Chapter 18: Variance Analysis

Our variance analysis example and practice exercise use the flexible budget approach. A flexible budget is one that is created using budgeted revenue and/or budgeted cost amounts. A flexible budget is adjusted, or flexed, to the actual level of output achieved (or perhaps expected to be achieved) during the budget period. A flexible budget thus looks toward a range of activity or volume (versus only one level in the static budget).

Examples of how the variance analysis works are contained in Figure 181 (the elements), in Figure 182 (the composition), and in Figures 183 and 184 (the calculation). Study these examples before undertaking the Practice Exercise. We have restated Exhibit 182 in a worksheet format for purposes of this example. The new format appears as follows. (The numbers have not changed.)

Exhibit 182
Actual Cost	$920,000
Less: Flexible Budget	990,000
Price Variance (favorable)	$70,000
Budgeted Cost	$937,500
Less: Flexible Budget	990,000
Quantity Variance (unfavorable)	$52,500
Net Variance (favorable)	$17,500

Assumptions (refer to Exhibit 182)

Practice Exercise 181: Variance Analysis

	Overhead Cost		# Therapy Minutes (Activity Level)	=	Cost per Therapy Minute
Actual	$920,000		330,000	=	(5) $2.79
Budgeted	$937,500		312,500	=	$3.00

Exhibit 182 presents the Variance Analysis for Hospital Systems Rehab Services for the third quarter. For our practice exercise we will duplicate this report for the fourth quarter. We are able to reformat the information in Exhibit 182 into a worksheet as follows. The fourth quarter assumptions appear below the worksheet.

Actual Cost
Less: Flexible Budget
Price Variance (favorable)
Budgeted Cost
Less: Flexible Budget
Quantity Variance (unfavorable)
Net Variance (unfavorable)

Assumptions

	Overhead Cost		# Therapy Minutes (Activity Level)	=	Cost per Therapy Minute
Actual	(1) $950,000		(3) 350,000	=	(5) $2.71
Budgeted	(2) $930,000		(4) 310,000	=	(6) $3.00

Required

Set up a worksheet for the fourth quarter like that shown in Exhibit 182 for the third quarter.

Insert the Fourth Quarter Input Data (per assumptions given above) on the worksheet. Complete the Actual Cost, Flexible Budget, and Budgeted Cost sections at the top of the worksheet. Compute the Price Variance and the Quantity Variance in the middle of the worksheet. Indicate whether the Price and the Quantity Variances are favorable or unfavorable for the fourth quarter.