Transcript Blocher 2nd Edition Chapter 15 - McGraw

15
The Flexible Budget and Standard
Costing: Direct Materials and Direct Labor
McGraw-Hill/Irwin
Slide
15-1
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Slide
15-2
15
Evaluating Operating Results
Performance is
evaluated by
comparing actual
results with the
budget.
McGraw-Hill/Irwin
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Slide
15-3
15
Effectiveness and Efficiency
An
operation
is effective if
it has attained
or exceeded
its goals.
An
operation
is efficient if it
has not wasted
resources.
An operation may be effective but inefficient,
and it may be efficient but ineffective.
McGraw-Hill/Irwin
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15-4
15
Assessing Effectiveness
Master budgets are
prepared for a single
activity level.
Hmm! Comparing
actual results with
the master budget will help
me determine my
effectiveness.
Comparing actual
results with the
master budget
reveals operating
income variances.
Consider the following example
from the Cheese Company . . .
McGraw-Hill/Irwin
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Slide
15-5
15
Assessing Effectiveness
Master
Budget
Actual
Results
Variances
10,000
8,000
2,000 U
Sales revenue
Less variable costs:
Manufacturing
Marketing and admin.
Contribution margin
Less fixed costs:
Manufacturing
Marketing and admin.
$ 100,000
$ 80,000
$ 20,000 U
Operating income
$ 25,000
Unit sales
McGraw-Hill/Irwin
30,000
20,000
50,000
12,000
13,000
© The McGraw-Hill Companies, Inc., 2002
Slide
15-6
15
Assessing Effectiveness
Master
Budget
Unit sales
10,000
Actual
Results
Variances
8,000
2,000 U
Sales revenue
$ 100,000
$ 80,000
$ 20,000 U
Less variable costs:
U = Unfavorable30,000
variances – Cheese
Manufacturing
Company
was ineffective
in achieving
Marketing
and admin.
20,000
its budgeted
level of sales.
Contribution margin
50,000
Less fixed costs:
Manufacturing
12,000
Marketing and admin.
13,000
Operating income
McGraw-Hill/Irwin
$ 25,000
© The McGraw-Hill Companies, Inc., 2002
Slide
15-7
15
Assessing Effectiveness
Master
Budget
Actual
Results
Variances
10,000
8,000
2,000 U
Sales revenue
Less variable costs:
Manufacturing
Marketing and admin.
Contribution margin
Less fixed costs:
Manufacturing
Marketing and admin.
$ 100,000
$ 80,000
$ 20,000 U
30,000
20,000
50,000
25,500
17,100
37,400
4,500 F
2,900 F
12,600 U
12,000
13,000
12,000
13,000
0
0
Operating income
$ 25,000
$ 12,400
Unit sales
McGraw-Hill/Irwin
$ 12,600 U
© The McGraw-Hill Companies, Inc., 2002
Slide
15-8
15
Assessing Effectiveness
Master
Budget
Unit sales
10,000
Actual
Results
Variances
8,000
2,000 U
Sales revenue
$ 100,000
$ 80,000
$
Less variable costs:
U = Unfavorable
operating25,500
income
Manufacturing
30,000
variance
was
Marketing and
admin.– Cheese
20,000Company
17,100
in achieving
its budgeted
Contributionineffective
margin
50,000
37,400
Less fixed costs:
operating income.
Manufacturing
12,000
12,000
Marketing and admin.
13,000
13,000
Operating income
McGraw-Hill/Irwin
$ 25,000
$ 12,400
20,000 U
4,500 F
2,900 F
12,600 U
0
0
$ 12,600 U
© The McGraw-Hill Companies, Inc., 2002
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15-9
15
Assessing Effectiveness
Master
Budget
Actual
Results
Variances
8,000
2,000 U
Sales revenue
$ 100,000
$ 80,000
Less variable costs:
Manufacturing
30,000
25,500
Marketing and admin.
20,000
17,100
Contribution margin
50,000
37,400
Less fixed
costs:
F = Favorable
variance – actual costs
Manufacturing
12,000 costs.12,000
are less than budgeted
Marketing and admin.
