETS A PERFORMANCE EVALUATION TOOL Unit 6 1 . Unit Unit © Tomwang112 / iStockphoto Unit TOTAL VARIANCE Actual results achieved Budgeted (expected) results Variance A variance is any difference between what you expected and what you achieved. Actual Static Budget Variance Sales $2,457,525 $2,335,000 $122,525 F Cost of goods sold 1,724,150 1,582,757 141,393 U Gross margin 733,375 752,243 (18,868) U Selling and administrative expenses 385,139 360,753 24,386 U Operating income 348,236 391,490 (43,254) U Financing costs 2,256 1,880 376 U Income before taxes 345,980 389,610 (43,630) U Income taxes 103,794 116,883 (13,089) F Net income $242,186 $272,727 ($30,541) U LET’S LOOK AT SOME VARIANCES A variance is favorable if it increases net income Actual Static Budget Variance Sales $2,457,525 $2,335,000 $122,525 F Cost of goods sold 1,724,150 1,582,757 141,393 U Gross margin 733,375 752,243 (18,868) U Selling and administrative expenses 385,139 360,753 24,386 U Operating income 348,236 391,490 (43,254) U Financing costs 2,256 1,880 376 U Income before taxes 345,980 389,610 (43,630) U Income taxes 103,794 116,883 (13,089) F Net income $242,186 $272,727 ($30,541) U LET’S LOOK AT SOME VARIANCES A variance is unfavorable if it decreases net income YOUR PERFORMANCE REPORT The month has just ended, and your department has been very productive. You were able to crank out 38,000 units! That’s 3,000 more than were budgeted for the month. You figure this
