Transcript Lecture 13

ACCT 2302
Fundamentals of Accounting II
Spring 2011
Lecture 13
Professor Jeff Yu
Review:
Cash Budget: (1) determine the amount of cash excess or
deficiency; (2) determine required borrowing if cash
deficiency; (3) calculate interest expense.
Budgeted Balance Sheet
Budgeted Income Statement
Chapter 10: Flexible Budget
The master budgets discussed in Chapter 9 could also
be called STATIC budgets because they are prepared
based on a fixed level of future activity.
A static budget (also called “planning budget”) is
suitable for planning, but is inadequate for
evaluating cost control.
Static Budget and Performance Analysis
Static budgets are
prepared for
a single, planned level of
activity.
Performance evaluation is
difficult when actual activity
level differs from the
planned activity level.
Hmm! Comparing
static budgets with
actual costs is like
comparing apples
and oranges.
Example: Inference using Static Budget
Static
Budget
Machine hours
Variable costs
Indirect labor
Indirect materials
Power
Fixed costs
Depreciation
Insurance
Total overhead costs
Actual
Results
Difference
(Act. - Bud.)
10,000
8,000
-2,000
$ 40,000
30,000
5,000
$ 34,000
25,500
3,800
($6,000)
($4,500)
($1,200)
12,000
2,000
12,000
2,000
$ 89,000
$ 77,300
0
0
($11,700)
Example: Inference using Static Budget
Did the firm do a good job in cost control?
I don’t think I can
answer this question
using a static budget.
I do know that
actual activity is below
budgeted activity which
is unfavorable.
But shouldn’t variable costs
be lower if actual activity
is below budgeted activity?
The relevant question?
How much of the favorable cost variance in the example is
due to lower activity level and how much is due to good
cost control?
To answer the question, we must
budget to the actual level of activity.
the
Flexible Budgets
May be prepared for any activity
level in the relevant range.
Show costs that should have been
incurred at the actual activity
level, enabling “apples to apples”
cost comparisons.
Help managers control costs.
Improve performance evaluation.
Example: Preparing a Flexible Budget
Variable
Cost
Per Hour
Machine hours
Variable costs
Indirect labor
Indirect material
Power
Total variable cost
Fixed costs
Depreciation
Insurance
Total fixed cost
Total overhead costs
$
4.00
3.00
0.50
7.50
Total
Fixed
Cost
Flexible Budgets
8,000
10,000
12,000
Hours
Hours
Hours
8,000
10,000
12,000
$ 32,000
24,000
4,000
$ 60,000
$ 40,000
30,000
5,000
$ 75,000
$ 48,000
36,000
6,000
$ 90,000
$12,000 $ 12,000
2,000
2,000
$ 14,000
$ 74,000
$ 12,000
2,000
$ 14,000
$ 89,000
$ 12,000
2,000
$ 14,000
$ 104,000
Flexible Budget Performance Report
Flexible budget
isble
prepared
V a ria
Tota l
for the same activity
Cost level
Fix eas
d
e r Hour Costs
actuallyPachieved.
M a chine hours
V a ria ble costs
Indire ct la bor
$
Indire ct m a te ria l
P ow e r
Tota l va ria ble costs $
Fix e d Ex pe nse s
De pre cia tion
Insura nce
Tota l fix e d costs
Tota l ove rhe a d costs
4.00
3.00
0.50
7.50
$ 12,000
2,000
Fle x ible
Budge t
Actua l
Re sults
8,000
8,000
$ 32,000
24,000
4,000
$ 60,000
$ 34,000
25,500
3,800
$ 63,300
$ 2,000
1,500
200
$ 3,300
$ 12,000
2,000
$ 14,000
$ 74,000
$ 12,000
2,000
$ 14,000
$ 77,300
0
0
0
$ 3,300 U
V a ria nce s
0
U
U
F
U
Flexible Budget Performance Report
Variance Analysis
Static
Overhead
Budget at
10,000 Hours
$
89,000
Flexible
Overhead
Budget at
8,000 Hours
$
Activity
This $15,000F variance is
due to lower actual
activity than budgeted.
(Activity Variance)
74,000
Actual
Overhead
at
8,000 Hours
$
77,300
Cost control
This $3,300U
variance is due
to poor cost control.
