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Flexible Budgets, Standard Costs, and Variances Analysis Chapter 8

Flexible Budgets, Standard Costs, and Variances Analysis Chapter 8. Adapted by Cynthia Fortin, CPA, CMA Introduction to Managerial Accounting , Brewer , Garrison,Noreen. Video preparation Starbucks. http://video.wileyaccountingupdates.com/2011/06/15/standard-costs/.

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Flexible Budgets, Standard Costs, and Variances Analysis Chapter 8

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  1. Flexible Budgets, Standard Costs, and Variances AnalysisChapter 8 Adapted by Cynthia Fortin, CPA, CMA Introduction to ManagerialAccounting, Brewer, Garrison,Noreen

  2. VideopreparationStarbucks • http://video.wileyaccountingupdates.com/2011/06/15/standard-costs/

  3. Want to compare what actuallyhappened with what shouldhavehappened

  4. Management Control • Develop Planning budgets before a period begins • Adjust budgets to reflect actual level of activity => Flexible budget • Compare Actual revenue and spending to flexible budgets => Evaluate performance • Compute variances => Highlight significant problems • Take corrective action to solve problems

  5. Flexible Budget Computes what revenues and costs would have been given the actual level of activity

  6. Flexible budget assumption All costs are either variable or fixed with respect to level of activity

  7. Develop flexible budget • Start with Master budget or Planned budget IncomeStatement • Compute per unit Budget sales price (BSP) , Variable expenses (BV) • IdentifyFixedexpenses • DetermineActualquantities (AQ) of output • Compute Flexible Revenue = BSP * AQ • Compute Flexible Variable expenses = BV * AQ • Use Budget Fixedexpenses • Compute Net Operating Income

  8. Develop flexible budget • Start with Master budget or Planned budget IncomeStatement • Compute per unit Budget sales price (BSP) , Variable expenses (BV) • IdentifyFixedexpenses • DetermineActualquantities (AQ) of output • Compute Flexible Revenue = BSP * AQ • Compute Flexible Variable expenses = BV * AQ • Use Budget Fixedexpenses • Compute Net Operating Income

  9. Day 13 mix Chap008 Qianqianhai fish house.xlsx

  10. Variances The Revenue variance = Actual Revenue – Flexible Budget Revenue The Spending variance = Actual spending - Flexible budget spending.

  11. Standard costs • Developed at all levels during the planning process • DM (weight, units, length, price per unit of measure) • DL (wages, taxes, benefits, mix of workers, rate per hour, labor time) • Variable manufacturing OH (rates, allocation basis)

  12. Standard Costing Examples: Standard quantity of materials = 2 kg. per unit Standard cost of materials = $8 per kg. Standard cost of materials = $16 per unit

  13. Webb’s standard cost per jacket • Direct materials: 2sq metres at $30 per sq metre = $60 per jacket • Direct mfg labour: 0.8 mfg labour-hours of input allowed per output unit manufactured at $20 standard cost per hours = $16 per jacket manufactured. • Direct marketing labour: 0.25 marketing labour-hour of input allowed per output unit sold at $24 standard cost per hour: $6 per jacket sold.

  14. Variable mfg o/h: Allocated based on 1.20 machine-hours per output unit mfg at $10 standard cost per machine-hour: $12 per unit manufactured. • Variable marketing overhead: Allocated based on 0.125 direct marketing l-h per output unit sold at $40 standard cost per hour: $5 per output unit sold.

  15. Standard Quantity Actual Quantity of input Actual Quantity of input allowed X actual output × × × Standard Price Standard Price Actual Price Efficiency Variance Price Variance A General Model forVariance Analysis

  16. A General Model forVariance Analysis Applied for Materials Bought and Used same Quantity – 10 000 jackets 20,000 metres 22,200 metres 22,200 metres × × × $30 / metre $30 / metre $31 / metre $600,000 $666,000 $666,000 $688,200 $66,000U $22,200U Price Variance Efficiency Variance $88,200U Material spending Variance

  17. Price and Efficiency Variance — Materials Actual Budget Direct 22,200 sq metres 20,000 sq metres materials $31 per metre $30 per metre Price variance = (Actual price – Budgeted price) x Actual quantity used = ($31 – $30) x 22,200 = $22,200 U Efficiency (Usage) variance = (Actual quantity used – Budgeted quantity used) x Budgeted price = (22,200 – 20,000) x $30 = $66,000 U

  18. Price and Efficiency Variance — Labour I Actual Budget Manufacturing 9,000 hours 8,000 hours labour $22 per hour $20 per hour Price (or rate) variance = (Actual price – Budgeted price) x Actual quantity used = ($22 – $20) x 9,000 = $18,000 U Efficiency variance = (Actual quantity used – Budgeted quantity used) x Budgeted price = (9,000 – 8,000) x $20 = $20,000 U

  19. Direct Labour Variances Higher rates than expected Overtime due to rework or poor material UnfavorablePriceVariance Poorlymaintainedequipment Employee mix with more experienced staff

  20. Price and Efficiency Variance — Labour II Actual Budget Marketing 2,304 hours 2,500 hours labour $25 per hour $24 per hour Price (or rate) variance = (Actual price – Budgeted price) x Actual quantity used = ($25 – $24) x 2,304 = $2,304 U Efficiency variance = (Actual quantity used – Budgeted quantity used) x Budgeted price = (2,304 – 2,500) x $25 = $4,704 F

  21. Poorlytrainedworkers Poorqualitymaterials Poorsupervisionof workers Poorlymaintainedequipment Direct Labour Variances UnfavorableEfficiencyVariance

  22. Possible reasons for efficiency variances Webb’s personnel manager hired under-skilled workers or their training was inadequate. Webb’s production process is being reorganized or a new machine has been installed, creating addition direct manufacturing time per jacket while the workers learn the new process, etc.

  23. Variances and Journal Entries • Each variance may be journalized • Each variance has its own account • Favorable variances are credits; Unfavorable variances are debits • Variance accounts are generally closed into Cost of Goods Sold at the end of the period, if immaterial

  24. Evaluating Performance Variances • Used to evaluate performance • Indicate that something was different than expected • Critical to understand why( the causes) significant variances arise and use this knowledge to promote learning and continuous improvement

  25. Effectiveness • The degree to which organization’s predetermined goals are met • Efficiency • How well inputs were used in relation to a given level of output

  26. Multiple causes of variances 1. Always consider possible interdependencies among variances; do not interpret them in isolation. 2. Use broad perspective of actions taken in the supply chain of organizations (supply chain: flow of goods, services, and information from beginning to end of a product or service). 3. Note that improvements in early stages of supply chain can sizably reduce magnitude of variances in subsequent stages .

  27. 4. Understand why variances arise and use knowledge to promote learning and continuous improvement –most important task in variance analysis 5. Emphasize total organizational objectives by design of performance measurement and reward system by top management 6. Use cost-benefit test to decide when and which variances should be investigated 7. Realize that the standard is a range of possible acceptable outcomes

  28. Variance Analysis Cycle Query ‘material’ variances Corrective actions implemented Develop explanations Determine and analyze variances Prepare report to management and new Budget Conduct next period’s operations Begin

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