Flexible Budgets, Variances, and Management Control: I
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Transcript of Flexible Budgets, Variances, and Management Control: I
7 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible Budgets, Variances,and Management Control: IFlexible Budgets, Variances,and Management Control: I
Chapter 7
7 - 2©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Distinguish
a static budget
from a flexible budget.
Learning Objective 1Learning Objective 1
7 - 3©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Static and Flexible BudgetsStatic and Flexible Budgets
Static BudgetPlanned level ofoutput at start ofthe budget period
Based on
Flexible BudgetBudgeted revenuesand cost based on
actual level of output
Based on
7 - 4©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Static Budget ExampleStatic Budget Example
Assume that Pasadena Co. manufacturesand sells dress suits.
Budgeted variable costs per suit are as follows:Direct materials cost $ 65
Direct manufacturing labor 26Variable manufacturing overhead 24
Total variable costs $115
7 - 5©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Static Budget ExampleStatic Budget Example
Budgeted selling price is $155 per suit.
Fixed manufacturing costs are expectedto be $286,000 within a relevant range
between 9,000 and 13,500 suits.
Variable and fixed period costs are ignored.
The static budget for year 2004 is basedon selling 13,000 suits.
What is the static-budget operating income?
7 - 6©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Static Budget ExampleStatic Budget Example
Revenues (13,000 × $155) $2,015,000Less Expenses:Variable (13,000 × $115) 1,495,000Fixed 286,000Budgeted operating income $ 234,000
Assume that Pasadena Co. produced and sold10,000 suits at $160 each with actual variablecosts of $120 per suit and fixed manufacturing
costs of $300,000.
7 - 7©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Static Budget ExampleStatic Budget Example
Revenues (10,000 × $160) $1,600,000 Less Expenses: Variable (10,000 × $120) 1,200,000 Fixed 300,000 Actual operating income $ 100,000
What was the actual operating income?
7 - 8©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Static-Budget Variance ExampleStatic-Budget Variance Example
What is the static-budget variance ofoperating income?
Actual operating income $100,000Budgeted operating income 234,000Static-budget variance of operating income $134,000 U
This is a Level 0 variance analysis.
7 - 9©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Static-Budget Variance ExampleStatic-Budget Variance Example
Static-Budget Based Variance Analysis(Level 1) in (000) Static Budget Actual Variance
Suits 13 10 3 URevenue $2,015 $1,600 $415 UVariable costs 1,495 1,200 296 FContribution margin $ 520 $ 400 $120 UFixed costs 286 300 14 UOperating income $ 234 $ 100 $134 U
7 - 10©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 2Learning Objective 2
Develop a flexible budgetand compute flexible-budgetvariances and sales-volume
variances.
7 - 11©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Steps in Developing Flexible Budgets
Steps in Developing Flexible Budgets
Step 1:Determine budgeted selling price, variable
cost per unit, and budgeted fixed cost.
Budgeted selling price is $155,variable cost is $115 per suit, and
the budgeted fixed cost is $286,000.
7 - 12©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Steps in Developing Flexible Budgets
Steps in Developing Flexible Budgets
Step 2:Determine the actual quantity of output.
In the year 2004, 10,000 suits wereproduced and sold.
Step 3:Determine the flexible budget for revenues.
$155 × 10,000 = $1,550,000
7 - 13©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Steps in Developing Flexible Budgets
Steps in Developing Flexible Budgets
Step 4:Determine the flexible budget for costs.
Variable costs: 10,000 × $115 = $1,150,000Fixed costs 286,000Total costs $1,436,000
7 - 14©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
VariancesVariances
Level 2 analysis provides informationon the two components of the
static-budget variance.
1. Flexible-budget variance
2. Sales-volume variance
7 - 15©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget VarianceFlexible-Budget Variance
Flexible-Budget Variance(Level 2) in (000)
Flexible Budget Actual Variance
Suits 10 10 0Revenue $1,550 $1,600 $ 50 FVariable costs 1,150 1,200 50 UContribution margin $ 400 $ 400 $ 0Fixed costs 286 300 14 UOperating income $ 114 $ 100 $ 14 U
7 - 16©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget VarianceFlexible-Budget Variance
Actual quantity sold: 10,000 suits
Flexible-budgetvariance
$14,000 U
Actual resultsoperating income
$100,000
Flexible-budgetoperating income
$114,000
7 - 17©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget VarianceFlexible-Budget Variance
Total flexible-budget variance= Total actual results
– Total flexible budget for actual sales level
7 - 18©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget VarianceFlexible-Budget Variance
Actual Budgeted Amount Amount
Selling price $160 $155Variable cost 120 115Contribution margin $ 40 $ 40
7 - 19©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget VarianceFlexible-Budget Variance
Why is the flexible-budget variance $14,000 U?
