THE BUDGET PLAN FOR 4 TH QUARTER

2. THE BUDGET PLAN FOR 4TH QUARTER • Sell in 4th quarter: • 70,000 pants • 25,000 jerseys • 9,000 award jackets • Control inventory • Manage cash

3. WHAT’S UP? • C&C sold more award jackets than budgeted. Managers thought that would be a good thing. • Turns out, workers took too long to make the extra jackets. And they were paid overtime to meet customer delivery dates. • Net income was $144,800 lower than budgeted, even though more jackets were sold.

5. TOTAL VARIANCE Actual Cost Incurred Budgeted Costs Total Variance A variance is any difference between what you expected and what you achieved.

6. LET’S LOOK AT SOME VARIANCES A variance is favorable if it increases net income

7. LET’S LOOK AT SOME VARIANCES A variance is unfavorable if it decreases net income

8. YOUR PERFORMANCE REPORT You are very excited. The month has just ended and your department has been very productive. You were able to crank out 38,000 machine hours! That’s 3,000 more than you budgeted. You figure this must be good for a bonus, so let’s see how well you did.

9. YOUR PERFORMANCE REPORT

10. YOUR PERFORMANCE REPORT Do these unfavorable variances mean that you have done a poor job controlling costs? These variances are unfavorable because actual costs were greater than what was budgeted, thus lowering net income

11. THE QUESTION… Think about it. By definition, the total variable costs would be higher. Working more machine hours should result in higher costs. But some of the higher costs could be a result of poor management as well. How can we tell the difference?

12. THE ANSWER… We have to… the budget to match the actual activity level achieved. FLEX

13. FLEXIBLE BUDGETS • Present a budget for any level of activity achieved. • Variable costs change with activity level. • Fixed costs remain constant regardless of activity level, as long as you remain within the relevant range.

14. LET’S PRACTICE: FIX THE FLEX

15. COMPONENTS OF THE STATIC BUDGET VARIANCE

16. LET’S LOOK AT EXHIBIT 6-4

17. SOME GENERAL POINTS… • Always identify a variance as “favorable” (F) or “unfavorable” (U) • A favorable variance is not necessarily a good thing, just as an unfavorable variance is not necessarily a bad thing • Variance analysis provides an opportunity to benchmark against established standards to control operations

19. ANALYZING THE FLEXIBLE BUDGET VARIANCE

20. This measures the difference between the actual price of inputs and the standard price of inputs PRICE VARIANCE CALCULATION Actual Results Flexible Budget AQ × SP AQ × AP SP × SQ Price Variance Flexible Budget Variance or AQ (AP - SP)

21. This measures the difference between the actual quantity of inputs used and the standard quantity of inputs that should have been used QUANTITY VARIANCE CALCULATION Actual Results Flexible Budget AQ ×SP AQ × AP SP × SQ Quantity Variance Price Variance Flexible Budget Variance or SP (AQ - SQ)

22. Direct materials variances

23. C&C’S DIRECT MATERIAL VARIANCES

24. INTERPRETING DM PRICE VARIANCES Unfavorable Variance Favorable Variance Purchased in bulk and received quantity discount Purchased lower-quality goods at a cheaper price Received discount from supplier to get business Suppliers decreased price Purchased smaller-than-normal quantity and lost quantity discounts Purchased higher-quality goods at a higher price Suppliers increased price Placed rush order with overnight delivery

25. INTERPRETING DM QUANTITY VARIANCES Unfavorable Variance Favorable Variance Use of higher-quality goods resulted in reduced waste Highly-skilled workers generated a lower scrap rate Use of lower-quality goods resulted in increased waste Low-skilled worked generated a higher scrap rate Machine problems ruined some units Poor supervision allowed extra scrap and waste Employee theft

26. THINGS TO CONSIDER ON MATERIAL VARIANCES • Price variance should be calculated at time of purchase, quantity variance at time of use • Price and quantity variances may stem from the same cause

28. DIRECT LABOR VARIANCES

29. C&C’s DIRECT LABOR VARIANCES

30. INTERPRETING DL RATE VARIANCES Unfavorable Variance Favorable Variance Used less skilled (lower paid) workers Market wage rates decreased Used higher skilled (higher paid) workers Employees worked overtime and received overtime pay Market wage rates increased

31. INTERPRETING DL EFFICIENCY VARIANCES Unfavorable Variance Favorable Variance Used more highly skilled (higher paid) workers than allowed in the standard Used higher quality materials that needed less handling New employees were still learning their jobs Overtime caused fatigue and reduced workers’ efficiency Low quality materials required longer production time Poor supervision resulted in employees “goofing off” Excessive machine downtime

33. VARIABLE OVERHEAD VARIANCES • Variable overhead variances are calculated just like labor variances • Variable overhead spending variance • Variable overhead efficiency variance

34. VARIABLE OVERHEAD VARIANCES

35. C&C’s VARIABLE OVERHEAD VARIANCES

36. INTERPRETING VOH SPENDING VARIANCES Unfavorable Variance Favorable Variance Paid less than expected for variable overhead items Used variable overhead items efficiently Paid more than expected for variable overhead items Used variable overhead items inefficiently

37. INTERPRETING VOH EFFICIENCY VARIANCES Unfavorable Variance Favorable Variance Efficient use of activity base Inefficient use of activity base

38. FOH SPENDING VARIANCE • Since fixed costs do not change with changes in volume, the flexible budget amount for FOH is the same as the static budget amount • FOH spending variance is the difference between the actual amount spent and the budgeted amount.

39. THIS IS JUST THE BEGINNING… • The calculation of the variances is the easy part • Unless you investigate the cause of the variance, the whole process is useless • What variances should you investigate? All of them?