Slides 7 4 calculate spending and efficiency variances

Calculate Spending and Efficiency Variances Intermediate Cost Analysis and Management © Why So Much? © Terminal Learning Objective • Task: Calculate Spending and Efficiency Variances • Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors • Standard: with at least 80% accuracy • Identify root causes of Spending and Efficiency Variances • Identify and enter relevant scenario data into macro enabled templates to calculate Spending and Efficiency Variances â Why So Much? The gas pump is a calculator that charges based on number of gallons * price per gallon • Higher gas bills are caused by an increase in one or both of these variables • If you are using more gallons than you should be you have an unfavorable efficiency variance • If you are paying more per gallon then you have an unfavorable spending variance • These are common situations where we dig deeper into the root cause of variable cost changes © Getting to the Root Cause Projected Cost Resource level should have used 20 gallons * Price should have paid $4/gallon $80 • Imagine that in a normal week of driving you expect to use 20 gallons and you planned on spending $4 per gallon © You Actually Spent • You cut down on driving last week and the pump registered only 18 gallons, but the cost per gallon went up to $5 • Note that your total variance is $10 unfavorable Actual Cost Resource level actually used 18 gallons * Price actually paid $5/gallon $90 © What if No Price Change? • If the price were still $4 per gallon your more efficient driving would have spent $72 • This is an Efficiency Variance of $8 favorable Projected Cost Efficiency Intermediate Variance Product Resource level should have used Resource level actually used 20 gallons 18 gallons * Price should have paid $4/gallon * Price should have paid $4/gallon $80 © $8 $72 How Did Price Impact? Intermediate Product Resource level actually used 18 gallons Price should have paid $4/gallon $72 Spending Variance ($18) Actual Cost Resource level actually used 18 gallons Price actually paid $5/gallon $90 © • However, instead you paid $5 per gallon more for the 18 gallons: a total of $18 more • This is a Spending Variance of $18 Unfavorable Putting it All Together Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Resource level should have used Resource level actually used Resource level actually used 20 gallons 18 gallons 18 gallons * Price should have paid $4/gallon * Price should have paid $4/gallon * Price actually paid $80 $8 $72 $5/gallon ($18) $90 note that the net of efficiency and spending variance equals the total variance © Relating to Volume Variance plan units price/unit sales variable/unit variable cost fixed cost profit fcst fcst fcst   fcst fcst fcst   fcst Efficiency and Spending Variances are going one level deeper in trying to understand the root cause of the variable cost change sales volume variance = = = performance variance = = = = flexible plan actual fcst =   fcst = fcst   = = actual results actual actual actual   actual actual actual   actual flex budget variable cost efficiency variance intermediate product spending variance = = = = resource quantity should have used X price per resource should have paid ∆ = = = = resource quantity actually used X price per resource should have paid ∆ actual results variable cost = resource quantity actually used X price per resource actually paid 10 © Gasoline Example Projected Cost Resource level should have used Efficiency Variance Intermediate Product Resource level actually used 1000 gallons * Price should have paid $4/gallon Spending Variance Actual Cost Resource level actually used 1200 gallons * Price should have paid * Price actually paid $3.9/gallon $4000 $4680 © 16 Gasoline Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Resource level should have used Resource level actually used Resource level actually used 1000 gallons 1200 gallons 1200 gallons * Price should have paid $4/gallon * Price should have paid $4/gallon * Price actually paid $4000 ($800) $4800 © $3.9/gallon $120 $4680 17 Staff Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Resource level should have used Resource level actually used Resource level actually used * Price should have paid * Price should have paid * Price actually paid © 18 Staff Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Resource level should have used Resource level actually used Resource level actually used 500 400 400 * Price should have paid $50 * Price should have paid $50 * Price actually paid $2500 $500 $2000 © $50 $2000 19 Maintenance Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Resource level should have used Resource level actually used Resource level actually used * Price should have paid * Price should have paid * Price actually paid © 20 Maintenance Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Resource level should have used Resource level actually used Resource level actually used 600 miles 600 miles 600 miles * Price should have paid $20/mile * Price should have paid $20/mile * Price actually paid $12,000 $12,000 © $25/mile ($3000) $15,000 21 Editing Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Resource level should have used Resource level actually used Resource level actually used * Price should have paid * Price should have paid * Price actually paid © 22 Editing Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Resource level should have used Resource level actually used Resource level actually used 200 pages 350 pages 350 pages * Price should have paid $5/page * Price should have paid $5/page * Price actually paid $1000 ($750) $1,750 © $6/page ($350) $2100 23 Electricity Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Resource level should have used Resource level actually used Resource level actually used * Price should have paid * Price should have paid * Price actually paid © 24 Electricity Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Resource level should have used Resource level actually used Resource level actually used 150 kw 120 kw 120 kw * Price should have paid $.3/kw * Price should have paid $.3/kw * Price actually paid $45 $9 $36 © $.5/kw ($24) $60 25 Telephone Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Resource level should have used Resource level actually used Resource level actually used * Price should have paid * Price should have paid * Price actually paid © 26 Telephone Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Resource level should have used Resource level actually used Resource level actually used 400 550 550 * Price should have paid $.2/min * Price should have paid $.2/min * Price actually paid $80 ($30) $110 © $.15/min $27.50 $82.50 27 Food Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Resource level should have used Resource level actually used Resource level actually used * Price should have paid * Price should have paid * Price actually paid © 28 Food Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual Cost Resource level should have used Resource level actually used Resource level actually used 2000 cal 2500 cal 2500 cal * Price should have paid $.05/cal * Price should have paid $.05/cal * Price actually paid $100 ($25) $125 © $.04/cal $25 $100 29 Spreadsheet Exercises © 30 ... Objective Task: Calculate Spending and Efficiency Variances • Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of... variables and actors • Standard: with at least 80% accuracy • Identify root causes of Spending and Efficiency Variances • Identify and enter relevant scenario data into macro enabled templates to calculate. .. Price should have paid $4/ gallon * Price actually paid $40 00 ($800) $48 00 © $3.9/gallon $120 $46 80 17 Staff Example Projected Cost Efficiency Variance Intermediate Product Spending Variance Actual