Selling-price variance $50,000 F
Actual variable costs exceededflexible budget variable costs 50,000 U
Actual fixed costs exceededflexible budget fixed costs 14,000 U
Total flexible-budget variance $14,000 U
7 - 20©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales-Volume VarianceSales-Volume Variance
Sales-Volume Variance(Level 2) in (000)
Flexible Static Sales-VolumeBudget Budget Variance
Suits 10 13 3 URevenue $1,550 $2,015 $465 UVariable costs 1,150 1,495 295 FContr. margin $ 400 $ 520 $120 UFixed costs 286 286 0Operating income $ 114 $ 234 $120 U
7 - 21©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales-Volume VarianceSales-Volume Variance
Actual quantity sold: 10,000 suits
Sales-volumevariance
$120,000 U
Flexible-budgetoperating income
$114,000
Static-budgetoperating income
$234,000
7 - 22©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales-Volume VarianceSales-Volume Variance
Total sales-volume variance $120,000 U
=
Actual sales unit – Master budgeted sales units13,000 – 10,000 = 3,000×
Budgeted contribution margin per unit $40
7 - 23©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Budget VariancesBudget Variances
Static-budgetvariance
$134,000 U
Flexible-budgetvariance
$14,000 U
Level 1
Sales-volumevariance
$120,000 ULevel 2
7 - 24©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 3Learning Objective 3
Explain why standard costs areoften used in variance analysis.
7 - 25©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
StandardsStandards
Pasadena’s budgeted cost for each variabledirect cost item is computed as follows:
Standard inputallowed for
one output unit
Standard costper input unit
×
7 - 26©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
StandardsStandards
4.00 square yards allowed per output unit at $16.25 standard cost per square yard.
Standard cost per output unit 4.00 × $16.25 = $65.00
7 - 27©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
StandardsStandards
2.00 manufacturing labor-hours of inputallowed per output unit at $13.00 standard
cost per hour.
Standard cost per output unit2.00 × $13.00 = $26.00
7 - 28©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 4Learning Objective 4
Compute price variancesand efficiency variances
for direct-cost categories.
7 - 29©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Actual DataActual Data
Direct materials purchased and used:42,500 square yards at $15.95
Labor hours: 21,500 at $12.90
Cost of direct materials = $677,875
Cost of direct manufacturing labor = $277,350
7 - 30©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Price Variance ExamplePrice Variance Example
Direct-material price variance
Actual price – Budgeted price
× Actualquantity
($15.95 – $16.25) × 42,500 = $12,750 F=
=
7 - 31©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Price Variance ExamplePrice Variance Example
Direct-labor price variance
Actual price – Budgeted price
× Actualquantity
($12.90 – $13.00) × 21,500 = $2,150 F=
=
7 - 32©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Price Variance ExamplePrice Variance Example
What is the journal entry when the materials pricevariance is isolated at the time of purchase?
Materials Control 690,625Direct-Materials Price Variance 12,750Accounts Payable Control 677,875To record direct materials purchased
7 - 33©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Efficiency Variance ExampleEfficiency Variance Example
Direct-material efficiency variance
Actual quantity – Standard
quantity× Standard
price
(42,500 – 40,000) × $16.25 = $40,625 U=
=
7 - 34©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Efficiency Variance ExampleEfficiency Variance Example
Direct-labor efficiency variance
Actual quantity – Standard
quantity× Standard
price
(21,500 – 20,000) × $13.00 = $19,500 U=
=
7 - 35©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Efficiency VarianceEfficiency Variance
What is the journal entry to record materials used?
Work in Process Control 650,000Direct-Materials Efficiency Variance 40,625
Materials Control 690,625To record direct materials used
7 - 36©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Price and Efficiency VariancePrice and Efficiency Variance
What is the journal entry for direct manufacturing labor?
