Financial and Managerial Accounting
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Financial and Managerial Accounting- MBA Professor-Jose Cintron, MBA- CPC http://www.linkedin.com/in/ josecintron Http://mba4help.com
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managerial accounting, managerial function, planning, directing, controlling, decision making, direct labor,direct material, factory overhead, product cost, period cost, cost of good manufactured, job order, process costing, abc costing, abc, equivalent units, variable cost, fixed cost, relevant cost, cvp, BEP, break even point, budgeting, production budget, jose cintron, advance business consulting, http://mba4help.com, miami
Transcript of Financial and Managerial Accounting
Financial and Managerial Accounting- MBA
Professor-Jose Cintron, MBA-CPChttp://www.linkedin.com/in/josecintron
Http://mba4help.com
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Managerial Accounting
Managerial accounting is directed towards providing information to managers inside the organization.
Managerial accountants prepare reports and analyze data.Reporting and analysis is often related to parts/departments/functions of the company rather than reporting on the entire organization as a whole.
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Managerial Accounting
Examples of activities performed by managerial accountants are:
1. Determining the cost of providing a service or making a product 2. Assist management in profit planning and formalizing the plans into budgets 3. Determine the behavior of costs and how profit will change as sales and production volumes change 4. Compare actual costs and financial results with budgeted costs and results 5. Providing cost and sales information necessary for management to use to make a decision.
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Management FunctionsPlanning: Identify objectives the company wants to accomplish which will add value to the company and increase profits. Discuss ways to accomplish the objectives Prepare budgets to accomplish the profit objective
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Management Functions
Directing/Motivating:
Coordinating the activities to produce a smooth running operation. Oversee day to day activities and keep the organization functioning smoothly Assign jobs/tasks – answer questions – solve problems
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Management Functions
Controlling: Make sure the plans are being followed and objectives are accomplished Performance reporting – compare actual results to the budget Implement changes when objectives and goals are not being accomplished
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Management Functions
Decision Making:
Use all information provided to make good business decisions. Product mix Buy or outsource Rent or Buy Upgrade or down grade
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MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING:
Does not follow GAAP and there are no reporting regulations Prepares reports only for management’s internal use Provides information to make decisions regarding the future Relevance of data is emphasized over reliability Focuses on timeliness of information Nothing is required to be reported, reports what management needs to see Reporting is focused on parts of the organization such as departments or divisions and not on the organization as a whole.
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FINANCIAL ACCOUNTING
Reports are provided outside the organization – external reports Reports past activities – based on a historical perspective Reliability of data is emphasized – reports take more time to provide focus on precise information since they are used outside the company Summarized data for entire company as a whole Must follow GAAP which has specific required external reports
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Review
Direct Labor Direct MaterialFactory Overhead
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Review
Product costPeriod cost
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Product vs Period cost
Product Costs: Include all costs that are required to make a product
Period Costs: Selling and Administrative costs. These costs are reported on the income statement as they are incurred. Not part of manufacturing overhead, not related to making the product.
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Cost of Goods Manufactured
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What costing system?
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Job order costing
The flow of costs through the manufacturing accounts is essentially the same in both process costing and job-order costing.
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Job order costing
1.Many different jobs are worked on during each period, with each job having different production requirements.
2.Costs are accumulated by individual job.
3.Job cost sheet is the key document controlling the accumulation of costs by a job. 4.Unit costs are computed by job on the job cost sheet.
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What costing system?
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What costing system?
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Process Costing
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Process Costing
1.A single product is produced either on continuous basis or for long periods. All units of product are identical.
2.Costs are accumulated by departments.
3.The department production report is the key document showing the accumulation and disposition of costs.
4.Unit costs are computed by department on the department production report.
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Job order and Process costing
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Job Order Cost Record
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Job order and Process costing
1.Both systems have the same basic purposes-to assign material, labor, and overhead costs to products and to provide mechanism for computing unit product cost. 2. Both systems use the same basic manufacturing accountants, including manufacturing overhead, Raw materials, Work in process, and Finished Good.
3.The flow of costs through the manufacturing accounts is basically the same in both systems.
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What costing system???
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What Costing System???
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What costing system???
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Activity based costing (ABC)
Activity based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore "fixed cost".
