Variance Analysis/Gmsisuccess
US CMA Part 1: Financial Planning, Performance, and Analytics
*Topic: Variance Analysis – Section C*
*Case-Based Question*
*Case Scenario:*
Meridian Cabinets Inc. manufactures custom kitchen cabinets. For August 2026, the company uses a standard costing system. The standard for one cabinet unit is:
**Cost Component** **Standard**
Direct materials 12 sq ft of oak @ $8.00 per sq ft
Direct labor 3.0 hours @ $22.00 per hour
Variable overhead 3.0 labor hours @ $10.00 per hour
Budgeted production for August: 2,000 units
Actual results for August:
- Units produced: 1,900 units
- Direct materials purchased & used: 23,500 sq ft @ $7.80 per sq ft
- Direct labor: 5,900 hours @ $22.50 per hour
- Variable overhead: $61,950 total
*Required:*
1. Calculate the direct materials price variance and quantity variance. Indicate if favorable or unfavorable.
2. Calculate the direct labor rate variance and efficiency variance. Indicate if favorable or unfavorable.
3. Calculate the variable overhead spending variance and efficiency variance. Indicate if favorable or unfavorable.
4. If the Production Manager claims “we saved money on materials because the price was lower,” evaluate this statement using your variance results.
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*Solution & Explanations*
*1. Direct Materials Variances*
*Standard for actual output:* 1,900 units × 12 sq ft = 22,800 sq ft
*Material Price Variance = AQ × (AP - SP)*
= 23,500 sq ft × ($7.80 - $8.00)
= 23,500 × (-$0.20) = *$4,700 Favorable*
_Price paid was lower than standard._
*Material Quantity Variance = SP × (AQ - SQ)*
= $8.00 × (23,500 - 22,800)
= $8.00 × 700 = *$5,600 Unfavorable*
_Used 700 sq ft more than standard allowed._
*Total Material Variance* = $4,700 F – $5,600 U = *$900 Unfavorable*
*2. Direct Labor Variances*
*Standard hours for actual output:* 1,900 units × 3.0 hrs = 5,700 hrs
*Labor Rate Variance = AH × (AR - SR)*
= 5,900 hrs × ($22.50 - $22.00)
= 5,900 × $0.50 = *$2,950 Unfavorable*
_Paid higher wage rate than standard._
*Labor Efficiency Variance = SR × (AH - SH)*
= $22.00 × (5,900 - 5,700)
= $22.00 × 200 = *$4,400 Unfavorable*
_Used 200 more hours than standard._
*Total Labor Variance* = $2,950 U + $4,400 U = *$7,350 Unfavorable*
*3. Variable Overhead Variances*
*Standard VOH rate* = $10.00 per DL hour
*Standard hours for actual output* = 5,700 hrs
*VOH Spending Variance = Actual VOH - (AH × SR)*
= $61,950 - (5,900 × $10.00)
= $61,950 - $59,000 = *$2,950 Unfavorable*
_Spent more per hour than standard._
*VOH Efficiency Variance = SR × (AH - SH)*
= $10.00 × (5,900 - 5,700)
= $10.00 × 200 = *$2,000 Unfavorable*
_Inefficient use of labor hours drove extra VOH._
*Total VOH Variance* = $2,950 U + $2,000 U = *$4,950 Unfavorable*
*4. Evaluation of Production Manager’s Claim*
The manager’s statement “we saved money on materials because the price was lower” is *misleading*.
- *True*: Material price variance was $4,700 F. We paid less per sq ft.
- *But*: Material quantity variance was $5,600 U due to excess usage.
- *Net impact*: Total materials were *$900 Unfavorable* overall.
*Conclusion*: The lower price did NOT offset the waste. Poor material handling, defective cuts, or lax supervision likely caused excess usage. Management should investigate why 700 extra sq ft were used.
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*CMA Exam Tips for Variance Analysis*
1. *Price/Rate vs Quantity/Efficiency*: Price variances use _actual quantity_. Efficiency variances use _standard price/rate_.
2. *Flexible Budget*: Always use actual output × standard to get “SQ” or “SH”. Never use budgeted output.
3. *Interpreting “F” vs “U”*: Favorable means actual cost < standard cost. Unfavorable means actual > standard.
4. *Linkage*: Labor efficiency variance drives VOH efficiency variance because VOH is applied on DL hours.
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Got it – here’s a *Sales Variance* case, since that’s heavily tested in CMA Part 1 Section C. Fixed OH follows after if you want it.
