chapter 07 cost accounting

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Chapter 7

Flexible Budgets, Direct-Cost Variances, and Management Control


Key TermsFlexible Budget 弹性预算Static Budget 固定预算Standard Costs 标准成本Favorable Variance有利差异Unfavorable VarianceManagement by Exception 例外管理Efficiency Variance 效率差异


Basic ConceptsVariance is the difference between an actual

and an expected (budgeted) amount.Management by Exception – the practice of

focusing management attention on areas not operating as expected and devoting less time to areas operating as expected

Static (Master) Budget – is based on the output planned at the start of the budget period. The master budget is called a static budget because the budget for the period is developed around a single (static) planned output level


Basic ConceptsStatic-Budget Variance– the difference between

the actual result and the corresponding static budget amount

Favorable Variance (F) – has the effect of increasing operating income relative to the budget amount

Unfavorable Variance (U) – has the effect of decreasing operating income relative to the budget amount


ExampleWebb company, a firm that manufactures and sells jacket. For simplicity,

we assume that webb’s only costs are in the manufacturing function, webb incurs no costs in other value chain, such as marketing and distribution. No inventories exist at either the beginning or the end in April 2011.

Cost Category Variable Cost per Jacket

Direct material costs $60Direct labor costs 16Variable overhead costs 12Total variable costs $88

Budgeted fixed costs for production between 0 and 12,000 jackets

$276,000

Budgeted selling price $120 per jacket

Budgeted production and sales 12,000 jackets

Actual production and sales 10,000 jackets


Level 1 Analysis, Illustrated


Flexible BudgetsManagers, therefore, create a flexible

budget, which enables a more in-depth understanding of deviation from the static budget.

Flexible budget calculates budgeted revenues and budgeted costs based on the actual output in the budget period. (the flexible budget is prepared at the end of the period April 2011)


Sales-Volume VariancesThe difference between the static-budget and the flexible-budget

amounts is called the sales-volume variance because it arises solely from the difference between the 10,000 actual quantity of jackets sold and 12,000 quantity of jackets expected to be sold in the static budget.

Flexible-budget operating income = (Budgeted selling price-Budgeted variable cost)*Actual units sold-Fixed

costsStatic-budget operating income = (Budgeted selling price-Budgeted variable cost)*Static-budget units sold-

Fixed costsSo,Sales-volume variance for operating income= (Budgeted selling price-Budgeted variable cost)*(Actual units sold- Static-

budget units sold)


Sales-Volume VariancesOne or more of the Following reasons:The overall demand for jackets is not growing

at the rate that was anticipatedCompetitors are taking away market share

from WebbWebb did not adapt quickly to changes in

customer preferences and tastesBudgeted sales targets were set without careful

analysis of market conditionsQuality problems developed that led to

customer dissatisfaction with Webb’s jackets


Flexible-Budget VariancesFlexible-budget variances are a better measure

of operating performance than static-budget variances because they compare actual revenues to budgeted revenues and actual costs to budgeted costs for the same 10,000 jackets of output.

Flexible-budget variance = Actual result – Flexible-budget amount

The flexible-budget variance for revenues is called the selling-price variance:

Selling-price variance= (Actual selling price-budgeted selling price)*Actual units sold


Flexible-Budget Variances

One or more of the following:Webb used greater quantities of input (such

as direct manufacturing labor-hour) compared to the budgeted quantities of inputs

An overall increase in market pricesWebb incurred higher prices per unit for the

input (such as the wage rat per direct manufacturing labor-hour) compared to the budgeted prices per units of the inputs

Webb sold better quality of jackets


Price Variances and Efficiency Variances for Direct-Cost Inputs

A price-variance that reflects the difference between an actual input price and a budgeted input price

An efficiency variance that reflects the difference between an actual input quantity and a budgeted input quantity.

Managers generally have more control over efficiency variances than price variances.( that because the quantity of inputs is primarily affected by factors inside the company, but price changes are primarily due to market forces outside the company)


ExampleDirect materials purchased and used

1.Square yards of cloth input purchased and used 22,200

2.Actual price incurred per square yard $28

3.Direct material costs(22,200*28) $621,600

Direct manufacturing labor

1.Direct manufacturing labor-hours 9,000

2.Actual price incurred per direct manufacturing labor-hour

$22

3.Direct manufacturing labor costs(9,000*22) $198,000


ExampleDirect materials standard cost

1.Square yards of cloth input per jacket 2sq.yds

2.Budgeted price incurred per square yard $30

3.Actual output 10,000

Direct manufacturing labor standard cost

1.Direct manufacturing labor-hours per jacket 0.8hr/unit

2.Budget price incurred per direct manufacturing labor-hour

$20/hr

3.Actual output 10,000


Level 3 VariancesPrice Variance formula:

Efficiency Variance formula:

Price Actual Price Budgeted Price Actual QuantityVariance Of Input Of Input Of InputX= { - }

Efficiency Actual Quantity Budgeted Quantity of Input Budgeted PriceVariance Of Input Used Allowed for Actual Output Of InputX= { - }


Price Variances and Efficiency Variances

One or more following:Webb’s purchasing manager changed to a lower-price

supplierWebb’s purchasing manager negotiated the direct

materials price more skillfully than was planned for in the budget

Direct material prices decreased unexpectedly because of, say, industry oversupply.