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Activity Based Costing
IdentifiedAdditional
ImprovementOpportunities
Analyzed Processeswith Costs,
Outcomes andBenchmarks
Assigned cost rateper CostDriver
Unit
Identify the costDriver Associatedwith each activity
Established theMajor Resources
Pools
Identified all MayorActivities
Activity CostingCost
Activity Based Costing
Activity Based Cost per Unit = Total Activity Cost . Total Number of Units for Activity
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Activity based costing system
Is used to determine product costs for special management reports. This system is ordinarily used as a supplement to the company's usual costing system. Most organizations that use ABC system have two costing systems--the official costing system that is used for preparing external financial reports and the activity based costing system that is used for internal decision making and for managing activities.
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ABC costingIn traditional cost accounting systems, the objective is to value inventories and cost of goods sold for external financial reports in accordance with the (GAAP).
In activity based costing (ABC) system the objective is to understand overhead and the profitability of products and customers and to manage overhead.
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ABC costing1. Non-manufacturing as well as manufacturing costs may be assigned to products.
2. Some manufacturing costs may be excluded from product costs.
3. A number of overhead cost pools are used, each of which is allocated to products and other costing objects using its own unique measure of activity.
4. The allocation bases often differ from those used in traditional costing system.
5. The overhead rates or activity rates may be based on the level of activity at capacity rather than on the budgeted level of activity.
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ABC costing
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Job order costing
If a company has estimated that its total manufacturing overhead cost will be $320,000 for the year and its total
direct labor hour will be 40,000. Its predetermined overhead rate for the year will be
$8 per direct labor hour, as calculated below:
$320,000 / 40,000= $8 per direct labor hour
Application of Manufacturing Overhead Cost in Job Order Costing:
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Job CostingOverhead applied to a particular job = Predetermined overhead rate × Amount of allocation incurred by the job
Example below indicates that 27 labor hours have been worked. Therefore a total of $216 of manufacturing overhead cost would be applied to the job. See the following calculation:
Overhead applied to job 2B47 = Predetermined overhead rate × Actual direct labor hours charged to job 2B47
= $8 per DLH × 27 DLHs
= $216 of overhead applied to job 2B47
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Job cost sheet
JOB COST SHEET
Job Number 2B47 Department Milling
Date Initiated March 2 Date Completed March 8
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
14873 $660 843 5 $45 27 $8/DLH $21614875 506 846 8 60
14912 238 850 4 21 --------- 851 10 54
$1,404 -------- -------- ===== 27 $180
===== =====
Cost Summary Units ShippedDirect Materials $1,404 Date Number BalanceDirect Labor 180 March 8 -- 2Manufacturing Overhead 216
Total Cost 1800
Unit Product Cost 900
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Unit cost underthe method of process costing
Global Defense starts with the manufacturing process. All units will start and end in this period. Altogether, Global Defense will manufacture 400
units of DG-19 during this period.
Direct materials in this period: $ 32.000 Conversion costs in this period: $ 24.000 _______ Total Assembly costs in January: $ 56.000
Global Defense records direct materials and conversion costs in the Assembly Department as these costs are incurred. By averaging, the assembly cost per unit would be $
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Equivalent UnitsFor example, if 1000 units are in work - in - process at the end of the period and are considered 80% complete, the equivalent production is 800 units. The equivalent unit cost of manufacturing an item equals the total cost divided by the equivalent units. If the total cost of manufacturing the item was $2,400, the unit cost would be $3 ($2,400/800).
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Equivalent units process costing
A term used in cost accounting to arrive at the cost per unit. The term is associated with the units that are not completed at the end of an accounting period. For example, if 500 units are completed as far as materials, but are only 40% completed as far as direct labor and manufacturing overhead, the equivalent units are 500 for materials and 200 (40% of 500) for direct labor and manufacturing overhead.
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Cost behavior analysisCost behavior analysis is the study of how specific costs respond to changes in the level of business activity. As you might expect, some costs change, and others remain the same. For example, for an airline company such as Southwest or United, the longer the flight the higher the fuel costs. A knowledge of cost behavior helps management plan operations and decide between alternative courses of action
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Variable CostVariable costs are costs that vary in total directly and proportionately with changes in the activity level. If the level increases 10%, total variable costs will increase 10%. If the level of activity decreases by 25%, variable costs will decrease 25%. Examples of variable costs include direct materials and direct labor for a manufacturer; cost of goods sold and sales commissions. A variable cost may also be defined as a cost that remains the same per unit at every level of activity.
