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7 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible 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 1
7 - 3©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Static and Flexible Budgets
Static Budget
Planned level of
output at start of
the budget period
Based on
Flexible Budget
Budgeted revenues
and 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 Example
Assume that Pasadena Co. manufactures
and sells dress suits.
Budgeted variable costs per suit are as follows:
Direct materials cost $ 65
Direct manufacturing labor 26
Variable manufacturing overhead 24
Total variable costs $115
7 - 5©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Static Budget Example
Budgeted selling price is $155 per suit.
Fixed manufacturing costs are expected
to 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 based
on 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 Example
Revenues (13,000 × $155) $2,015,000
Less Expenses:
Variable (13,000 × $115) 1,495,000
Fixed 286,000
Budgeted operating income $ 234,000
Assume that Pasadena Co. produced and sold
10,000 suits at $160 each with actual variable
costs 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 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 Example
What is the static-budget variance of
operating income?
Actual operating income $100,000
Budgeted operating income 234,000
Static-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 Example
Static-Budget Based Variance Analysis
(Level 1) in (000)
Static Budget Actual Variance
Suits 13 10 3 U
Revenue $2,015 $1,600 $415 U
Variable costs 1,495 1,200 296 F
Contribution margin $ 520 $ 400 $120 U
Fixed costs 286 300 14 U
Operating income $ 234 $ 100 $134 U
7 - 10©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 2
Develop a flexible budget
and compute flexible-budget
variances and sales-volume
variances.
7 - 11©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
Step 2:
Determine the actual quantity of output.
In the year 2004, 10,000 suits were
produced 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
Step 4:
Determine the flexible budget for costs.
Variable costs: 10,000 × $115 = $1,150,000
Fixed costs 286,000
Total costs $1,436,000
7 - 14©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Variances
Level 2 analysis provides information
on 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 Variance
Flexible-Budget Variance
(Level 2) in (000)
Flexible
Budget Actual Variance
Suits 10 10 0
Revenue $1,550 $1,600 $ 50 F
Variable costs 1,150 1,200 50 U
Contribution margin $ 400 $ 400 $ 0
Fixed costs 286 300 14 U
Operating income $ 114 $ 100 $ 14 U
7 - 16©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget Variance
Actual quantity sold: 10,000 suits
Flexible-budget
variance
$14,000 U
Actual results
operating income
$100,000
Flexible-budget
operating income
$114,000
7 - 17©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-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 Variance
Actual Budgeted
Amount Amount
Selling price $160 $155
Variable cost 120 115
Contribution margin $ 40 $ 40
7 - 19©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget Variance
Why is the flexible-budget variance $14,000 U?
Selling-price variance $50,000 F
Actual variable costs exceeded
flexible budget variable costs 50,000 U
Actual fixed costs exceeded
flexible 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 Variance
Sales-Volume Variance
(Level 2) in (000)
Flexible Static Sales-Volume
Budget Budget Variance
Suits 10 13 3 U
Revenue $1,550 $2,015 $465 U
Variable costs 1,150 1,495 295 F
Contr. margin $ 400 $ 520 $120 U
Fixed costs 286 286 0
Operating income $ 114 $ 234 $120 U
7 - 21©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales-Volume Variance
Actual quantity sold: 10,000 suits
Sales-volume
variance
$120,000 U
Flexible-budget
operating income
$114,000
Static-budget
operating income
$234,000
7 - 22©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales-Volume Variance
Total sales-volume variance $120,000 U
=
Actual sales unit – Master budgeted sales units
13,000 – 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 Variances
Static-budget
variance
$134,000 U
Flexible-budget
variance
$14,000 U
Level 1
Sales-volume
variance
$120,000 U
Level 2
7 - 24©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 3
Explain why standard costs are
often used in variance analysis.
7 - 25©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Standards
Pasadena’s budgeted cost for each variable
direct cost item is computed as follows:
Standard input
allowed for
one output unit
Standard cost
per input unit
×
7 - 26©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Standards
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
Standards
2.00 manufacturing labor-hours of input
allowed per output unit at $13.00 standard
cost per hour.