13,000
13,000
$ 20,000 U
Operating income
$ 12,600 U
Unit sales
McGraw-Hill/Irwin
10,000
$ 25,000
$ 12,400
4,500 F
2,900 F
12,600 U
0
0
© The McGraw-Hill Companies, Inc., 2002
Slide
15-10
15
Assessing Effectiveness
Master
Budget
Actual
Results
Variances
8,000
2,000 U
Sales revenue
$ 100,000
$ 80,000
Less variable costs:
Manufacturing
30,000
25,500
Marketing and admin.
20,000
17,100
Contribution margin
50,000
37,400
Less
fixed cost
costs:variances are favorable, has
Since
Manufacturing
Cheese Company done12,000
a good job12,000
of
Marketing and admin.
13,000
13,000
$ 20,000 U
Operating income
$ 12,600 U
Unit sales
10,000
controlling costs at the lower level of sales?
McGraw-Hill/Irwin
$ 25,000
$ 12,400
4,500 F
2,900 F
12,600 U
0
0
© The McGraw-Hill Companies, Inc., 2002
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15-11
15
Assessing Effectiveness
I don’t think I can
answer the question
comparing actual results
with the master budget.
McGraw-Hill/Irwin
I do know that actual
sales are below budgeted
sales, which is unfavorable.
But shouldn’t variable costs
be lower if actual sales
are below budgeted sales?
© The McGraw-Hill Companies, Inc., 2002
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15-12
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The Flexible Budget
 The relevant question is . . .
“How much of the favorable cost variance is
due to lower activity, and how much is due
to good cost control?”
 To answer the question, we must
the budget to the
actual activity.
A
will
help me evaluate efficiency.
McGraw-Hill/Irwin
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The Flexible Budget
Show revenues and expenses
that should have occurred at the
actual activity.
May be prepared for any activity
level in the relevant range.
Reveal variances due to good cost
control or lack of cost control.
Improve performance evaluation.
McGraw-Hill/Irwin
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The Flexible Budget
Central Concept
If you can tell me what your activity was
for the period, I will tell you what your costs
and revenue should have been.
McGraw-Hill/Irwin
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The Flexible Budget
To
a budget for different activity
levels, we must know how costs behave
with changes in activity levels.
 Total variable costs change
in direct proportion to
changes in activity.
 Total fixed costs
remain unchanged
within the relevant
range.
McGraw-Hill/Irwin
Fixed
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McGraw-Hill/Irwin
The Flexible Budget
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Slide
15-17
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The Flexible Budget
Per Unit
Amount
Total
Fixed
Costs
Unit sales
Sales revenue
$ 10.00
Less variable costs:
Manufacturing
3.00
Mkt. and Admin.
2.00
Contribution margin
5.00
Less fixed costs:
Manufacturing
Mkt. and Admin.
$12,000
13,000
Flexible
Budget
Actual
Results
8,000
8,000
Variances
0
A flexible budget
is prepared for the
same activity level
(8,000 units) as
actually achieved.
Operating income
McGraw-Hill/Irwin
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15-18
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The Flexible Budget
Per Unit
Amount
Unit sales
Sales revenue
$ 10.00
Less variable costs:
Manufacturing
3.00
Mkt. and Admin.
2.00
Contribution margin
5.00
Less fixed costs:
Manufacturing
Mkt. and Admin.
Total
Variable costs are expressed as
Fixed Flexible
Actual
a constant
unit.
Costs
Budget amount
ResultsperVariances
8,000 budget,
0
In the 8,000
original static
variable manufacturing costs
were $30,000 for 10,000 units
resulting in $3.00 per unit.
$12,000
13,000
Fixed
Operating income
costs are expressed as a total amounts that
do not change within the relevant range of activity.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
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The Flexible Budget
Per Unit
Amount
Unit sales
Total
Fixed
Costs
Flexible
Budget
Actual
Results
8,000
8,000
Sales revenue
$ 10.00
$ 80,000
Less variable costs:
Manufacturing
3.00
24,000
Mkt. and Admin.
2.00
16,000
Contribution margin
5.00
40,000
Less fixed costs:
Manufacturing
$12,000× $3.00 per
8,000 units
Mkt. and Admin.