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*US CMA Part 1: Financial Planning, Performance, and Analytics*
*Topic: Sales Variances – Section C*
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*Case-Based Question*
*Case Scenario:*
Veridian Bottles Ltd. sells 2 products: 500ml and 1L reusable bottles. For Q3 2026, the budgeted data was:
**Product** **Budgeted Units** **Budgeted Price** **Budgeted CM/Unit**
500ml 40,000 units $12.00 $5.00
1L 10,000 units $20.00 $9.00
Total budgeted sales mix: 80% 500ml, 20% 1L
Budgeted total contribution margin: (40,000×$5) + (10,000×$9) = $290,000
Actual results for Q3 2026:
**Product** **Actual Units** **Actual Price** **Actual CM/Unit**
500ml 30,000 units $12.50 $5.50
1L 20,000 units $19.00 $8.00
Actual total CM: (30,000×$5.50) + (20,000×$8.00) = $325,000
*Required:*
1. Calculate the *sales quantity variance* and *sales mix variance* for contribution margin.
2. Calculate the *sales price variance* by product and in total.
3. The Sales VP says: “We exceeded budget CM by $35,000 because we sold more high-margin 1L bottles.” Is this fully accurate? Explain using variances.
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*Solution & Explanations*
*Step 1: Key figures*
Actual total units = 30,000 + 20,000 = *50,000 units*
Budgeted total units = 40,000 + 10,000 = *50,000 units*
So total volume didn’t change, but mix did.
*Budgeted weighted avg CM/unit* = $290,000 / 50,000 = *$5.80*
*1. Sales Quantity & Sales Mix Variances*
*Sales Quantity Variance*
= (Actual total units – Budgeted total units) × Budgeted weighted avg CM
= (50,000 – 50,000) × $5.80 = *$0*
_No variance because total volume was exactly on budget._
*Sales Mix Variance*
= Actual total units × (Actual mix % – Budgeted mix %) × Budgeted CM/unit
500ml: 50,000 × (60% – 80%) × $5.00 = 50,000 × (-20%) × $5 = *-$50,000 U*
1L: 50,000 × (40% – 20%) × $9.00 = 50,000 × 20% × $9 = *+$90,000 F*
*Total Sales Mix Variance = $40,000 Favorable*
_Shift toward higher-margin 1L bottles helped CM._
*2. Sales Price Variance*
Price variance = Actual units × (Actual price – Budgeted price).
But for CM analysis, we use _Actual CM/unit vs Budgeted CM/unit_ because costs assumed constant:
500ml: 30,000 × ($5.50 – $5.00) = 30,000 × $0.50 = *$15,000 F*
1L: 20,000 × ($8.00 – $9.00) = 20,000 × (-$1.00) = *$20,000 U*
*Total Sales Price Variance = $5,000 Unfavorable*
Check: Total CM variance = $325,000 – $290,000 = *$35,000 F*
= Mix $40,000 F + Quantity $0 + Price $5,000 U = $35,000 F ✓
*3. Evaluation of Sales VP’s Claim*
*Partly true, but incomplete.*
1. *True*: Mix variance was $40,000 F. Selling 40% 1L vs budgeted 20% added CM because 1L has higher $9 CM vs $5 for 500ml.
2. *But*: Price variance was $5,000 U. The 1L bottle was discounted $1 in CM, and 500ml price gain didn’t fully offset it.
3. *Net*: The $35,000 F beat came from _mix shift +$40,000_ minus _price cuts -$5,000_. Quantity had no impact.
*Management insight*: The favorable result was driven by mix, not price or volume. If discounts on 1L continue, it could erode margin. Also check if the mix shift is sustainable or due to stock-outs of 500ml.
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*CMA Exam Tips for Sales Variances*
1. *CM vs Revenue*: CMA Part 1 tests sales variances on _contribution margin_, not revenue, unless told otherwise.
2. *Volume breakdown*: Sales Volume Variance = Quantity Variance + Mix Variance. If total units change, you’ll have a quantity variance too.
3. *Market share/size*: If given, further split Quantity Variance into Market Size + Market Share.
4. *Signs*: Favorable = actual CM > budgeted CM. Mix is F when you sell more high-CM products.
