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CHAPTER 15

CHAPTER 15. Cost Analysis for Control. Revisit plans. Implement plans. Data collection and performance feedback. Decision Making. Strategic, Operational, and Financial Planning. Planning and control cycle. Performance analysis: Plans vs. actual results ( Controlling ).

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CHAPTER 15

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  1. CHAPTER 15 Cost Analysis for Control

  2. Revisit plans Implement plans Data collection andperformance feedback Decision Making Strategic, Operational,and Financial Planning Planning and control cycle Performance analysis: Plans vs. actual results (Controlling) Executing operational activities (Managing)

  3. Cost Classification Accordingto a Time-Frame Perspective Degree of Control Costs that may notcontrollable in theshort run are controllablein the long run. Time

  4. Performance Report Characteristics BudgetAmount ActualAmount – = Activity Variance Explanation • Favorable • Actual revenues > Budget revenues • Actual costs < Budget costs • Unfavorable • Actual revenues < Budget revenues • Actual costs > Budget costs

  5. A cost variance is the amount by which actualamount differs from the budget amount. BudgetAmount This variance isunfavorablebecause the actual costexceeds the budget cost. Performance Report Characteristics Product Cost

  6. Performance Report Characteristics Responsibility ReportingAmount of detail varies according to level in organization. A store manager receives summarized information from each department. A department manager receives detailed reports.

  7. Performance Report Characteristics Responsibility ReportingAmount of detail varies according to level in organization. Management by exception: Upper-level management does not receive operating detail unless activities are not performing according to plan. The vice president of operations receives summarized information from each store.

  8. The Flexible Budget Show revenues and expensesthat should have occurred at theactual activity. May be prepared for any activity level in the relevant range. Reveal variances due to good cost control or lack of cost control. Improve performance evaluation.

  9. The Flexible Budget To a budget for different activity levels, we must know how costs behave with changes in activity levels. • Total variable costs changein direct proportion to changes in activity. • Total fixed costsremain unchangedwithin the relevantrange. Variable Fixed

  10. First, let’s compareactual results withthe original budget. The Flexible Budget

  11. Cost variances have little meaning since actual costsare at a different activity than the budgeted activity. The Flexible Budget

  12. Now, let’s compareactual results witha flexed budgetprepared at theactual levelof activity. The Flexible Budget

  13. The Flexible Budget

  14. The Flexible Budget A flexible budget is prepared for thesame activity level as actually achieved. Note: There is no flexin the fixed costs.

  15. The Flexible Budget Variable costs have unfavorable variances because actual costs are more than the flexible budget costs.

  16. Based on carefullypredetermined amounts. Used for planning labor, material,and overhead requirements. The expected levelof performance. Benchmarks formeasuring performance. Standard Cost Variance Analysis Standard Costs are

  17. Price Variance Usage Variance The difference betweenthe actual price and thestandard price The difference betweenthe actual quantity andthe standard quantity Standard Cost Variance Analysis Standard Cost Variances

  18. Actual Quantity Actual Quantity Standard Quantity × × × Actual PriceStandard Price Standard Price Price Variance Usage Variance Standard Cost Variance Analysis Standard priceis the amount that should have been paid for the resources acquired.

  19. Actual Quantity Actual Quantity Standard Quantity × × × Actual PriceStandard Price Standard Price Price Variance Usage Variance Standard Cost Variance Analysis Standard quantityis the quantity that shouldhave been used for the output achieved.

  20. Standard Cost Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual PriceStandardPrice Standard Price Price Variance Usage Variance AQ(AP - SP) SP(AQ - SQ) AQ = Actual QuantitySP= Standard PriceAP= Actual PriceSQ = Standard Quantity

  21. Let’s apply what we have learned to calculate standard cost variances, starting withmaterial. Calculating Material Priceand Usage Variances

  22. Calculating Material Priceand Usage Variances Cruisers, Inc. has the following material standards for fiberglass cloth used to makeone SeaCruiser boat hull: 218 yards per hull at $2.10 per yard Last month 22,500 yards of material were purchased and used to make 100 hulls. The material cost a total of $46,125.

  23. Calculating Material Priceand Usage Variances What is the actual price per yard paid for the material? a. $2.00 per yard. b. $2.10 per yard. c. $2.05 per yard. d. $2.25 per yard.

  24. AP = $46,125 ÷ 22,500 yds.AP = $2.05 per yd. Calculating Material Priceand Usage Variances What is the actual price per yard paid for the material? a. $2.00 per yard. b. $2.10 per yard. c. $2.05 per yard. d. $2.25 per yard.

  25. Calculating Material Priceand Usage Variances The material price variance (MPV) for the month was: a. $1,125 unfavorable. b. $1,125 favorable. c. $1,255 unfavorable. d. $1,255 favorable.

  26. MPV = AQ(AP - SP) MPV = 22,500 yds. × ($2.05 – $2.10) MPV = $1,125 Favorable Calculating Material Priceand Usage Variances The material price variance (MPV) for the month was: a. $1,125 unfavorable. b. $1,125 favorable. c. $1,255 unfavorable. d. $1,255 favorable.

  27. Calculating Material Priceand Usage Variances The standard quantity of material thatshould have been used to produce100 hulls is: a. 22,500 yards. b. 21,600 yards. c. 21,800 yards. d. 22,000 yards.

  28. SQ = 100 hulls × 218 yds. per hull SQ = 21,800 yds. Calculating Material Priceand Usage Variances The standard quantity of material thatshould have been used to produce100 hulls is: a. 22,500 yards. b. 21,600 yards. c. 21,800 yards. d. 22,000 yards.