Webb’s personnel manager hired underskilled workersBudgeted time standards were set too tight without

careful analysis of the operating conditions and the employees’ skills.


Variance Summary


Exercise

Flexible-budget preparation and analysisBank Management Printers, Inc., produces luxury checkbooks with three checks and stubs per page. Each checkbook is designed for an individual customer and is ordered through the customer’s bank.


The company’s operating budget for September 2009 included these data: Number of checkbooks 15,000 Selling price per book $ 20 Variable cost per book $ 8 Fixed costs for the month $145,000The actual results for September 2009 were: Number of checkbooks 12,000 Selling price per book $ 21 Variable cost per book $ 7 Fixed costs for the month $150,0001. Prepare a static-budget-based variance analysis of the September performance2.Prepare a flexible-budget-based variance analysis of the September performance3. Why might Bank Management find the flexible-budget-based variance analysis more informative than the static-budget-based variance analysis?


1. Prepare a static-budget-based variance analysis of the September performance

Variance Analysis for Bank Management Printers for September 2009


2. Prepare a flexible-budget-based variance analysis of the September performance

Reminder: the sales volume variance is the difference between actual and budged output times budgeted contribution margin or (3,000 x 12)


3. Why might Bank Management find the flexible-budget-based variance analysis more informative than the static-budget-based variance analysis?

Level 2 analysis breaks down the static-budget variance into a flexible-budget variance and a sales-volume variance. The primary reason for the static-budget variance being unfavorable ($17,000 U) is the reduction in unit volume from the budgeted 15,000 to an actual 12,000.


Morro Bay Surfboards manufactures fiberglass surfboards. The standard cost of direct materials and direct manufacturing labor is $100 per board. This includes 20 pounds of direct materials, at the budgeted price of $2 per pound, and five hours of direct manufacturing labor, at the budgeted rate of $12 per hour.Following are additional data for the month of July:Units completed 6,000 unitsDirect material purchases 150,000 poundsCost of direct material purchases $292,500Actual direct manufacturing labor-hours 32,000Actual direct-labor cost $368,000Direct materials efficiency variance $12,500 UThere were no beginning inventories.1.Compute direct manufacturing labor variances for July2.Compute the actual pounds of direct materials used in

production in July3.Calculate the actual price per pound of direct materials

purchased


1. Compute direct manufacturing labor variances for July


2. Compute the actual pounds of direct materials used in production in JulyBudgeted pounds allowed for the output achieved: 6,000 × 20 = 120,000 poundsActual pounds of direct materials used:120,000 + 6,250 = 126,250 pounds

Unfavorable direct materials efficiency variance of $12,500 indicates that more pounds of direct materials were actually used than the budgeted quantity allowed for actual output.

$12,500 efficiency variance $2 per pound budgeted price

The 6,250 excess units can also be computed by

dividing the efficiency variance by the standard

price


3. Calculate the actual price per pound of direct materials purchased


Standard CostingTargets or standards are established for direct

material and direct labor.The standard costs are recorded in the

accounting system.Actual price and usage amounts are compared

to the standard and variances are recorded.


Variances & Journal EntriesEach variance may be journalizedEach variance has its own accountFavorable variances are credits;

Unfavorable variances are debitsVariance accounts are generally closed into

Cost of Goods Sold at the end of the period, if immaterial


Management Uses of VariancesMultiple Cause of Variances The causes of variances in one part of the value chain can be

the result of decisions made in another part of the value chain. Whenever possible, manager must attempt to understand the root causes of the variances.

When to Investigate Variance A variance within an acceptable range is considered to be an

“in control occurrence” and calls for no investigation or action by managers. Frequently, managers investigate variances based on subject judgments or rules of thumb.

Performance Measurement Using Variances Two attributes of performance are commonly evaluated:

Effectiveness and Efficiency


Management Uses of VariancesOrganization Learning the goal of variance analysis is for managers to

understand why variances arise, to learn, and to improve future performance

Financial and Nonfinancial Performance Measures

Almost all companies use a combination of financial and nonfinancial performance measures for planning and control rather than relying exclusively on either type of measure. Timely nonfinancial performance measures are frequently used for control a production process


Benchmarking and VariancesBenchmarking is the continuous process of

comparing the levels of performance in producing products and services against the best levels of performance in competing companies.

Variances can be extended to include comparison to other entities.


Benchmarking Example: Airlines


Thank you!

chapter 07 cost accounting

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