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Cost Accounting Videos 27 videos

Cost Accounting: What is a Cost: Cost Versus Expense?
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What is a Cost: Cost Versus Expense? Cost and expense are pretty similar terms when looking at traditional definitions but they’re a little diffe...

Cost Accounting: How Can Unit Fixed Costs Mislead the Misled?
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How can unit fixed costs mislead the misled? Unit fixed costs can be misleading because the fixed cost per unit decreases as production increases;...

Cost Accounting: What Is Differential Analysis?
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What is Differential Analysis? Differential analysis is a strategy used to make the best decision. Possible choices are compared to determine which...

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Cost Accounting: What is Variance Analysis? 3 Views


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Description:

What is Variance Analysis? Variance analysis is the difference between what a company plans and what actually happens, in a monetary sense. So, if they planned on spending x amount and they actually spent y, variance analysis would show a difference of x minus y.

Language:
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Transcript

00:00

And finance Allah shmoop What is variants Analysis Well basically

00:07

it's the fancy business Way to ask Why didn't things

00:10

go as expected Or how on Earth are we so

00:14

far off Plan plan is the key word You made

00:17

a plan a k a Budget Others in the company

00:19

rely in your planning and budgeting You know from the

00:22

hiring needs of the union factory workers this year to

00:25

the marketing spend for TV ads from that department to

00:28

the legal team who's fully plumbed up for the eleven

00:31

point three lawsuits you expected you'd have to defend this

00:34

year But then real life happened and things didn't quite

00:37

go as you expected What happened Well they'll figure it

00:40

out You're going to use variance analysis And yes it's

00:43

a whole science unto itself You own zesty kitty a

00:47

leading provider of condiments for pet food You launch a

00:50

new Suraj based sauce meant to pair perfectly with the

00:54

frozen mice that people feed to there Pet snakes It's

00:58

called spicy serpent surprise and cats love it As much

01:02

as I know a cat can love anything based on

01:04

market research and projections derived from other products you already

01:08

sell while you expect sales of three hundred thousand dollars

01:11

in the first month and you expect contributed profits from

01:14

this product to be one hundred twenty five grand giving

01:16

you a contribution margin of about forty two percent Well

01:19

a month after launch you look at the numbers you

01:21

brought in revenues of four hundred thousand dollars way better

01:24

than expected However profits and margins fell meaningful E short

01:28

of projections You only brought in one hundred thousand dollars

01:31

in contributed profits A contribution margin of just twenty five

01:34

percent Well shy of the budgeted forty two percent So

01:37

w t f baby Well you run some variance analysis

01:41

And as it turns out you had unexpected demand from

01:43

Ireland You were pretty sure you'd heard they didn't have

01:46

anything left there but oh well additional demand is usually

01:50

a good surprise Right That drove your four hundred thousand

01:53

over the much less revenue that you originally thought But

01:56

the extra demand meant you had to scramble to make

01:58

enough spicy serpents Surprised to feel all the orders Well

02:01

to do this you had to pay overtime to your

02:04

union workers in order to crank out the extra sauce

02:07

And that was expensive Now that you know what happened

02:10

you can well kind of adjust You know the extra

02:12

demand is there so you can hire some additional workers

02:15

carefully These new employees will get regular pay and the

02:18

additional capacity means you won't have to pay anybody usurious

02:21

overtime Since you're not paying the extra labor costs associated

02:25

with the overtime well margins will return to the expected

02:28

levels Meanwhile you adjust your revenue projections to the new

02:31

levels The added demand is still going to be there

02:34

next month so you revise your expectations You're going to

02:37

make them higher revenues go up So for the second

02:39

month you expect to repeat four hundred thousand dollars in

02:41

revenue However your labor adjustment should allow margins to get

02:45

closer to the originally expected forty two percent which would

02:48

give you contribution profits of about one hundred sixty eight

02:51

grand Right Well once the month is over you'll look

02:53

at the numbers and see if anything else doesn't match

02:55

the new budgeted expectations Then you'll run the variance analysis

02:59

process again and it becomes part of an ongoing cycle

03:01

Basically checking budgets against projections against riel Life results well

03:06

When the process is done you'll know whether your projections

03:08

were just wrong and need to be adjusted You know

03:11

like with the unexpected Irish demand for your new mouse

03:14

sauce or you'll find points in the production process and

03:17

distribution process and marketing process where your costs went awry

03:21

like they were too expensive to get Your stuff shipped

03:23

are marketed or placed or put on shelves or whatever

03:26

was needed and then you'll adjust You can implement changes

03:29

here to get things back to what you predicted Like

03:31

when you figured out how the overtime hurt your profit

03:34

margins and you brought in new workers overseas likely to

03:37

fix the unnecessarily high labor costs Well now thatyou're Suraj

03:41

a mouse sauce has taken off You can start your

03:43

RND department working on its next big project soy sauce

03:47

flavored insects for pets Spiders who

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