Cost Management

Introduction to Management Accounting
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 1
Introduction to Management Accounting
Chapter 8
Flexible Budgets and Variance Analysis
Favorable and Unfavorable Variances problem page 342 Dominion Company

Favorable variances arise when actual results exceed budgeted. Unfavorable variances arise when actual results fall below budgeted.
Favorable (F) versus Unfavorable (U) Variances Actual > Expected Actual < Expected Profit Revenue Costs F F U U U F
Learning Objective 1
Static and Flexible Budgets
A static budget is prepared for only one level of a given type of activity. Differences between actual results and the static budget for level of output achieved are static-budget variances. A flexible budget (variable budget) adjusts for different levels of activities. Differences between actual results and the flexible budget are flexible-budget variances.
Flexible Budget Formulas pg 345 (8-2) and Pg 346 (8-4)

To develop a flexible budget, managers determine revenue and cost behavior (within the relevant range) with respect to cost drivers.
Note that the static budget is just the flexible budget for a single assumed level of activity.
Activity-Based Flexible Budget
An activity-based flexible budget is based on budgeted costs for each activity and related cost driver.
For each activity, costs depend on an different cost driver.
Evaluation of Financial Performance
Actual results may differ from the master budget because... 1) sales and other cost-driver activities were not the same as originally forecasted, or 2) revenue or variable costs per unit of activity and fixed costs per period were not as expected.
Evaluation of Financial Performance

Actual results at actual activity level (1) Flexible budget for actual sales activity (3) SalesActivity Variance (4) = (3)(5)
Flexiblebudget variances (2) = (1)-(3)
Static Budget
(5)
Units 7,000 7,000 2,000U 9,000 Sales $217,000 $217,000 $62,000 U $279,000 Variable costs 158,200 5,670 U 152,600 43,600 F 196,200 Contribution margin $ 58,730 $ 5,670 U $ 64,400 $18,400 U $ 82,800 Fixed costs 70,300 300 U 70,000 70,000 Operating income $ (11,570) $5,970 U $(5,600) $18,400 U $ 12,800
Isolating the Causes of Variances
Managers use comparisons among actual results, master budgets, and flexible budgets to evaluate organizational performance.
Isolating the Causes of Variances
Effectiveness is the degree to which a goal, objective, or target is met. Efficiency is the degree to which inputs are used in relation to a given level of outputs. Performance may be effective, efficient, both, or neither.
Flexible-Budget Variances pg 347
Total flexible-budget variance = Total actual results Total flexible-budget planned results Actual results $(11,570) Flexible budget $(5,600)
$5,970 Unfavorable Flexible-budget variances
Sales-Activity Variances
Total sales - activity variance
Actual sales unit Master budgeted sales units
Flexible budget
Budgeted contribution margin per unit
(7,000 9,000) $9.20
Master budget
$18,400 Unfavorable
Activity-level variances
Setting Standards pg 351

A standard cost is a carefully developed cost per unit that should be attained. An expected cost is the cost that is most likely to be attained.
Perfection (ideal) standards are expressions of the most efficient performance possible under the best conceivable conditions, using existing specifications and equipment.
No provision is made for waste, spoilage, machine breakdowns, and the like.
Currently Attainable Standards...

are levels of performance that managers can achieve by realistic levels of effort. They make allowances for normal defects, spoilage, waste, and nonproductive time.
Trade-Offs Among Variances

Improvements in one area could lead to improvements in others and vice versa. Likewise, substandard performance in one area may be balanced by superior performance in others.
When to Investigate Variances
When should management investigate a variance? Many organizations have developed such rules of thumb as investigate all variances exceeding $5,000 or 25% of expected cost, whichever is lower.
Comparison with Prior Periods
Some organizations compare the most recent budget periods actual results with last years results for the same period.
These comparisons are not as useful as comparisons of actual outcomes with planned results.
Flexible-Budget Variance in Detail pg 355
Standard per unit of output:

Std. inputs expected
Direct Material Direct Labor 5 pounds hour Std. price expected
Flexible Budget Amount

$10 $ 8
$ 2 /pound $16/hour
Variances from Material and Labor Standards
Actual results for 7,000 units produced: Direct material Pounds purchased and used: 36,800 Price/pound: $1.90 Total actual cost: $69,920
Direct labor Hours used: 3,750 Actual price (rate): $16.40 Total actual cost: $61,500

Flexible Budget or Total Standard Cost Allowed
Units of good output achieved
Input allowed per unit of output
Standard unit price of input

Standard Direct-Materials Cost Allowed:
7,000 units X 5 pounds X $2.00 per pound = $70,000*
Standard Direct-Labor Cost Allowed:

