Following the described business scenario, the calculation of:
- Target Costs
- Variance Absolute
- Variance in Percent
- Variance Categories of the Input Side
- Variance Categories of the Output Side
have to be explained.
Target Costs - Variance Absolute - Variance in Percent
Analyzing the data posted on a specific cost center, both planned and actual costs, as well as planned and actual activity quantities allocated from the cost center, must be taken into account.
You can only differentiate between fixed and variable costs by planning the costs with reference to the activity type. If the planned activity quantity is zero, the variable planned costs are also zero.
Similarly, if the distributed actual activity quantity is zero, the variable target costs are also zero.
If variable actual costs have still been posted, this is a variance.
The comparison of planned costs with actual costs is a budget consideration and shows to what extent the planned budget was used. However, no information is provided using the planned/actual comparison as to whether the actual costs assigned to the cost center are economical or not.
Fixed plan costs are also fixed target costs. However, the variable planned costs mean that no variable costs are to be expected without an actual activity distribution.
In the ratio in which the actual activity quantity has been distributed in comparison to the planned activity quantity, variable actual costs in comparison to variable plan costs are expected as economical.
Higher variable actual costs than variable planned costs are variances that are calculated according to variance categories (e. g. quantity variance, price variance, etc.).These are the variable target costs. Target Costs are calculated for each G/L Account of type cost element. This enables you to analyze which variances occurred for each G/L Account of type cost element.
The calculated Target Costs show whether the actual costs are in relation to the distributed actual activity quantity.
Fixed planned costs are also valued in full as fixed actual costs.
However variable planned costs are valued as variable actual costs only to the relation of actual activity quantity to plan activity quantity.
For example: 50 percent actual activity quantity in comparison to planned activity quantity leads to 50 percent variable target costs compared to variable planned costs.
The figure above shows the calculation of the Target Costs in our scenario.
In the previous lesson, the capacity utilization level was already explained with the division of plan activity quantity through actual activity quantity. This also makes it clear what variable costs of a cost center mean: variable in relation to the activity quantity.
Let's first look at the material costs of cost element 51100000. The sum of fixed and variable planned costs is 200,000.
The capacity utilization of the cost center activity is the result of 500 hours actual activity quantity and 1000 hours plan activity quantity, and therefore 50%, as a factor of 0.5.
This results in variable target costs of 100,000 * 0.5 = 50,000. Together with the fixed target costs of 100,000, the total target costs for material amount to 150,000.
Let's look at the secondary costs for cost type 94301000. This is a debit cost posting because it is related to the cost center's activity allocation. Only variable costs of 150,000 are planned here. With reference to the employment of 50%, this results in target costs of 75,000.
The following figure shows the calculation of the Variance Absolute.
With target costs of EUR 150,000 in comparison to EUR 180,000 actual costs for cost element 51100000, there is a variance of EUR -30000.
The actual costs are therefore EUR 30,000 too high for the given actual activity quantity. Here the calculation is based on an actual/target deviation. You can also calculate the deviation as the actual-target deviation. In this case the deviation amount is then positive. It just needs to be clearly defined or specified.
With target costs of EUR 75,000 in comparison to EUR 75,000 actual costs for cost element 94301000, there is a variance of zero.
The calculated Variance Absolute shows whether the actual costs of a cost center can be considered economical. In order to be able to analyze the Variance Absolute more precisely according to their cause, the planned and actual quantities must also be recorded in addition to the planned and actual costs for each G/L Account of type cost element (also referred to as a cost account).
To do this, the indicator, Quantity, must be set for the cost account to which planning and posting is carried out. These are the quantities for the costs, in this example material quantities for the material costs.
The target-actual deviation is an indicator that the material costs are too high.
However, it is not yet clear whether this variance exists due to a change in the price of the material and/or a greater material actual quantity than originally planned.
In the following the variance categories price variance and quantity variance will be calculated. It will be shown that the variance of 30,000 is made up of a quantity variance of -60,000 and a price variance of +90,000.
Depending on the results of the variance categories, Cost center controlling can react to this and ask itself why a price deviation of 90,000 occurred. Were the prices paid too high? Has the supplier increased his prices? Or did the production costs to obtain the raw material increase etc.?
The quantity variance is analyzed analogous. How could the actual performance be achieved with less quantity? Poorly planned? Well managed, etc.?
The following figure shows the calculation of the Variance in Percent.
The calculation of the variances relates to debit postings for the cost center and is therefore called Input Variances.
Since the calculation of the Input Quantity Variance and Input Price Variance is also a Target/Actual Variance analysis, it is necessary to calculate the Target Quantities first.
The Target Quantities are calculated the same way Target Costs are calculated.
Fixed Plan Quantities are also fixed Target Quantities.
Variable Plan Quantities, on the other hand, are multiplied by the ratio of Actual and Planned Activity Quantities.
The Input Quantity Variance results from the difference between the Actual Quantity and the Planned Quantity, multiplied by the Planned Price - and thus price variance-neutral.
The following figure describes the calculation of theInput Price Variance .
The calculation of theInput Price Variance to the planned and actually posted material costs is calculated as follows:
- The Planned Price results from the ratio of the planned material costs and the planned material quantity.
- The Actual Price of the material results from the ratio of the posted Actual Material Costs and the posted Actual Material Quantity.
- The difference between the Actual Price and the Planned Price multiplied by the Actual Quantity defines the Input Price Variance.
Cost Center Variances - Variance Categories - Output Side
The second perspective in the variance analysis of cost centers relates to the planned and actual performance and the associated credit postings. Therefore, these are Variances on the Output Side.
When calculating the Activity Price Variance, it is a question of whether the plan price of the activity type with which the actual activity quantity has been allocated corresponds to the actual costs debited to the cost center.
It is therefore calculated if the plan activity price is too high or too low.
If it is too low, the cost center has not offset all of the actual costs it has incurred with the actual activity quantity.
If, on the other hand, the activity price is too high, more actual costs were offset against the actual activity quantity than the cost center itself incurred.
The figure above shows that the relationship between the Planned Costs and the Planned Activity Quantity results in a fair activity price of EUR 200 per hour and EUR 150 EUR per hour.
The figure above shows that a manually set Plan Activity Price of EUR 150 was used for activity allocation. However, given the actual activity quantity distributed and actual costs debited to the cost center, an activity type price - hourly rate - of EUR 200 should have been charged.
The difference between the Plan Activity Price of EUR 150/h and the Target Activity Price of EUR 200/h, multiplied by the Actual Activity Quantity, results in anOutput Price Variance of EUR 25,000.
By using a Plan Activity Price, that was too low for the cost allocation, EUR 25,000 less has been credited.
Controlling can now ask itself the following questions: Have the planned costs been calculated too low? Why was less actual activity quantity distributed than planned, etc.?