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*US CMA Part 1: Financial Planning, Performance, and Analytics*
*Topic: Fixed Overhead Variances – Section C*
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*Case-Based Question*
*Case Scenario:*
Atlas Mfg. uses standard costing and applies fixed overhead on the basis of machine hours. For 2026, the relevant data is:
*Budgeted Fixed Overhead:* $1,200,000 per year
*Denominator Level:* 60,000 machine hours per year = 5,000 MH per month
*Standard Fixed OH Rate:* $1,200,000 / 60,000 MH = *$20.00 per MH*
*Standard hours per unit:* 2.0 MH per unit
*August 2026 Actuals:*
- Units produced: 2,400 units
- Actual machine hours worked: 5,100 MH
- Actual fixed overhead incurred: $102,500
*Required:*
1. Calculate the *fixed overhead budget/spending variance* for August.
2. Calculate the *fixed overhead volume variance* using the 4-way analysis. State if it’s favorable or unfavorable.
3. Break down the volume variance into *capacity* and *efficiency* components for a 3-way analysis.
4. The Plant Manager says: “We were over budget on fixed OH because we ran 100 extra machine hours.” Evaluate this statement.
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*Solution & Explanations*
*Step 1: Key standard figures for August*
Budgeted fixed OH for month = $1,200,000 / 12 = *$100,000*
Standard hours allowed for actual output = 2,400 units × 2.0 MH = *4,800 MH*
Fixed OH applied = 4,800 MH × $20.00 = *$96,000*
*1. Fixed Overhead Budget/Spending Variance*
= Actual Fixed OH – Budgeted Fixed OH
= $102,500 – $100,000 = *$2,500 Unfavorable*
_We spent $2,500 more than the lump-sum budget. Has nothing to do with activity level._
*2. Fixed Overhead Volume Variance – 4-way*
= Budgeted Fixed OH – Applied Fixed OH
= $100,000 – $96,000 = *$4,000 Unfavorable*
_Why U? We produced only 2,400 units = 4,800 std hrs, but denominator was 5,000 std hrs. We under-used capacity, so fixed OH was under-applied._
*Total Fixed OH Variance* = Spending $2,500 U + Volume $4,000 U = *$6,500 Unfavorable*
Check: Actual $102,500 – Applied $96,000 = $6,500 U ✓
*3. 3-Way Analysis: Break Down Volume Variance*
*a. Fixed OH Efficiency Variance*
= (Actual Hours – Standard Hours Allowed) × Std Fixed OH Rate
= (5,100 – 4,800) × $20.00 = 300 × $20 = *$6,000 Unfavorable*
_We used 300 extra MH vs standard for the output. Fixed OH is “fixed,” but inefficiency means we got fewer units per MH, causing under-application._
*b. Fixed OH Capacity Variance*
= (Actual Hours – Denominator Hours) × Std Fixed OH Rate
= (5,100 – 5,000) × $20.00 = 100 × $20 = *$2,000 Favorable*
_We worked 100 MH more than the monthly denominator, which helps absorb fixed OH._
*Reconcile Volume Variance*: Efficiency $6,000 U + Capacity $2,000 F = *$4,000 U*, matches 4-way ✓
*4. Evaluation of Plant Manager’s Claim*
*Incorrect.* The manager confused variable and fixed concepts.
1. *Extra 100 MH* vs denominator actually creates a *$2,000 Favorable capacity variance*. Running more hours helps absorb fixed OH.
2. *The real issues were*:
- *Spending $2,500 U*: We overspent on items like rent, depreciation, supervisor salaries vs budget.
- *Efficiency $6,000 U*: We took 5,100 MH to make output that should take 4,800 MH. This inefficiency is what hurt fixed OH absorption.
3. *Net impact*: Despite working extra hours, we were still 200 units short of denominator volume = 2,500 units × 2 MH. That under-utilization drives the volume variance.
*Management insight*: Investigate why 5,100 MH produced only 2,400 units. Machine downtime, poor scheduling, or quality issues likely. Also review why actual fixed OH exceeded budget – check property tax, insurance, or new lease costs.
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*CMA Exam Tips for Fixed OH Variances*
**Analysis Type** **Variances** **Formula**
**2-Way** 1. Budget/Spending 2. Volume Actual – Budget ; Budget – Applied
**3-Way** 1. Spending 2. Efficiency 3. Capacity Actual – Budget ; (AH-SH)×SR ; (AH-DH)×SR
**4-Way** 1. Spending 2. VOH Efficiency 3. VOH Spending 4. FOH Volume Splits variable OH too
*Key CMA traps:*
1. *Fixed OH has NO spending variance based on hours* – only lump-sum budget vs actual. Hours affect volume only.
2. *Volume variance is ALWAYS caused by production volume ≠ denominator volume*. It’s not “controllable” day-to-day.
3. *Efficiency variance for FOH exists only in 3-way/4-way* and uses standard FOH rate × (AH – SH).
4. *Favorable capacity* = AH > DH. *Unfavorable efficiency* = AH > SH.
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