(Spending Variance)
Summary: Flexible Budget
Flexible budget is prepared based on the actual activity level and
is used for performance evaluation (control) purpose.
Activity Variance = Flexible budget amount – planning
(static) budget amount
Spending Variance = Actual cost – flexible budget cost
Spending variance is unfavorable if positive, favorable if negative;
Spending variance captures the efficiency of cost control.
Revenue Variance = Actual revenue – flexible budget revenue
Revenue variance is favorable if positive, unfavorable if negative;
Practice Problem: flexible budget
Harrald’s Fish House has following data for April, 2009 operations
(Q refers to the number of meals served):
Formula used
for budgeting
Actual data
with Q=1700
Revenue
$16.5Q
$27,920
Cost of Ingredients
$6.25Q
$11,110
Wages
$12,600
$12,330
Miscellaneous
$1,400+$1Q
$3,320
Q: (1) Prepare the planning budget for April assuming Q=1800.
(2) prepare a flexible budget for the actual Q of 1700 meals served.
(3) Calculate activity variances for revenue and all three expenses.
(4) Compute revenue variance;
(5) Compute spending variances for all three expenses.
Practice Problem: multiple cost drivers
Aly Tours operates tours of glaciers on its tour boat with data below.
Expenses
Fixed cost
per month
Cost per
Cruise
Cost per
Actual
Passenger costs
Boat operating
$5,200
$480
$2
Advertising
$4,600
Administrative
$4,300
$20,000
$4,600
$24
$1
$6,300
Aly’s planning budget for July is based on 24 cruises and 1,400
passengers using the historical cost formula as in columns 2-4. The
actual activity levels are 20 cruises and 1,500 passengers.
Q: Compute activity variances and spending variances for all three
expenses.
Chapter 11 Standard Costs
Standards are benchmarks or “norms” for measuring
performance. Two types of standards are commonly used.
Quantity standards
specify how much of an
input should be used to
make one unit of
the product.
Price standards
specify how much should
be paid for each unit
of the input.
Standard Cost
 Standard vs. Budget:
• A budget is set for total costs;
• A standard is set for per unit cost;
• Standards are often used when preparing for budgets.
 Quantity standards are set for each unit of production
(How much units of input are needed for each unit of output?)
Price standards are set for each unit of input
(How
much should be paid for each unit of input?)
• Standard quantity per unit and Standard price (SP) for DM;
• Standard hours per unit and Standard rate per hour (SR) for DL;
• Standard activity level (allocation base for POHR) per unit and
Standard rate (variable portion of POHR) for MOH
Example: Standard Cost
Inputs
Direct materials
Direct labor
Variable mfg. overhead
Standard cost per unit
A
B
AxB
Standard
Quantity
or Hours
Standard
Price
or Rate
Standard
Cost
per Unit
3.0 lbs.
$ 4.00 per lb.
$
2.5 hours 14.00 per hour
2.5 hours
3.00 per hour
$
12.00
35.00
7.50
54.50
Management by Exception
Compare the actual quantities and costs of inputs to the
quantity and cost standards we have set for
performance evaluation purposes.
If the actual quantity or cost departs significantly from the
standard, managers investigate the discrepancy.
Goal: Find the cause of the problem and eliminate it.
The act of computing and interpreting the deviation
(variance) is called VARIANCE ANALYSIS.
A General Model for Variance Analysis
Variance Analysis
Price Variance
Quantity Variance
Materials price variance
Labor rate variance
VOH rate variance
Materials quantity variance
Labor efficiency variance
VOH efficiency variance
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Standard Quantity
×
Standard Price
Materials Price Variance
Materials Quantity Variance
AQ(AP - SP)
SP(AQ - SQ)
Labor/VOH Rate Variance
Labor/VOH Efficiency Variance
AH(AR – SR)
SR(AH – SH)
SQ (SH)= Standard quantity (hours) allowed for the actual output
= actual production in units * standard quantity (hours) per unit
Example: Materials Variances
Glacier Peak Outfitters has the following direct material
standard for the fiberfill in its mountain parka: 0.1 kg.
of fiberfill per parka at $5.00 per kg.
Last month 210 kgs of fiberfill were purchased and used
to make 2,000 parkas. The actual cost of fiberfill was
$4.90 per kg.