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Variable CostDamon Company manufactures radios that contain a $10 digital clock. The activity index is the number of radios produced. As Damon manufactures each radio, the total cost of the clocks increases by $10. Total cost of the clocks will be $20,000 if Damon produces 2,000 radios, and $100,000 when it produces 10,000 radios. We also can see that a variable cost remains the same per unit as the level of activity changes
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Variable Cost
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Fixed CostFixed costs are costs that remain the same in total regardless of changes in the activity level. Examples include property taxes, insurance, rent, supervisory salaries, and depreciation on buildings and equipment. Because total fixed costs remain constant as activity changes, it follows that fixed costs per unit vary inversely with activity: As volume increases, unit cost declines, and vice versa.
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Fixed Cost ExampleDamon Company leases its productive facilities at a cost of $10,000 per month. Total fixed costs of the facilities will remain constant at every level of activity. But, on a per unit basis, the cost of rent will decline as activity increases.At 2,000 units, the unit cost is $5 ($10,000 ÷ 2,000). When Damon produces 10,000 radios, the unit cost is only $1 ($10,000 ÷ 10,000).
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Fixed Cost
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Variable and Fixed (Rental)
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Relevant RangeThe range of activity within which assumptions about variable and fixed cost behavior are valid.
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Relevant Range
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Teamwork (answer)1. If American Airlines is to make a profit when it reduces all domestic fares by 30%, what reduction in costs or increase in passengers will be required?
2.If Ford Motor Company meets workers' demands for higher wages, what increase in sales revenue will be needed to maintain current profit levels?
3.If United States Steel Corp.'s program to modernize plant facilities through significant equipment purchases reduces the work force by 50%, what will be the effect on the cost of producing one ton of steel? 4.What happens if Kellogg Company increases its advertising expenses but cannot increase prices because of competitive pressure?
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Cost-volume-profit (CVP)Cost-volume-profit (CVP) analysis is the study of the effects of changes in costs and volume on a company's profit. CVP analysis is important to profit planning. It is also a critical factor in such management decisions as determining product mix, maximizing use of production facilities, and setting selling prices.
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CPV Income StatementThe CVP income statement classifies costs as variable or fixed and computes a contribution margin. Contribution margin is the amount of revenue remaining after deducting variable costs.
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CVP Income Statement
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Break-even Point Video's CVP income statement shows that total contribution margin (sales minus variable expenses) is $320,000, and the company's contribution margin per unit is $200. Recall that contribution margin can also be expressed in the form of the contribution margin ratio (contribution margin divided by sales), which in the case of Vargo is 40% ($200 ÷ $500).
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Break event chart
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Target net income
Once a company achieves break-even, it then sets a sales goal that will generate a target net income. For example, assume that Vargo's management has a target net income of $250,000
In order to achieve net income of $250,000, Vargo has to sell 2,250 DVD players, for a total price of $1,125,000.
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Team-work
What effect will a 10% discount on selling price have on the break-even point for DVD players?
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Solution1 What effect will a 10% discount on selling price have on the break-even point for DVD players?Answer:
A 10% discount on selling price reduces the selling price per unit to $450 [$500 - ($500 × 10%)]. Variable costs per unit remain unchanged at $300. Thus, the contribution margin per unit is $150. Assuming no change in fixed costs, break-even sales are 1,333 units, computed as follows.
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Cost volume profit analysis(CVP analysis) is one of the most powerful tools that managers have at their command. It helps them understand the interrelationship between cost, volume, and profit in an organization by focusing on interactions among the following five elements:
Prices of products Volume or level of activity Per unit variable cost Total fixed cost Mix of product sold
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Cost Volume Profit
Because cost-volume-profit (CVP) analysis helps managers understand the interrelationships among cost, volume, and profit it is a vital tool in many business decisions. These decisions include, for example, what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of productive facilities to acquire.
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Pricing/cost/volume/profit $100 per unit, unit variable cost of $60. Sales are 3,000 units.
The manager can drop prices and generate a 20% increase in volume.