Standard cost per output unit
2.00 × $13.00 = $26.00
7 - 28©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 4
Compute price variances
and efficiency variances
for direct-cost categories.
7 - 29©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Actual 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 Example
Direct-material price variance
Actual price –
Budgeted price
× Actual
quantity
($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 Example
Direct-labor price variance
Actual price –
Budgeted price
× Actual
quantity
($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 Example
What is the journal entry when the materials price
variance is isolated at the time of purchase?
Materials Control 690,625
Direct-Materials Price Variance 12,750
Accounts Payable Control 677,875
To record direct materials purchased
7 - 33©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Efficiency 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 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 Variance
What is the journal entry to record materials used?
Work in Process Control 650,000
Direct-Materials Efficiency Variance 40,625
Materials Control 690,625
To record direct materials used
7 - 36©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Price and Efficiency Variance
What is the journal entry for direct manufacturing labor?
Work in Process Control 260,000
Direct Manufacturing
Labor Efficiency Variance 19,500
Direct-Manufacturing
Labor Price Variance 2,150
Wages 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 Material
Variance Example
Actual
Cost
$677,875
BQ × BP
40,000 × $16.25
$650,000
AQ × BP
42,500 × $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 Labor
Variance Example
Actual
Cost
$277,350
BQ × BP
20,000 × $13.00
$260,000
AQ × BP
21,500 × $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 variance
Materials $167,125 F
Labor 60,650 F
Total $227,775 F
Flexible-budget variance
Materials $27,875 U
Labor 17,350 U
Total $45,225 U
Sales-volume variance
Materials $195,000 F
Labor 78,000 F
Total $273,000 F
Level 1
Level 2
Variance Analysis
Level 2
7 - 40©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-budget variance
Materials $27,875 U
Labor 17,350 U
Total $45,225 U
Price variance
Materials $12,750 F
Labor 2,150 F
Total $14,900 F
Efficiency variance
Materials $40,625 U
Labor 19,500 U
Total $60,125 U
Level 2
Level 3
Variance Analysis
Level 3
7 - 41©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 5
Explain why purchasing
performance measures should
focus on more factors than
just price variances.
7 - 42©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Performance Measurement
Using Variances
Effectiveness is the degree to which a
predetermined objective or target is met.
Efficiency is the relative amount of inputs
used to achieve a given level of output.
Variances should not solely be used to
evaluate performance.
7 - 43©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
When to Investigate Variances
When should variances be investigated?
Subjective judgments
Rules of thumb as “investigate all variances
exceeding $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 6
Integrate continuous
improvement
into variance analysis.
7 - 45©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Continuous Improvement
Assume that the budgeted direct materials cost for
each suit that Pasadena Co. manufactures is $65.
Pasadena Co. wants to implement continuous
improvement budgets based on a target 1%
materials cost reduction each period.
What should the budgeted cost be for the
next 3 subsequent periods?
7 - 46©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Continuous Improvement
Prior Period Reduction Revised
Budgeted in Budgeted
Amount Budget Amount
This Period: – – $65.00
Period 1: $65.00 $0.650 $64.35
Period 2: $64.35 $0.644 $63.71
Period 3: $63.71 $0.637 $63.07
7 - 47©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 7
Perform variance analysis in
activity-based costing systems.
7 - 48©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible Budgeting and
Activity-Based Costing
Materials costs and direct manufacturing labor
costs are examples of output-unit level costs.
Batch-level costs are resources sacrificed
on activities that are related to a group of
units of product(s) or service(s) rather than
to each individual unit of product or service.
7 - 49©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible Budgeting and
Activity-Based Costing
Denver Co. produces metal planters (MP).
Assume that material-handling labor costs vary
with the number of batches produced rather
than the number of units in a batch.
Material-handling labor costs are direct batch
level 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
Static Actual
Budget Amounts
Units produced and sold 18,000 15,660
Batch size 180 174
Number of batches 100 90
Material-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
Static Actual
Budget Amounts
Total labor-hours 500 468
Cost per material-handling
labor-hour $14.00 $14.50
Total material-handling
labor cost $7,000 $6,786
7 - 52©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible Budgeting and
Activity-Based Costing
How many batches should have been employed
to produce the actual output units?
