Managerial Accounting

1. PRESENTATION
On
Variance Analysis
Relevant Costing &
CostVolume Profit Analysis

2. Saad Suhail ( 58079)
Maira Khan (57733)
Mehek Siddiqui (58153)
Urooj Kanwal (58022)

4.  A variance is the difference between a budgeted,
planned or standard cost and the actual amount
incurred/sold.
 Variances are a key part of the standard costing system
used by many manufacturers costs and revenues.
 These cost variances send an early signal to
management that the company is experiencing actual
costs that are different from the company's plan

5. “VarianceAnalysis, in managerial accounting,
refers to the investigation of deviations in
financial performance from the standards
defined in organizational budgets”

6.  If direct wages had been budgeted to cost $100,000
actually cost $200,000 during a period, variance analysis
shall aim to identify how much of the increase in direct
wages is attributable to:
• Increase in the wage rate (adverse labor rate variance);
• Decline in the productivity of workforce
(adverse labor efficiency variance);
• Unanticipated idle time (labor idle time variance);
• More wages incurred due to higher production than
the budget (favorable sales volume variance).

7. Main types of variances are as follows:
 Sales Volume Variance
 Sales Mix Variance
 Sales Quantity Variance
 Sales Price Variance
 Direct Material Price Variance
 Direct Material Usage Variance
 Direct Material Mix Variance
 Direct Material Yield Variance
 Direct Labor Rate Variance
 Direct Labor Efficiency Variance
 Direct Labor Idle Time Variance
 Variable Overhead Spending Variance
 Variable Overhead Efficiency Variance
 Fixed Overhead Spending Variance
 Fixed Overhead Volume Capacity & Efficiency Variance
 Fixed Overhead Total Variance

9.  Variance analysis is an important part of an
organization's information system.
 Functions of variance analysis include:
a) Planning, Standards and Benchmarks
b) Control Mechanism
c) ResponsibilityAccounting

11. “Relevant cost, in managerial accounting,
refers to the incremental and avoidable
cost of implementing a business decision”

12.  Attempts to determine the objective cost of a
business decision.
 An objective measure of the cost of a business
decision is the extent of cash outflows that shall
result from its implementation.
 Relevant costing focuses on just that and ignores
other costs which do not affect the future cash
flows.

13. 1. Future Cash Flows
2. AvoidableCosts
3. Opportunity Costs
4. IncrementalCost

14. FUTURE CASH FLOWS:
Cash expense that will be incurred in the future as a
result of a decision is a relevant cost.
AVOIDABLE COSTS:
Only those costs are relevant to a decision that can be
avoided if the decision is not implemented.

15. OPPORTUNITY COSTS:
Cash inflow that will be sacrificed as a result of a
Particular management decision is a relevant cost.
INCREMENTAL COST:
Where different alternatives are being considered,
relevant cost is the incremental or differential cost
between the various alternatives being considered.

17. “A managerial accounting technique
concerned with the effect of sales volume
and product costs on operating profit of a
business”.
 Deals with how operating profit is affected by
changes in variable costs, fixed costs, selling
price per unit and the sales mix of two or
more different products.

18. The basic formula used in CVP Analysis is derived
from profit equation:
px = vx + FC + Profit
In the above formula,
p is price per unit;
v is variable cost per unit;
x are total number of units produced and sold;
FC is total fixed cost

19.  1: Contribution Margin (CM)
The difference between total sales (S) and total
variable cost or, in other words, it is the amount
by which sales exceed total variable costs (VC). In
order to make profit the contribution margin of a
business must exceed its total fixed costs. In
short:
CM = S −VC

20. Contribution Margin Ratio is calculated by dividing contribution
margin by total sales or unit CM by price per unit.
Contribution Margin can also be calculated per unit which is called Unit
Contribution Margin. It is the excess of sales price per unit (p) over
variable cost per unit (v).Thus:
Unit CM = p − v
3: Contribution Margin Ratio (CM Ratio)