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Pricing/cost/volume/profitIncrease prices by 5% and take a 15% drop in sales. To see whether the manager should follow this alternative, consider the following graph.
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Pricing/cost/volume/profitThe marketing department of this company wants to spend an additional $10,000 on promotion because they say it will increase unit sales by 10%. Should the company make the investment in additional promotion
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Pricing/cost/volume/profit
Fixed Costs Decrease by $10
Fixed Costs Increase by $10
Variable Costs Increase by $1
Variable Costs Decrease by $1
Unit Sales Price Drops by $1
Unit Sales Price Increases by $1
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CVP High and Low
For purposes of CVP analysis, mixed costs must be classified into their fixed and variable elements. How does management make the classification? One possibility is to determine the variable and fixed components each time a mixed cost is incurred. But because of time and cost constraints, this approach is rarely followed. Instead, the usual approach is to collect data on the behavior of the mixed costs at various levels of activity. Analysts then identify the fixed and variable cost components. Companies use various types of analysis. One type of analysis, called the high-low method,
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The high-low methodUses the total costs incurred at the high and low levels of activity to classify mixed costs into fixed and variable components. The difference in costs between the high and low levels represents variable costs, since only the variable cost element can change as activity levels change
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The high-low method
Transit Company has the following maintenance costs and mileage data for its fleet of buses over a 4-month period.
The difference in maintenance costs is $33,000 ($63,000 - $30,000), and the difference in miles is 30,000 (50,000 - 20,000). Therefore, for Metro Transit, variable cost per unit is $1.10, computed as follows.
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High-Low method
Maintenance costs are therefore $8,000 per month plus $1.10 per mile. This is represented by the following formula: For example, at 45,000 miles, estimated maintenance costs would be $8,000 fixed and $49,500 variable ($1.10 × 45,000) for a total of $57,500
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Institute of Management Accountants
(IMA®) Institute of Management Accountants is a professional organization headquartered in New Jersey more than 60,000 professionals worldwide. The IMA vision is to be the leading resource for developing, certifying, connecting, and supporting the world’s best accountants and financial professionals working in business.
IMA is a collective voice for professionals around the world who work in business, distinct from public accounting.
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Certified Management Accountant
The Certified Management Accountant (CMA®), for critical internal financial management responsibilities, including planning, budgeting, business reporting, decision analysis, and risk management. Members can achieve career development through access to an active professional community, continuing education, valuable information, and resources.
Recognizing that the roles of in-house professionals (which include CFOs and controllers) are distinct from the functions of auditing and financial reporting, IMA raises awareness of management accountants, who serve in key decision support, planning, and control positions.
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Six Sigma
Six Sigma is a business management strategy originally developed by Motorola, USA in 1986
Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes. It uses a set of quality management methods, including statistical methods, and creates a special infrastructure of people within the organization ("Black Belts", "Green Belts", etc.) who are experts in these methods
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Team Work (5min.)Matt Reiss owns the Fredonia Barber Shop. He employs five barbers and pays each a base rate of $1,000 per month. One of the barbers serves as the manager and receives an extra $500 per month. In addition to the base rate, each barber also receives a commission of $5.50 per haircut.
Other costs are as follows. What the variable cost per haircut? Advertising $200 per month Rent $900 per month Barber supplies $0.30 per haircut Utilities $175 per month plus $0.20 per haircut Magazines $25 per month Matt currently charges $10 per haircut.
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Budgeting
Budgeting is used as a planning tool by management. Through budgeting, it should be possible for management to maintain enough cash to pay creditors, to have sufficient raw materials to meet production requirements, and to have adequate finished goods to meet expected sales.
One of management's major responsibilities is planning. Planning is the process of establishing enterprise-wide objectives. A successful organization makes both long-term and short-term plans.
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Budgeting and AccountingAccounting information makes major contributions to the budgeting process. From the accounting records, companies can obtain historical data on revenues, costs, and expenses.
Normally, accountants have the responsibility for presenting management's budgeting goals in financial terms. In this role, they translate management's plans and communicate the budget to employees throughout the company. They prepare periodic budget reports that provide the basis for measuring performance and comparing actual results with planned objectives.
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Benefits of budgeting
1. It requires all levels of management to plan ahead and to formalize goals on a recurring basis. 2. It provides definite objectives for evaluating performance at each level of responsibility. 3. It creates an early warning system for potential problems so that management can make changes before things get out of hand.