15,660 units ÷ 180 units per batch = 87 batches
How many material-handling hours
should 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 and
Activity-Based Costing
What is the flexible budget for
material-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 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 8
Describe benchmarking
and how it is used
in cost management.
7 - 56©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Benchmarking
It refers to the continuous process of
measuring 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 7

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11ch07

  • 1. 7 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible Budgets, Variances, and Management Control: I Chapter 7
  • 2. 7 - 2©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Distinguish a static budget from a flexible budget. Learning Objective 1
  • 3. 7 - 3©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Static and Flexible Budgets Static Budget Planned level of output at start of the budget period Based on Flexible Budget Budgeted revenues and cost based on actual level of output Based on
  • 4. 7 - 4©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Static Budget Example Assume that Pasadena Co. manufactures and sells dress suits. Budgeted variable costs per suit are as follows: Direct materials cost $ 65 Direct manufacturing labor 26 Variable manufacturing overhead 24 Total variable costs $115
  • 5. 7 - 5©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Static Budget Example Budgeted selling price is $155 per suit. Fixed manufacturing costs are expected to 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 based on selling 13,000 suits. What is the static-budget operating income?
  • 6. 7 - 6©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Static Budget Example Revenues (13,000 × $155) $2,015,000 Less Expenses: Variable (13,000 × $115) 1,495,000 Fixed 286,000 Budgeted operating income $ 234,000 Assume that Pasadena Co. produced and sold 10,000 suits at $160 each with actual variable costs of $120 per suit and fixed manufacturing costs of $300,000.
  • 7. 7 - 7©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Static 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?
  • 8. 7 - 8©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Static-Budget Variance Example What is the static-budget variance of operating income? Actual operating income $100,000 Budgeted operating income 234,000 Static-budget variance of operating income $134,000 U This is a Level 0 variance analysis.
  • 9. 7 - 9©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Static-Budget Variance Example Static-Budget Based Variance Analysis (Level 1) in (000) Static Budget Actual Variance Suits 13 10 3 U Revenue $2,015 $1,600 $415 U Variable costs 1,495 1,200 296 F Contribution margin $ 520 $ 400 $120 U Fixed costs 286 300 14 U Operating income $ 234 $ 100 $134 U
  • 10. 7 - 10©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 2 Develop a flexible budget and compute flexible-budget variances and sales-volume variances.
  • 11. 7 - 11©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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.
  • 12. 7 - 12©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Steps in Developing Flexible Budgets Step 2: Determine the actual quantity of output. In the year 2004, 10,000 suits were produced and sold. Step 3: Determine the flexible budget for revenues. $155 × 10,000 = $1,550,000
  • 13. 7 - 13©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Steps in Developing Flexible Budgets Step 4: Determine the flexible budget for costs. Variable costs: 10,000 × $115 = $1,150,000 Fixed costs 286,000 Total costs $1,436,000
  • 14. 7 - 14©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Variances Level 2 analysis provides information on the two components of the static-budget variance. 1. Flexible-budget variance 2. Sales-volume variance
  • 15. 7 - 15©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible-Budget Variance Flexible-Budget Variance (Level 2) in (000) Flexible Budget Actual Variance Suits 10 10 0 Revenue $1,550 $1,600 $ 50 F Variable costs 1,150 1,200 50 U Contribution margin $ 400 $ 400 $ 0 Fixed costs 286 300 14 U Operating income $ 114 $ 100 $ 14 U
  • 16. 7 - 16©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible-Budget Variance Actual quantity sold: 10,000 suits Flexible-budget variance $14,000 U Actual results operating income $100,000 Flexible-budget operating income $114,000
  • 17. 7 - 17©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible-Budget Variance Total flexible-budget variance = Total actual results – Total flexible budget for actual sales level
  • 18. 7 - 18©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible-Budget Variance Actual Budgeted Amount Amount Selling price $160 $155 Variable cost 120 115 Contribution margin $ 40 $ 40
  • 19. 7 - 19©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible-Budget Variance Why is the flexible-budget variance $14,000 U? Selling-price variance $50,000 F Actual variable costs exceeded flexible budget variable costs 50,000 U Actual fixed costs exceeded flexible budget fixed costs 14,000 U Total flexible-budget variance $14,000 U