7,000 units X 1/2 hour X $16 per hour = $56,000** (1) Actual Costs Direct Materials $69,920 Direct Labor 61,500 (2) Flexible Budget *$70,000 **$56,000 (3) Flexible Budget Variance $ 80 F $5,500 U
Variance Components
Actual Price X Actual Quantity Standard Price X Actual Quantity Standard Price X Standard Quantity
Price Variance
Efficiency Variance
Total Cost Variance
11-22
Copyright 2008 Prentice Hall All rights reserved
Price Variance
Measures how well the business keeps unit costs within standards:
(Actual Price x Actual Quantity) (Standard Price x Actual Quantity) or (Actual Price Standard Price) x Actual Quantity (AP SP) x AQ
11-23
Efficiency Variance
Efficiency variance measures how well the business uses its materials or human resources:
(Standard Price x Actual Quantity) (Standard Price x Standard Quantity) or (Actual Quantity Standard Quantity) x Standard Price (AQ SQ) x SP
11-24
Price and Quantity Variances
(Actual price Standard Price) Actual quantity used
(Actual quantity used standard quantity allowed for actual output) Standard price
Price Variance Computations
($1.90 $2.00) per pound 36,800 pounds = $3,680 F
($16.40 $16.00) per hour 3,750 hours = $1,500 U
Quantity (Usage) Variance Computations
[36,800 (7,000 5)] pounds $2 per pound = $3,600 U
[3,750 (7,000 )] hours $16 per hour = $4,000 U
Favorable or Unfavorable Variance?

To determine whether a variance is Favorable or unfavorable, use logic rather than memorizing a formula.
A price variance is favorable is the actual price is less than the standard.
A quantity variance is favorable if the actual quantity used is less than the standard quantity allowed.
Direct Materials Flexible Budget Variance

Direct-Materials Flexible-budget variance:
$3,680 favorable
+ $3,600 unfavorable = $80 favorable
Direct-Labor Flexible-budget variance:

$1,500 unfavorable
+ $4,000 unfavorable
= $5,500 unfavorable
Interpretation of Price and Usage Variances Responsibility accounting
Price and usage variances are helpful because they provide feedback to those responsible for managing inputs. Managers should not use these variances alone for decision making, control, or evaluation.
Variable-Overhead Spending and Efficiency Variances
A variable-overhead efficiency variance occurs when actual cost-driver activity differs from the standard amount allowed for the actual output achieved.
A variable-overhead spending variance occurs when the difference between the actual variable overhead and the amount of variable overhead budgeted for the actual level of cost-driver activity.
Variable-Overhead Variances
variableoverhead efficiency variance
actual cost-driver activity
standard cost-driver activity allowed
standard variable-overhead rate per cost-driver unit
variableoverhead spending variance
actual variable overhead
standard variable-overhead rate per unit of cost-driver
actual cost-driver activity used
Fixed Overhead Spending Variance
The difference between actual fixed overhead and budgeted fixed overhead Is the fixed overhead spending variance.
Problems
Problem 8-B1 pg 366 Problem 8-B2 pg 366 Problem 8-22 pg 368 Problem 8-25 pg 368 Problem 8-26 pg 368 Problem 8-27 pg 368 Problem 8-41 pg 372 Problem 8-43 pg 373

Cost Management

Încărcat de

Informații document

Descriere originală:

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Cost Management

Încărcat de

Drepturi de autor:

Formate disponibile

Introduction to Management Accounting

Introduction to Management Accounting

Flexible Budgets and Variance Analysis

Favorable and Unfavorable Variances problem page 342 Dominion Company

Static and Flexible Budgets

Flexible Budget Formulas pg 345 (8-2) and Pg 346 (8-4)

Activity-Based Flexible Budget

For each activity, costs depend on an different cost driver.

Evaluation of Financial Performance

Evaluation of Financial Performance

Flexiblebudget variances (2) = (1)-(3)

Isolating the Causes of Variances

Isolating the Causes of Variances

Flexible-Budget Variances pg 347

$5,970 Unfavorable Flexible-budget variances

Actual sales unit Master budgeted sales units

Budgeted contribution margin per unit

(7,000 9,000) $9.20

Setting Standards pg 351

Currently Attainable Standards...

Trade-Offs Among Variances

When to Investigate Variances

Comparison with Prior Periods

Flexible-Budget Variance in Detail pg 355

Standard per unit of output:

Flexible Budget Amount

Variances from Material and Labor Standards

Variances from Material and Labor Standards

Units of good output achieved

Input allowed per unit of output

Standard unit price of input

Variances from Material and Labor Standards

Standard Direct-Labor Cost Allowed:

Total Cost Variance

Price and Quantity Variances

(Actual price Standard Price) Actual quantity used

Price Variance Computations

($1.90 $2.00) per pound 36,800 pounds = $3,680 F

($16.40 $16.00) per hour 3,750 hours = $1,500 U

Quantity (Usage) Variance Computations

[36,800 (7,000 5)] pounds $2 per pound = $3,600 U

[3,750 (7,000 )] hours $16 per hour = $4,000 U

Favorable or Unfavorable Variance?

Direct Materials Flexible Budget Variance

Direct-Labor Flexible-budget variance:

Interpretation of Price and Usage Variances Responsibility accounting

Variable-Overhead Spending and Efficiency Variances

variableoverhead efficiency variance

actual cost-driver activity

standard cost-driver activity allowed

standard variable-overhead rate per cost-driver unit

variableoverhead spending variance

actual variable overhead

standard variable-overhead rate per unit of cost-driver

actual cost-driver activity used

Fixed Overhead Spending Variance

S-ar putea să vă placă și