Q: Compute Materials Variances for the company.
Materials Variances
Actual Quantity
×
Actual Price
210 kgs.
×
$4.90 per kg.
= $1,029
Actual Quantity
×
Standard Price
Standard Quantity
×
Standard Price
210 kgs.
×
$5.00 per kg.
0.1kg. * 2000
×
$5.00 per kg.
= $1,050
Materials Price variance
$21 favorable
= $1,000
Materials Quantity variance
$50 unfavorable
Material Variances: Using the Factored Equations
Materials price variance
MPV = AQ (AP - SP)
= 210 kgs ($4.90/kg - $5.00/kg)
= 210 kgs (-$0.10/kg)
= $21 F
Materials quantity variance
MQV = SP (AQ - SQ)
= $5.00/kg (210 kgs-(0.1 kg/parka 2,000 parkas))
= $5.00/kg (210 kgs - 200 kgs)
= $5.00/kg (10 kgs)
= $50 U
Material Price and Quantity Variances
Price and quantity variances are determined
separately for two reasons:
 The purchasing manager is responsible for raw
material purchase prices and the production manager
is responsible for the quantity of raw material used.
 The buying and using activities occur at different
times. Raw material purchases may be held in inventory
for a period of time before being used in production.
Isolation of Material Variances
I need the price variance
sooner so that I can better
identify purchasing problems.
You accountants just don’t
understand the problems that
purchasing managers have.
I’ll start computing
the price variance
when material is
purchased rather than
when it’s used.
Responsibility for Material Variances
Materials Quantity Variance
Production Manager
Materials Price Variance
Purchasing Manager
The standard price is used to compute the quantity variance
so that the production manager is not held responsible for
the purchasing manager’s performance.
Responsibility for Material Variances
I am not responsible for
this unfavorable material
quantity variance.
You purchased cheap
material, so my people
had to use more of it.
Your poor scheduling
sometimes requires me to
rush order material at a
higher price, causing
unfavorable price variances.
Practice Problem: Materials Variances
Bella Inc. has the following direct material standard to
manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per
pound.
Last week 1,700 pounds of material were purchased at a
total cost of $6,630 and all 1,700 pounds are used to
make 1,000 Zippies.
Question:
1.What is the actual price per pound paid for the material?
2.What is Bella’s materials price variance for the week?
3.What is Bella’s materials quantity variance for the week?
Materials Variances: purchased ≠ used
When material purchased ≠ material used
To compute the PRICE variance, use the total
quantity of raw materials PURCHASED.
To compute the QUANTITY Variance, use only the
quantity of raw materials USED.
Practice Problem: Materials Variances
Bella has the following material standard to manufacture one
Zippy: 1.5 pounds per Zippy at $4.00 per pound.
Last week 2,800 pounds of material were purchased at a
total cost of $10,920, and 1,700 pounds were used to make
1,000 Zippies.
Question:
1) What is Bella’s materials price variance for the week?
2) What is Bella’s materials quantity variance for the week?
Practice Problem: Materials Variances
During February, Pisces Co. produced 1000 fishing rods
with the following information:
Materials quantity variance
Materials price variance
$6,000 U
$1,200 U
Standard cost information for materials:
5 ounces at $6 per ounce.
Q: If the quantity of materials purchased was equal to
the quantity of materials used. What was the actual
per ounce cost of materials purchased?
For Next Class
 Finish Chapter 11
 Start Chapter 12
 Attempt the assigned HW problems
Homework Problem 1
Harvey Co.’s variable MOH rate is $5 per direct labor hour and fixed
MOH is $10,000 per month. Its planning budget for March is based
on 6,000 direct labor hours. The actual total MOH cost is $38,000
and the actual activity level is 5,000 direct labor hours in March.
Q:
(1) what is the amount of Activity Variance for total MOH
cost in March?
(2) What is the amount of Spending Variance for total MOH
cost in March?
Homework Problem 2
In May, Vail Co. produced 10,000 units of Zippies, purchased 20,000
pounds of material at a total cost of $30,000, and used 15,000
pounds of material. Materials quantity variance is $3,000 U.
Material quantity standard indicates that 1.4 pounds of material are
needed to produce each unit of Zippy.
Q: What is Vail’s materials price variance in May?