  • 20. 7 - 20©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Sales-Volume Variance Sales-Volume Variance (Level 2) in (000) Flexible Static Sales-Volume Budget Budget Variance Suits 10 13 3 U Revenue $1,550 $2,015 $465 U Variable costs 1,150 1,495 295 F Contr. margin $ 400 $ 520 $120 U Fixed costs 286 286 0 Operating income $ 114 $ 234 $120 U
  • 21. 7 - 21©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Sales-Volume Variance Actual quantity sold: 10,000 suits Sales-volume variance $120,000 U Flexible-budget operating income $114,000 Static-budget operating income $234,000
  • 22. 7 - 22©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Sales-Volume Variance Total sales-volume variance $120,000 U = Actual sales unit – Master budgeted sales units 13,000 – 10,000 = 3,000 × Budgeted contribution margin per unit $40
  • 23. 7 - 23©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Budget Variances Static-budget variance $134,000 U Flexible-budget variance $14,000 U Level 1 Sales-volume variance $120,000 U Level 2
  • 24. 7 - 24©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 3 Explain why standard costs are often used in variance analysis.
  • 25. 7 - 25©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Standards Pasadena’s budgeted cost for each variable direct cost item is computed as follows: Standard input allowed for one output unit Standard cost per input unit ×
  • 26. 7 - 26©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Standards 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
  • 27. 7 - 27©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Standards 2.00 manufacturing labor-hours of input allowed per output unit at $13.00 standard cost per hour. Standard cost per output unit 2.00 × $13.00 = $26.00
  • 28. 7 - 28©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 4 Compute price variances and efficiency variances for direct-cost categories.
  • 29. 7 - 29©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Actual 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
  • 30. 7 - 30©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Price Variance Example Direct-material price variance Actual price – Budgeted price × Actual quantity ($15.95 – $16.25) × 42,500 = $12,750 F= =
  • 31. 7 - 31©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Price Variance Example Direct-labor price variance Actual price – Budgeted price × Actual quantity ($12.90 – $13.00) × 21,500 = $2,150 F= =
  • 32. 7 - 32©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Price Variance Example What is the journal entry when the materials price variance is isolated at the time of purchase? Materials Control 690,625 Direct-Materials Price Variance 12,750 Accounts Payable Control 677,875 To record direct materials purchased
  • 33. 7 - 33©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Efficiency Variance Example Direct-material efficiency variance Actual quantity – Standard quantity × Standard price (42,500 – 40,000) × $16.25 = $40,625 U= =
  • 34. 7 - 34©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Efficiency Variance Example Direct-labor efficiency variance Actual quantity – Standard quantity × Standard price (21,500 – 20,000) × $13.00 = $19,500 U= =
  • 35. 7 - 35©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Efficiency Variance What is the journal entry to record materials used? Work in Process Control 650,000 Direct-Materials Efficiency Variance 40,625 Materials Control 690,625 To record direct materials used
  • 36. 7 - 36©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Price and Efficiency Variance What is the journal entry for direct manufacturing labor? Work in Process Control 260,000 Direct Manufacturing Labor Efficiency Variance 19,500 Direct-Manufacturing Labor Price Variance 2,150 Wages Payable 277,350 To record liability for direct manufacturing labor
  • 37. 7 - 37©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible Budget Material Variance Example Actual Cost $677,875 BQ × BP 40,000 × $16.25 $650,000 AQ × BP 42,500 × $16.25 $690,625 $12,750 F $40,625 U $27,875 U
  • 38. 7 - 38©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible Budget Labor Variance Example Actual Cost $277,350 BQ × BP 20,000 × $13.00 $260,000 AQ × BP 21,500 × $13.00 $279,500 $2,150 F $ 19,500 U $17,350 U
  • 39. 7 - 39©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Static-budget variance Materials $167,125 F Labor 60,650 F Total $227,775 F Flexible-budget variance Materials $27,875 U Labor 17,350 U Total $45,225 U Sales-volume variance Materials $195,000 F Labor 78,000 F Total $273,000 F Level 1 Level 2 Variance Analysis Level 2
  • 40. 7 - 40©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible-budget variance Materials $27,875 U Labor 17,350 U Total $45,225 U Price variance Materials $12,750 F Labor 2,150 F Total $14,900 F Efficiency variance Materials $40,625 U Labor 19,500 U Total $60,125 U Level 2 Level 3 Variance Analysis Level 3
  • 41. 7 - 41©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 5 Explain why purchasing performance measures should focus on more factors than just price variances.