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Benefits of budgeting
4. It facilitates the coordination of activities within the business. It does this by correlating the goals of each segment with overall company objectives. 5. It results in greater management awareness of the entity's overall operations and the impact on operations of external factors, such as economic trends. 6. It motivates personnel throughout the organization to meet planned objectives.
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Budget PeriodBudget period is not necessarily one year in length. A budget may be prepared for any period of time.
The budget period should be long enough to provide an attainable goal under normal business conditions.
The most common budget period is one year. The annual budget, in turn, is often supplemented by monthly and quarterly budgets. Many companies use continuous 12-month budgets. These budgets drop the month just ended and add a future month. One advantage of continuous budgeting is that it keeps management planning a full year ahead.
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Budgeting processThe budgeting process usually begins with the collection of data from each organizational unit of the company. Past performance is often the starting point from which future budget goals are formulated.
The budget is developed within the framework of a sales forecast. Sales forecasting involves a consideration of various factors: (1) general economic conditions, (2) industry trends, (3) market research studies, (4) anticipated advertising and promotion, (5) previous market share, (6) changes in prices, and (7) technological developments. The input of sales personnel and top management is essential to the sales forecast.
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Budgeting and Human Behavior
A budget can have a significant impact on human behavior.
In developing the budget, each level of management should be invited to participate. This “bottom-to-top” approach is referred to as participative budgeting.
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Master BudgetThe master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period.
The master budget contains two classes of budgets. Operating budgets are the individual budgets that result in the preparation of the budgeted income statement. These budgets establish goals for the company's sales and production personnel.
In contrast, financial budgets are the capital expenditure budget, the cash budget, and the budgeted balance sheet. These budgets focus primarily on the cash resources needed to fund expected operations and planned capital expenditures.
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Operating vs. Financial
It is necessary to be familiar with the various types of budgets to understand the whole picture. The types of budgets include master, operating (for income statement items comprised of revenue and expenses), financial (for balance sheet items)
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Operating and financial
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The sales budget is the first budget prepared
The sales budget is the first budget prepared. Each of the other budgets depends on the sales budget. The sales budget is derived from the sales forecast. It represents management's best estimate of sales revenue for the budget period.
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Production budget
The production budget shows the units to produce to meet anticipated sales. Production requirements are determined from the following formula.
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Production budget
Hayes Company believes it can meet future sales requirements by maintaining an ending inventory equal to 20% of the next quarter's budgeted sales volume.
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Direct material budgetHayes Company maintains an ending inventory of raw materials equal to 10% of the next quarter's production requirements. Each Kitchen-Mate requires 2 pounds of raw materials, and the expected cost per pound is $4
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Direct labor budgetLike the direct materials budget, the direct labor budget contains the quantity (hours) and cost of direct labor necessary to meet production requirements. The total direct labor cost is derived from the following formula.
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Direct Labor Budget
Direct labor hours are determined from the production budget. At Hayes Company, two hours of direct labor are required to produce each unit of finished goods. The anticipated hourly wage rate is $10
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Team work (10min.)
Neely, Inc., is preparing its direct labor budget for 2008 from the following production budget based on a calendar year. Quarter Units Quarter Units 1. 20,400 3. 35,100 2. 25,400 4. 30,100
Each unit requires 1.9 hours of direct labor.
Prepare a direct labor budget for 2008. Wage rates are expected to be $17 for the first 2 quarters and $16 for quarters 3 and 4.
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Solution AE-9-7
NEELY, INC.Direct Labor Budget
For the Year Ending December 31, 2008 Quarter 1 2 3 4 YearUnits to be produced 20,400 25,400 35,100 30,100 Direct labor time (hours) per unit × 1.9 × 1.9 × 1.9 × 1.9 Total required direct labor hours 38,760 48,260 66,690 57,190
Direct labor cost per hour× $17 × $17 × $16 × $16
Total direct labor cost
$658,920 $820,420 $1,067,040 $915,040
$3,461,420
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Manufacturing overhead budget
The manufacturing overhead budget shows the expected manufacturing overhead costs for the budget period. This budget distinguishes between variable and fixed overhead costs.