  29. Calculating Material Priceand Usage Variances The material usage variance (MUV) for the month was: a. $1,250 unfavorable. b. $1,250 favorable. c. $1,470 unfavorable. d. $1,470 favorable.

  30. Calculating Material Priceand Usage Variances The material usage variance (MUV) for the month was: a. $1,250 unfavorable. b. $1,250 favorable. c. $1,470 unfavorable. d. $1,470 favorable. MUV = SP(AQ - SQ) MUV = $2.10(22,500 yds. – 21,800 yds.) MUV = $1,470 unfavorable

  31. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 22,500 yds. 22,500 yds. 21,800 yds. × × × $2.05 per yd. $2.10 per yd. $2.10 per yd. =$46,125 = $ 47,250 = $45,780 Price variance$1,125 favorable Usage variance$1,470 unfavorable Material Variances Summary

  32. Now let’s calculate standard cost variances for labor. Calculating Labor Rateand Efficiency Variances

  33. Calculating Labor Rateand Efficiency Variances Cruisers, Inc. has the following direct labor standard to manufacture one boat hull: 26 standard hours per hull at $12.80 perdirect labor hour Last month 2,540 direct labor hours were worked at a total labor cost of $32,893 to make 100 hulls.

  34. Calculating Labor Rateand Efficiency Variances What was the actual rate (AR) for labor for the month? a. $12.95 per hour. b. $12.80 per hour. c. $12.50 per hour. d. $12.25 per hour.

  35. Calculating Labor Rateand Efficiency Variances What was the actual rate (AR) for labor for the month? a. $12.95 per hour. b. $12.80 per hour. c. $12.50 per hour. d. $12.25 per hour. AP = $32,893 ÷ 2,540 hours AP = $12.95 per hour

  36. Calculating Labor Rateand Efficiency Variances The labor rate variance (LRV) for the month was: a. $381 unfavorable. b. $381 favorable. c. $462 unfavorable. d. $462 favorable.

  37. Calculating Labor Rateand Efficiency Variances The labor rate variance (LRV) for the month was: a. $381 unfavorable. b. $381 favorable. c. $462 unfavorable. d. $462 favorable. LRV = AH(AP - SP) LRV = 2,540 hrs($12.95 - $12.80) LRV = $381 unfavorable

  38. Calculating Labor Rateand Efficiency Variances The standard hours (SH) of labor that should have been worked to produce100 hulls is: a. 2,500 hours. b. 2,600 hours. c. 2,700 hours. d. 2,800 hours.

  39. SH = 100 hulls × 26 hours per hulls SH = 2,600 hours Calculating Labor Rateand Efficiency Variances The standard hours (SH) of labor that should have been worked to produce100 hulls is: a. 2,500 hours. b. 2,600 hours. c. 2,700 hours. d. 2,800 hours.

  40. Calculating Labor Rateand Efficiency Variances The labor efficiency variance (LEV) for the month was: a. $694 unfavorable. b. $694 favorable. c. $768 unfavorable. d. $768 favorable.

  41. Calculating Labor Rateand Efficiency Variances The labor efficiency variance (LEV) for the month was: a. $694 unfavorable. b. $694 favorable. c. $768 unfavorable. d. $768 favorable. LEV = SR(AH - SH) LEV = $12.80(2,540 hrs. - 2,600 hrs.) LEV = $768 favorable

  42. Actual Hours Actual Hours Standard Hours × × × Actual Price Standard Price Standard Price 2,540 hours 2,540 hours 2,600 hours × × × $12.95 per hr. $12.80 per hr. $12.80 per hr. = $32,893 = $32,512 = $33,280 Rate variance$381 unfavorable Efficiency variance$768 favorable Labor Variances Summary

  43. Now let’s calculate standard cost variances for the last of the variable production costs –variable overhead. Calculating Variable Overhead Spending and Efficiency Variances

  44. Calculating Variable Overhead Spending and Efficiency Variances Cruiser, Inc. has the following variable overhead standard to manufacture one boat hull: 26 standard hours per hull at$3.20 per direct labor hour Last month 2,540 hours were workedto make 100 hulls, and actualvariable overhead was $8,128.

  45. Calculating Variable Overhead Spending and Efficiency Variances What was the actual rate (AR) for variable overhead rate for the month? a. $3.00 per hour. b. $3.11 per hour. c. $3.20 per hour. d. $4.30 per hour.

  46. Calculating Variable Overhead Spending and Efficiency Variances What was the actual rate (AR) for variable overhead rate for the month? a. $3.00 per hour. b. $3.11 per hour. c. $3.20 per hour. d. $4.30 per hour. AR = $8,128 ÷ 2,540 hours AR = $3.20 per hour

  47. Calculating Variable Overhead Spending and Efficiency Variances The spending variance (SV) for variable overhead for the month was: a. $0. b. $400 favorable. c. $335 unfavorable. d. $300 favorable.

  48. SV = AH(AR - SR) SV = 2,540 hrs($3.20 - $3.20) SV = $0 Calculating Variable Overhead Spending and Efficiency Variances The spending variance (SV) for variable overhead for the month was: a. $0. b. $400 favorable. c. $335 unfavorable. d. $300 favorable.

  49. Calculating Variable Overhead Spending and Efficiency Variances The efficiency variance (EV) for variable overhead for the month was: a. $438 unfavorable. b. $438 favorable. c. $192 unfavorable. d. $192 favorable.

  50. Calculating Variable Overhead Spending and Efficiency Variances The efficiency variance (EV) for variable overhead for the month was: a. $438 unfavorable. b. $438 favorable. c. $192 unfavorable. d. $192 favorable. 100 hulls × 26 hrs. per hull EV = SR(AH - SH) EV = $3.20(2,540 hrs. - 2,600 hrs.) EV = $192 favorable

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