CMA Training Video | Topic 1.2 Cost & Variance Measures | By Varun Jain
Miles Education - CPA, CMA, CFA
The variance analysis in Europe is based on budgeting techniques that were covered in the
previous section. We discussed the concept of a master budget, which is typically a static
budget at a particular level of activity. To perform a variance analysis, we convert this static
budget into a flexible budget. This is done by separating out the variable costs from the fixed
costs, particularly when it comes to manufacturing costs.At the beginning of the period, the
budgeted operating profit, looking only at the manufacturing costs, was $50,800. This was
based on the budget for selling 6,000 units at $25 per unit. However, in reality, the entity only
sold 5,000 units.The budget for direct labor was $45,000. The actual fixed costs were $8,100,
while the budget was $8,000. Considering only manufacturing costs, the operating income was
$33,385.
To produce 5000 units, they were supposed to use 10,000 pounds of raw material, which is
precisely what was used here. The direct labor cost for producing 5000 units was $37,500, but
they spent $40,000 and $40, resulting in a direct labor variance of two thousand five hundred
forty dollars. For the production of 5000 units, the standard direct labor cost was fifteen
thousand US dollars, with a standard rate of one dollar fifty cents per hour. On the flexible
budget, the contribution calculates to forty-nine thousand dollars, but the actual figure was three
hundred dollars unfavorable due to a budget of forty-one thousand dollars. The sales volume
variance is unfavorable since they charged only $24 per unit instead of the expected $25.
Therefore, for 5,000 units, it resulted in a $1.00 per unit loss, leading to five thousand dollars
unfavorable spending. The costs mentioned above represent the production costs while the top
line is the total sales.
Miles Education - CPA, CMA, CFA
The variance analysis in Europe is based on budgeting techniques that were covered in the
previous section. We discussed the concept of a master budget, which is typically a static
budget at a particular level of activity. To perform a variance analysis, we convert this static
budget into a flexible budget. This is done by separating out the variable costs from the fixed
costs, particularly when it comes to manufacturing costs.At the beginning of the period, the
budgeted operating profit, looking only at the manufacturing costs, was $50,800. This was
based on the budget for selling 6,000 units at $25 per unit. However, in reality, the entity only
sold 5,000 units.The budget for direct labor was $45,000. The actual fixed costs were $8,100,
while the budget was $8,000. Considering only manufacturing costs, the operating income was
$33,385.
To produce 5000 units, they were supposed to use 10,000 pounds of raw material, which is
precisely what was used here. The direct labor cost for producing 5000 units was $37,500, but
they spent $40,000 and $40, resulting in a direct labor variance of two thousand five hundred
forty dollars. For the production of 5000 units, the standard direct labor cost was fifteen
thousand US dollars, with a standard rate of one dollar fifty cents per hour. On the flexible
budget, the contribution calculates to forty-nine thousand dollars, but the actual figure was three
hundred dollars unfavorable due to a budget of forty-one thousand dollars. The sales volume
variance is unfavorable since they charged only $24 per unit instead of the expected $25.
Therefore, for 5,000 units, it resulted in a $1.00 per unit loss, leading to five thousand dollars
unfavorable spending. The costs mentioned above represent the production costs while the top
line is the total sales.