Hayes Company expects variable costs to fluctuate with production volume on the basis of the following rates per direct labor hour: indirect materials $1.00, indirect labor $1.40, utilities $0.40, and maintenance $0.20. Thus, for the 6,200 direct labor hours to produce 3,100 units, budgeted indirect materials are $6,200 (6,200 × $1), and budgeted indirect labor is $8,680 (6,200 × $1.40).
Hayes also recognizes that some maintenance is fixed. The amounts reported for fixed costs are assumed for our example.
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Manufacturing Overhead Budget
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Selling and administrative expense budget
Hayes Company combines its operating expenses into one budget, the selling and administrative expense budget. This budget projects anticipated selling and administrative expenses for the budget period.
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Budgeted income statement
The budgeted income statement is the important end-product of the operating budgets. This budget indicates the expected profitability of operations for the budget period. The budgeted income statement provides the basis for evaluating company performance. Budgeted income statements often act as a call to action.
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Team work(10min.) Goody Company estimates that unit sales will be 10,500 in quarter 1; 12,200 in quarter 2; 14,800 in quarter 3; and 19,000 in quarter 4. Using a sales price of $85 per unit, prepare the sales budget by quarters for the year ending December 31, 2008.
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Solution
GOODY COMPANYSales Budget
For the Year Ending December 31, 2008 Quarter 1 2 3 4 YearExpected unit sales 10,500 12,200 14,800 19,000 56,500
Unit selling price × $85 × $85 × $85 × $85 × $85
Total sales $892,500 $1,037,000 $1,258,000 $1,615,000$4,802,500
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Budgeted Income Statement
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Financial Budget
Financial budgets consist of the capital expenditure budget, the cash budget, and the budgeted balance sheet.
The cash budget shows anticipated cash flows. Because cash is so vital, this budget is often considered to be the most important financial budget.
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Cash Budget
Cash budget contains three sections (cash receipts, cash disbursements, and financing) and the beginning and ending cash balances
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Cash budget components
The cash receipts section includes expected receipts from the company's principal source(s) of revenue. These are usually cash sales and collections from customers on credit sales.
The cash disbursements section shows expected cash payments. Such payments include direct materials, direct labor, manufacturing overhead, and selling and administrative expenses. Includes projected payments for income taxes, dividends, investments, and plant assets.
The financing section shows expected borrowings and the repayment of the borrowed funds plus interest.
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Cash Budget
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Budgeted balance sheetThe budgeted balance sheet is a projection of financial position at the end of the budget period. This budget is developed from the budgeted balance sheet for the preceding year and the budgets for the current year.
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Team work(15min.)Turney Company produces and sells automobile batteries, the heavy-duty HD. The 2008 sales budget is as follows. Quarter HD 1 5,300 2 7,300 3 8,500 4 10,500 The January 1, 2008, inventory of HD is 2,900 units. Management desires an ending inventory each quarter equal to 50% of the next quarter's sales. Sales in the first quarter of 2009 are expected to be 30% higher than sales in the same quarter in 2008.
Prepare quarterly production budgets for each quarter and in total for 2008.
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Solution
TURNEY COMPANYProduction Budget
For the Year Ending December 31, 2008 Product HD-240 Quarter 1 2 3 4 YearExpected unit sales 5,300 7,300 8,500 10,500 Add: Desired end. finished goods units 3,650 4,250 5,250 3,445 Total required units 8,950 11,550 13,750 13,945 Less: Beg. finished goods units 2,900 3,650 4,250 5,250
Required production units6,050 7,900 9,500 8,695
32,145
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Static Budget
The master budget formalizes management's planned objectives for the coming year. When used in budgetary control, each budget included in the master budget is considered to be static. A static budget is a projection of budget data at one level of activity. These budgets do not consider data for different levels of activity. As a result, companies always compare actual results with budget data at the activity level that was used in developing the master budget.
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Static Budgetwe will use selected data prepared for Hayes Company. Budget and actual sales data for the Kitchen-Mate product in the first and second quarters of 2008 are as follows.
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Flexible BudgetIn contrast to a static budget, which is based on one level of activity, a flexible budget projects budget data for various levels of activity. In essence, the flexible budget is a series of static budgets at different levels of activity. The flexible budget recognizes that the budgetary process is more useful if it is adaptable to changed operating conditions
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Static vs. Flexible BudgetThe demand for steel ingots has increased, and Barton produces and sells 12,000 units during the year, rather than 10,000.
