Integrating Profit Variance Analysis and Capacity Costing to Provide Better Managerial Information

Abstract

We present a framework for integrating profit variance analysis and capacity costing to provide better managerial information. The framework expands traditional variance analysis to incorporate planned and unplanned changes in inventory levels and the use of practical capacity to determine overhead rates. The framework has practical value because effective cost management and performance evaluation require ascertaining the costs (effects on profit) associated with capacity and the manner in which it is being used. Pedagogical value stems from connecting concepts underlying the choice of a denominator volume to set overhead rates, the profit effects of inventory changes, and variance analysis. By virtue of its generality, the framework enhances the value of capacity costing and profit variance analysis for management planning and control.