  • 42. 7 - 42©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Performance Measurement Using Variances Effectiveness is the degree to which a predetermined objective or target is met. Efficiency is the relative amount of inputs used to achieve a given level of output. Variances should not solely be used to evaluate performance.
  • 43. 7 - 43©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster When to Investigate Variances When should variances be investigated? Subjective judgments Rules of thumb as “investigate all variances exceeding $10,000 or 25% of expected cost, whichever is lower.”
  • 44. 7 - 44©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 6 Integrate continuous improvement into variance analysis.
  • 45. 7 - 45©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Continuous Improvement Assume that the budgeted direct materials cost for each suit that Pasadena Co. manufactures is $65. Pasadena Co. wants to implement continuous improvement budgets based on a target 1% materials cost reduction each period. What should the budgeted cost be for the next 3 subsequent periods?
  • 46. 7 - 46©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Continuous Improvement Prior Period Reduction Revised Budgeted in Budgeted Amount Budget Amount This Period: – – $65.00 Period 1: $65.00 $0.650 $64.35 Period 2: $64.35 $0.644 $63.71 Period 3: $63.71 $0.637 $63.07
  • 47. 7 - 47©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 7 Perform variance analysis in activity-based costing systems.
  • 48. 7 - 48©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible Budgeting and Activity-Based Costing Materials costs and direct manufacturing labor costs are examples of output-unit level costs. Batch-level costs are resources sacrificed on activities that are related to a group of units of product(s) or service(s) rather than to each individual unit of product or service.
  • 49. 7 - 49©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible Budgeting and Activity-Based Costing Denver Co. produces metal planters (MP). Assume that material-handling labor costs vary with the number of batches produced rather than the number of units in a batch. Material-handling labor costs are direct batch level costs that vary with the number of batches.
  • 50. 7 - 50©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible Budgeting and Activity-Based Costing Static Actual Budget Amounts Units produced and sold 18,000 15,660 Batch size 180 174 Number of batches 100 90 Material-handling labor-hours per batch 5.00 5.20
  • 51. 7 - 51©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible Budgeting and Activity-Based Costing Static Actual Budget Amounts Total labor-hours 500 468 Cost per material-handling labor-hour $14.00 $14.50 Total material-handling labor cost $7,000 $6,786
  • 52. 7 - 52©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible Budgeting and Activity-Based Costing How many batches should have been employed to produce the actual output units? 15,660 units ÷ 180 units per batch = 87 batches How many material-handling hours should have been used? 87 batches × 5 hours/batch = 435 hours
  • 53. 7 - 53©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible Budgeting and Activity-Based Costing What is the flexible budget for material-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
  • 54. 7 - 54©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Price and Efficiency Variances Price variance = ($14.50 – $14.00) × 468 = $234 U Efficiency variance = (468 – 435) × $14.00 = $462 U Total variance $696 U
  • 55. 7 - 55©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 8 Describe benchmarking and how it is used in cost management.
  • 56. 7 - 56©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Benchmarking It refers to the continuous process of measuring products, services, and activities against the best levels of performance.
  • 57. 7 - 57©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster End of Chapter 7