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Static vs. Flexible Budget
Analyzing the budget data for these costs at 10,000 units, you arrive at the following per unit results.
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Flexible Budget
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Responsibility accounting Responsibility accounting involves accumulating and reporting costs (and revenues, where relevant) on the basis of the manager who has the authority to make the day-to-day decisions about the items. Under responsibility accounting, a manager's performance is evaluated on matters directly under that manager's control. Responsibility accounting can be used at every level of management. 1. Costs and revenues can be directly associated with the specific level of management responsibility. 2. The costs and revenues can be controlled by employees at the level of responsibility with which they are associated. 3. Budget data can be developed for evaluating the manager's effectiveness in controlling the costs and revenues.
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Responsibility accounting
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Teamwork(10min.)
In Mussatto Company, direct labor is $22 per hour. The company expects to operate at 10,100 direct labor hours each month. In January 2008, direct labor totaling $229,000 is incurred in working 10,800 hours. Prepare (a) a static budget report and (b) a flexible budget report.
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ABE10-3
MUSSATTO COMPANYStatic Direct Labor Budget Report
For the Month Ended January 31, 2008
Budget Actual Difference
Direct Labor $222,200.000000 (10,100 × $22) $229,000 $6,800 Unfavorable
MUSSATTO COMPANYFlexible Direct Labor Budget Report
For the Month Ended January 31, 2008
Budget Actual Difference
Direct Labor $237,600 (10,800 × $22) $229,000 $8,600 FavorableT
Solution
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Flexible BudgetFox's management uses a flexible budget for monthly comparisons of actual and budgeted manufacturing overhead costs of the Finishing Department. The master budget for the year ending December 31, 2008, shows expected annual operating capacity of 120,000 direct labor hours and the following overhead costs.
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Flexible BudgetThe activity index is direct labor hours. The relevant range is 8,000–12,000 direct labor hours per month.
There are three variable costs. The variable cost per unit is found by dividing each total budgeted cost by the direct labor hours used in preparing the master budget (120,000 hours)
There are three fixed costs. Since Fox desires monthly budget data, it divides each annual budgeted cost by 12 to find the monthly amounts.
*Prepare the budget for selected increments of activity within the relevant range.
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Flexible Budget
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Total budgeted cost graphThe graph highlights two activity levels (10,000 and 12,000). As shown, total budgeted costs at these activity levels are $70,000 [$30,000 + ($4 × 10,000)] and $78,000 [$30,000 + ($4 × 12,000)], respectively.
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Analyzing and Reporting Variances from Standards
One of the major management uses of standard costs is to identify variances from standards. Variances are the differences between total actual costs and total standard costs.In producing 1,000 gallons in the month, incurred the following costs.
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Computation of total variance
Companies determine total standard costs by multiplying the units produced by the standard cost per unit. The total standard cost is $42,000 (1,000 gallons × $42). Thus, the total variance is $2,500, as shown below.
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FavorableUnfavorable
When actual costs exceed standard costs, the variance is unfavorable.. It suggests that the company paid too much for one or more of the manufacturing cost elements or that it used the elements inefficiently.
If actual costs are less than standard costs, the variance is favorable It suggests efficiencies in incurring manufacturing costs and in using direct materials, direct labor, and manufacturing overhead.
However, be careful: A favorable variance could be obtained by using inferior materials. A variance is not favorable if the company has sacrificed quality control standards.
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Materials variance
In completing the order for 1,000 gallons, Xonic used 4,200 pounds of direct materials. These were purchased at a cost of $3.10 per unit.
The total materials variance is $1,020 ($13,020 - $12,000) unfavorable
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The materials price variance.
The company analyzes the total variance to determine the amount attributable to) price (costs and to quantity (use). The materials price variance.
The materials price variance is $420 ($13,020 - $12,600) unfavorable
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Materials quantity variance
Formula for the materials quantity variance and the calculation for Xonic
The materials quantity variance is $600 ($12,600 - $12,000) unfavorable
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Total materials varianceThe total materials variance of $1,020 U, therefore, consists of the following.
