Slides 7 4 calculate spending and efficiency variances

Calculate Spending and Efficiency Variances Intermediate Cost Analysis and Management... • Standard: with at least 80% accuracy • Identify root causes of Spending and Efficiency Varianc

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

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

• Imagine that in a

normal week of driving

you expect to use 20

gallons and you planned

on spending $4 per

gallon

Projected Cost

Resource level should have used

20 gallons

* Price should have paid

$4/gallon

$80

You Actually Spent

• You cut down on driving

last week and the pump

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

Resource level actually

used

* Price should have paid

* Price should have paid

How Did Price Impact?

• However, instead you paid

$5 per gallon more for the

18 gallons: a total of $18 more

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

* Price should

have paid

* Price should have paid

* Price actually

Relating to Volume Variance

units fcst = actual = actual

price/unit fcst = fcst = actual

sales fcst = = = actual

variable/unit fcst = fcst = actual

variable cost fcst = = = actual

fixed cost fcst = fcst = actual

resource quantity resource quantity resource quantity

should have used actually used actually used

price per resource price per resource price per resource

should have paid should have paid actually paid

Efficiency and

Spending Variances

are going one level

deeper in trying to

understand the root

cause of the variable

understand the root

cause of the variable

cost change

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10

Other Applications

• There are many, many application of spending and efficiency variances

• People cost is hours*rate/hour

• Material cost is parts*cost/part

• Tank Maintenance is miles*cost/mile

• There are many other types of variance

• Some of which are useful in certain circumstances

• All of which follow the same logic you have

learned here

Learning Check

• What does the efficiency variance reveal?

• The spending variance is favorable but the

efficiency variance is unfavorable How would you describe the situation?

Projected price $4 / gal $50 / hr $20 / mile page $5 / $.3 / kw $.2 / min $.05 / cal Actual

resource level 1200 gal 400 hrs miles 600 pages 350 120 kw min 550 2500 cal

Actual price $3.9 / gal $50 / hr $25 / mile page $6 / $.5 / kw $.15 / min $.04 / cal

* Price should

have paid

* Price should have paid

* Price actually

paid

1000 gallons

* Price should

have paid

* Price should have paid

* Price actually

paid

$4/gallon

$4000

* Price should

have paid

* Price should have paid

* Price actually

paid

* Price should

have paid

* Price should have paid

* Price actually

paid

* Price should

have paid

* Price should have paid

* Price actually

paid

* Price should

have paid

* Price should have paid

* Price actually

paid

* Price should

have paid

* Price should have paid

* Price actually

paid

* Price should

have paid

* Price should have paid

* Price actually

paid

* Price should

have paid

* Price should have paid

* Price actually

paid

* Price should

have paid

* Price should have paid

* Price actually

paid

* Price should

have paid

* Price should have paid

* Price actually

paid

* Price should

have paid

* Price should have paid

* Price actually

paid

* Price should

have paid

* Price should have paid

* Price actually

paid

* Price should

have paid

* Price should have paid

* Price actually

paid

* Price should

have paid

* Price should have paid

* Price actually

paid

* Price should

have paid

* Price should have paid

* Price actually

paid

Spreadsheet Exercises