by the change in selling price (a negative LC 0.05), and obtain a negative price vari-
ance of LC 60. The cost rate variance is LC 120, which we obtain by multiplying the
actual volume of 1,200 with the positive change in cost of LC 0.10. Finally, the neg-
ative expense variances of LC 20 and LC 5 are shown in the last column.
The analysis of these results shows that the company improved its before-tax in-
come by LC 135, which is made up as follows:
LC
Higher volumes accounted for 100
Lower prices reduced earnings by (60)
Cost rate lower by 120
Expenses higher by ___(25)Before-tax income improved by (^135) __
As mentioned previously, in many situations it is unnecessary, meaningless, or very
difficult to extend the variance analysis to include the tax line. In most business sit-
uations, management can affect transactions in terms of pretax realizations and out-
lays only. Prices to customers are always stated on a pretax basis, and merchandise
is normally paid for on a pretax basis. Moreover, tax calculations are frequently com-
plex; companies avail themselves of accelerated depreciation for tax purposes, but
not always for book purposes. In the United States and some other countries, deple-
tion allowances for tax purposes have a different basis from that used for shareholder
reporting purposes; various inventory systems, such as stock relief in the United
Kingdom or LIFO valuation in many other jurisdictions, apply to tax calculations but
do not always find reflection in book income (to mention just a few of the literally
dozens of book/tax adjustments that multinational companies face). Consequently,
25 • 16 MULTINATIONAL BUDGETING AND CONTROL SYSTEMS
Exhibit 25.11. Income Statement.
LC Company
Income Statement
Year Ended December 31, 20X0
Variance Analysis (LC)
Actual Plan Total Volume Price Cost Rate Expense
Revenues 1,140 1,000 140 200 (60)
Beginning inventory (400) (500) 100
Purchases ____(480) (500) 20
Total (880) (1,000) 120
Ending inventory ____ (^400) 500 (100)
Cost of sales ____(480) (500) 20 (100) _ _ 120
Gross profit 660 500 160 100 (60) 120
Expense (220) (200) (20) (20)
Interest (30) (25) (5) (5)
Depreciation (50) _(50) __ (^0) ___ __ _
Before-tax income ____ (^360) __ (^225) ____ (^135) ____ (^100) _(60) ____ (^120) (25)___