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ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 14 Professor Jeff Yu

ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 14 Professor Jeff Yu. Review: Flexible Budget. Flexible budget is prepared based on the actual activity level and is used for performance evaluation ( control ) purpose.

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ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 14 Professor Jeff Yu

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  1. ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 14 Professor Jeff Yu

  2. Review: Flexible Budget Flexible budgetis prepared based on the actual activity level and is used for performance evaluation (control) purpose. Activity Variance = Flexible budget amount – planning (static) budget amount Spending Variance = Actual cost – flexible budget cost Spending variance is unfavorable if positive, favorable if negative; Spending variance captures the efficiency of cost control. Revenue Variance = Actual revenue – flexible budget revenue Revenue variance is favorable if positive, unfavorable if negative;

  3. Review: Standard Cost • Standard vs. Budget: • A budget is set for total costs; • A standard is set for per unit cost; • Quantity standardsare set for each unit of production (How much units of input are needed for each unit of output?) SQ = standard quantity of materials allowed for the actual output SH = standard hours allowed for the actual output Price standards are set for each unit of input (How much should be paid for each unit of input?) Standard Price (SP) for materials Standard Rate (SR) for labor and overhead

  4. Materials Price Variance AQ(AP - SP) Labor/VOH Rate Variance AH(AR – SR) Materials Quantity Variance SP(AQ - SQ) Labor/VOH Efficiency Variance SR(AH – SH) Review: Variance Analysis AP (AR)= Actual Price (Actual Rate): the amount actually paid for each unit of the materials (labor or VOH). SP (SR)= Standard Price (Standard Rate): the amount that should Have been paid for each unit of the materials (labor or VOH). AQ (AH)= Actual Quantity (Actual Hour): the amount of materials (labor or VOH activity) actually used in the production. SQ (SH)= Standard Quantity (Stan. Hour) allowed for the actual output = actualproductionin units * standard quantity (hours) per unit

  5. Review: Materials Variances When material purchased ≠ material used • To compute the PRICE variance, use the total quantity of raw materials PURCHASED. • To compute the QUANTITY Variance, use only the quantity of raw materials USED.

  6. Example: Labor Variances Bella has the following direct labor standard to manufacture one Zippy: 1.5 standard hours per Zippy at $6.00 per direct labor hour. Last week 1,550 direct labor hours were worked at a total labor cost of $9,610 to make 1,000 Zippies. Q: (1)What was Bella’s actual rate for labor for the week? (2) What was Bella’s labor rate variance for the week? (3) What is the standard hours of labor that should have been worked to produce 1,000 Zippies? (4)What was Bella’s labor efficiency variance for the week?

  7. Mix of skill levelsassigned to work tasks. Level of employee motivation. Quality of production supervision. Production Manager Quality of training provided to employees. Responsibility for Labor Variances Production managers areusually held accountablefor labor variancesbecause they caninfluence the:

  8. Practice Problem: Labor Variances Osborne Co. has the following DL standards to produce each unit of horn: 5 direct labor hours at $20 per hour. In May, the actual hourly rate for direct labor is $22, with the labor variances reported below: Labor rate variance $30,400 U Labor efficiency variance $4,000 U Q: How many horns did Osborne Co. produce in May?

  9. Practice Problem: Labor Variances Foster Inc.’s direct labor standard for each unit of product is 3 hours at $8 per hour. In April, total direct labor cost of $240,000 was paid to make 10,000 units of product. Labor rate variance is $16,000 F. Q: What is Foster Inc.’s labor efficiency variance in April?

  10. Example: Variable OH Variances Cola Co’s Variable OH is applied based on machine hours. The standard allows for 3,200 machine hours for the actual production in March. In March, actual machine hours worked were 3,300, actual variable OH incurred was $6,740, and the variable OH efficiency variance was $200 U. Q: What is the amount of variable OH rate variance?

  11. Chapter 12 Segment Reporting Learning Objectives • Understand performance evaluation tools for cost center, profit center and investment center • Prepare a segmented income statement • Compute ROI and Residual Income • Understand the pros and cons of performance evaluation using ROI, Residual Income and the Balanced Scorecard.

  12. An Individual Store Quick Mart A Sales Territory A Service Center Decentralization and Segments Asegmentis any part or activity of an organization about which a manager seeks cost, revenue, or profit data. A segment can be . . .

  13. Evaluating Managers’ Performance Evaluation Tool Cost Center (controlscosts only) Flexible Budget Variances; Standard Cost Variances Profit Center (controls costs & revenues) Segmented Income Statement (Segment Margin) Investment Center (controls costs & revenues & Investments) Return on Investment (ROI); Residual Income

  14. Segmented Income Statement There are two keys to building segmented income statements: A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin. Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin.

  15. No computer division means . . . No computer division manager. Identifying Traceable Fixed Costs Traceable fixed costsarise because of the existence of a particular segment and would disappearif the segment itself disappeared.

  16. No computer division but . . . We still have a company president. Identifying Common Fixed Costs Common fixed costsarise because of the overall operation of the company and would not disappear if any particular segment was eliminated.

  17. Segmented Income Statement Sales - Variable Expenses Contribution Margin - Traceable Fixed costs Segment Margin • Do NOT subtract Common fixed costs!! • Segment margin is a valuable tool for performance evaluation and is also useful in decisions such as dropping or retaining a segment.

  18. Example: Segmented Income Statements Segment reporting uses the contribution format. Contribution margin is computed by taking sales minus variable costs. Segment margin is Television Division’s contribution to profits.

  19. Example: Segmented Income Statements Common fixed costs should not be allocated to the divisions. These costs would remain even if one of the divisions were eliminated.

  20. Practice Problem In the above reports, staff of the law firm FDS allocated common fixed expenses the two segments proportionally based on their revenues. Q: (1) Would the firm be better off financially if family law division were dropped? Prepare segmented income statements to support your answer. (2) Managers propose that an ad campaign costing $20,000 will increase family law revenue by $100,000. If other expenses and revenues remain constant, how would this proposal affect the family law segment margin and the firm’s overall NOI?

  21. Practice Problem Bolvine Co. had a net loss of $10,000 in May. The CEO asked for a segmented monthly income statement to isolate the problem. Q: (1) Prepare a segmented income statement by divisions. (2) What is the amount of common fixed costs for the company? (3)The manager of Division B proposes that an increase of $20,000 in the division’s monthly advertising costs will increase Division B sales by 10%. If this plan is adopted, what would be the new segment margin for Division B?

  22. For Next Class • Continue on Chapter 12 • Cover ROI, RI and the Balanced Scorecard

  23. Homework Problem 1 Xavier Co. applies MOH based on direct labor hours. The standard costs for one unit of product are as follows: Direct Material: 6 ounces at $0.50 per ounce Direct Labor: 1.8 hours at $10 per hour Variable MOH: 1.8 hours at $5 per hour 2,000 units were produced in June with the following cost data: Material purchased: 18,000 ounces at $0.6 per ounce Material used in production: 14,000 ounces Direct labor: 4,000 hours at $9.75 per hour Variable MOH cost: $20,800 Q: Compute materials, labor and VOH variances.

  24. Homework Problem 2 Q: (1) Store B Sales will increase by $30,000 if its advertising costs increase by $7,000. How would store B’s segment margin change? (2) Managers propose that an increase of $8,000 in traceable fixed costs will lower variable expense ratio in Store A to 62%. If sales and everything else remain constant, how would this proposal affect overall company’s NOI?

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