Work in Process Control 260,000Direct ManufacturingLabor Efficiency Variance 19,500
Direct-ManufacturingLabor Price Variance 2,150Wages Payable 277,350
To record liability for direct manufacturing labor
7 - 37©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible Budget MaterialVariance Example
Flexible Budget MaterialVariance Example
ActualCost
$677,875
BQ × BP40,000 × $16.25
$650,000
AQ × BP42,500 × $16.25
$690,625
$12,750 F $40,625 U
$27,875 U
7 - 38©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible Budget LaborVariance Example
Flexible Budget LaborVariance Example
ActualCost
$277,350
BQ × BP20,000 × $13.00
$260,000
AQ × BP21,500 × $13.00
$279,500
$2,150 F $ 19,500 U
$17,350 U
7 - 39©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Static-budget varianceMaterials $167,125 FLabor 60,650 FTotal $227,775 F
Flexible-budget varianceMaterials $27,875 ULabor 17,350 UTotal $45,225 U
Sales-volume varianceMaterials $195,000 FLabor 78,000 FTotal $273,000 F
Level 1
Level 2
Variance AnalysisVariance Analysis
Level 2
7 - 40©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-budget varianceMaterials $27,875 ULabor 17,350 UTotal $45,225 U
Price varianceMaterials $12,750 FLabor 2,150 FTotal $14,900 F
Efficiency varianceMaterials $40,625 ULabor 19,500 UTotal $60,125 U
Level 2
Level 3
Variance AnalysisVariance Analysis
Level 3
7 - 41©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 5Learning Objective 5
Explain why purchasingperformance measures should
focus on more factors thanjust price variances.
7 - 42©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Performance MeasurementUsing Variances
Performance MeasurementUsing Variances
Effectiveness is the degree to which apredetermined objective or target is met.
Efficiency is the relative amount of inputsused to achieve a given level of output.
Variances should not solely be used toevaluate performance.
7 - 43©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
When to Investigate VariancesWhen to Investigate Variances
When should variances be investigated?
Subjective judgments
Rules of thumb as “investigate all variancesexceeding $10,000 or 25% of expected cost,
whichever is lower.”
7 - 44©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 6Learning Objective 6
Integrate continuousimprovement
into variance analysis.
7 - 45©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Continuous ImprovementContinuous Improvement
Assume that the budgeted direct materials cost foreach suit that Pasadena Co. manufactures is $65.
Pasadena Co. wants to implement continuousimprovement budgets based on a target 1%
materials cost reduction each period.
What should the budgeted cost be for thenext 3 subsequent periods?
7 - 46©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Continuous ImprovementContinuous Improvement
Prior Period Reduction Revised Budgeted in
Budgeted Amount Budget
AmountThis Period: – – $65.00Period 1: $65.00 $0.650
$64.35Period 2: $64.35 $0.644
$63.71Period 3: $63.71 $0.637
$63.07
7 - 47©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 7Learning Objective 7
Perform variance analysis inactivity-based costing systems.
7 - 48©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible Budgeting andActivity-Based CostingFlexible Budgeting andActivity-Based Costing
Materials costs and direct manufacturing laborcosts are examples of output-unit level costs.
Batch-level costs are resources sacrificedon activities that are related to a group of
units of product(s) or service(s) rather thanto each individual unit of product or service.
7 - 49©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible Budgeting andActivity-Based CostingFlexible Budgeting andActivity-Based Costing
Denver Co. produces metal planters (MP).
Assume that material-handling labor costs varywith the number of batches produced rather
than the number of units in a batch.
Material-handling labor costs are direct batchlevel costs that vary with the number of batches.
7 - 50©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible Budgeting and Activity-Based Costing
Flexible Budgeting and Activity-Based Costing
Static ActualBudget Amounts
Units produced and sold 18,000 15,660Batch size 180 174Number of batches 100 90Material-handling labor-hours per batch 5.00 5.20
7 - 51©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible Budgeting and Activity-Based Costing
Flexible Budgeting and Activity-Based Costing
Static Actual
Budget AmountsTotal labor-hours 500
468Cost per material-handling labor-hour
$14.00 $14.50Total material-handling
labor cost$7,000 $6,786
7 - 52©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible Budgeting andActivity-Based CostingFlexible Budgeting andActivity-Based Costing
How many batches should have been employedto produce the actual output units?
15,660 units ÷ 180 units per batch = 87 batches
How many material-handling hoursshould have been used?
87 batches × 5 hours/batch = 435 hours
7 - 53©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible Budgeting andActivity-Based CostingFlexible Budgeting andActivity-Based Costing
What is the flexible budget formaterial-handling labor-hours?
435 hours × $14.00/labor-hour = $6,090
Flexible-budget costs $6,090 Actual costs 6,786 Flexible-budget variance $ 696 U
7 - 54©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Price and Efficiency VariancesPrice and Efficiency Variances
Price variance = ($14.50 – $14.00) × 468 = $234 U
Efficiency variance = (468 – 435) × $14.00 = $462 U
Total variance $696 U
7 - 55©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 8Learning Objective 8
Describe benchmarkingand how it is used
in cost management.
7 - 56©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
BenchmarkingBenchmarking
It refers to the continuous process ofmeasuring products, services, and activities
against the best levels of performance.
7 - 57©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
End of Chapter 7End of Chapter 7