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Completed matrix for the direct materials variance
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Causes of Material Variances
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Matrix for direct labor variances
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Causes of Labor Variances
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Total overhead variance?Sandra Co. produced 1,000 units during the period. Actual direct labor hours were 2,200 and the standard hours per unit were 2. Actual overhead costs were $10,500 and the actual overhead rate was $5.10 per hour. The predetermined overhead rate was $5.00 per hour. Compute the total overhead variance.
$300 U $300 F $500 F $500 U
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Standards and actual costs ?Marley Office Goods budgeted 12,000 and produced 11,000 tape dispensers during June. Resin used to make the dispensers is purchased by the pound. Standards and actual costs follow for June:
Standards Actual
Materials 2 pounds @ $5.00 a pound
20,900 pounds @ $4.90 per pound
Labor .25 hours @ $15.00 per hour
2,700 hours @$15.30 per hour
Variable Overhead $3.25 per dispenser $36,500
Fixed Overhead $1.50 per dispenser
$17,250
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Total, price, and quantity variances
Ivonne purchased (at a cost of $11,700) and used 2,360 pounds of materials during May. Buerhle's standard cost of materials per unit produced is based on 2 pounds per unit at a cost $5 per pound. Production in May was 1,120 units. Compute the total, price, and quantity variances for materials
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Total, price, and quantity variances
(AQ × AP) - (SQ × SP) = Total Materials Variance ($11,700) - (2,240 × $5) = $500 U (AQ × AP) - (AQ × SP) = Materials Price Variance (11,700) - (2,360 × $5) = $100 F (AQ × SP) - (SQ × SP) = Materials Quantity Variance (2,360 × $5) - (2,240 × $5) = $600 U
Ivonne purchased (at a cost of $11,700) and used 2,360 pounds of materials during May. Buerhle's standard cost of materials per unit produced is based on 2 pounds per unit at a cost $5 per pound. Production in May was 1,120 units. Compute the total, price, and quantity variances for materials
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Incremental AnalysisWhat Does Incremental Analysis Mean?
A decision-making technique used in business to determine the true cost difference between alternatives. Incremental analysis ignores sunk costs and costs that are the same between the two alternatives to look only at the remaining costs. Example; Replacing all printer. Cost of the old printer (sunk cost) -NoCost of electricity -YesCost of tuner -Yes
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Incremental analysisHere are some examples of incremental analysis:
Accepting additional business.Making or buying parts or products.Selling products or processing them further.Eliminating a segment.Allocating scarce resources (sales mix).
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Accepting additional business
Per Unit Annual Total Sales $25.00 $2,100,000 Direct Materials 12.00 1,008,000Direct Labor 6.00 504,000Overhead .50 42,000Selling Expenses 1.75 147,000Administrative Expenses .25 21,000
Total Costs and Expenses 20.50 1,722,000 Operating Income $ 4.50 $378,000
It is currently operating at 75% of its capacity. It currently makes and sells 84,000 packets per year.
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Accepting additional business
Aurora received a special order request for 15,000 packets at a price of $20 per packet to be shipped overseas. If 84,000 packets is 75% of capacity, 112,000 packets would be 100% of capacity. Aurora has the capacity to prepare the 15,000 packets requested without changing its existing operations. The order would generate a $7,500 loss. ???
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Accepting additional business
Per Unit Total Sales $20.00 $300,000 Direct Materials 12.00 180,000Direct Labor 6.00 90,000Overhead .50 7,500Selling Expenses 1.75 26,250Administrative Expenses
.25 3,750
Total Costs and Expenses
20.50 307,500
Operating Income
$ (.50) $(7,500)
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Incremental analysisIncremental analysis, which identifies only those revenues and costs that change if the order were accepted, should be used to analyze the alternative. This requires a review of the costs.
To manufacture 15,000 packets would require $12.00 of direct materials and $6.00 of direct labor.
The per unit overhead cost of $0.50 is 50% variable ($0.25) and 50% fixed ($0.25).
Selling costs (includes commissions and delivery costs) for the 15,000 packets would be $7,000.
Administrative expenses would not change.
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Using incremental analysis
Per Unit Totals Sales $20.00 $300,000
Direct Materials 12.00 180,000
Direct Labor 6.00 90,000
Overhead .25 3,750
Selling Expenses 7,000
Total Costs and Expenses 280,750
Operating Income $19,250