13,000
Variances
0
unit = $24,000
Operating income
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-20
15
The Flexible Budget
Per Unit
Amount
Total
Fixed
Costs
Unit sales
Flexible
Budget
Actual
Results
8,000
8,000
Sales revenue
$ 10.00
Less variable costs:
Note: There is no flex
Manufacturing
3.00
in the
Mkt.
and fixed
Admin.costs.
2.00
Contribution margin
5.00
Less fixed costs:
Manufacturing
$12,000
Mkt. and Admin.
13,000
$ 80,000
Operating income
$ 15,000
McGraw-Hill/Irwin
Variances
0
24,000
16,000
40,000
12,000
13,000
© The McGraw-Hill Companies, Inc., 2002
Slide
15-21
15
The Flexible Budget
Per Unit
Amount
Total
Fixed
Costs
Unit sales
Sales revenue
$ 10.00
Less variable costs:
Manufacturing
3.00
Mkt. and Admin.
2.00
Contribution margin
5.00
Less fixed costs:
Manufacturing
Mkt. and Admin.
Operating income
McGraw-Hill/Irwin
$12,000
13,000
Flexible
Budget
Actual
Results
8,000
8,000
0
$ 80,000
$ 80,000
0
24,000
16,000
40,000
25,500
17,100
37,400
12,000
13,000
12,000
13,000
$ 15,000
$ 12,400
Variances
1,500 U
1,100 U
2,600 U
0
0
$ 2,600 U
© The McGraw-Hill Companies, Inc., 2002
Slide
15-22
15
Unit sales
The Flexible Budget
Original actual
Total
results
Cheese
Per UnitforFixed
Flexible
Company
that we
Amount Costs
Budget
saw earlier.
8,000
Sales revenue
$ 10.00
Less variable costs:
Manufacturing
3.00
Mkt. and Admin.
2.00
Contribution margin
5.00
Less fixed costs:
Manufacturing
Mkt. and Admin.
Operating income
McGraw-Hill/Irwin
$12,000
13,000
Actual
Results
Variances
8,000
0
$ 80,000
$ 80,000
0
24,000
16,000
40,000
25,500
17,100
37,400
12,000
13,000
12,000
13,000
$ 15,000
$ 12,400
1,500 U
1,100 U
2,600 U
0
0
$ 2,600 U
© The McGraw-Hill Companies, Inc., 2002
Slide
15-23
15
The Flexible Budget
Per Unit
Amount
Total
Fixed
Costs
Unit sales
Variable costs have
Sales revenue
$ 10.00
unfavorable
variances
Less variable costs:
because actual3.00
costs
Manufacturing
Mkt. and
areAdmin.
more than2.00
the
Contribution
margin
flexible
budget5.00
costs.
Less fixed costs:
Manufacturing
Mkt. and Admin.
Operating income
McGraw-Hill/Irwin
$12,000
13,000
Flexible
Budget
Actual
Results
8,000
8,000
0
$ 80,000
$ 80,000
0
24,000
16,000
40,000
25,500
17,100
37,400
12,000
13,000
12,000
13,000
$ 15,000
$ 12,400
Variances
1,500 U
1,100 U
2,600 U
0
0
$ 2,600 U
© The McGraw-Hill Companies, Inc., 2002
Slide
15-24
15
McGraw-Hill/Irwin
Assessing Efficiency
© The McGraw-Hill Companies, Inc., 2002
Slide
15-25
15
Assessing Efficiency
Master
Budget
Actual
Results
Variances
10,000
8,000
2,000 U
Recall
the original
Sales
revenue
Less
variable costs:
variances
resulting
Manufacturing
from the
Marketing
and admin.
comparison
of
Contrtibution margin
actual results with
Less fixed costs:
the
master budget.
Manufacturing
Marketing and admin.
$ 100,000
$ 80,000
$ 20,000 U
30,000
20,000
50,000
25,500
17,100
37,400
4,500 F
2,900 F
12,600 U
12,000
13,000
12,000
13,000
0
0
Operating income
$ 25,000
$ 12,400
Unit sales
McGraw-Hill/Irwin
$ 12,600 U
© The McGraw-Hill Companies, Inc., 2002
Slide
15-26
15
McGraw-Hill/Irwin
Assessing Efficiency
© The McGraw-Hill Companies, Inc., 2002
Slide
15-27
15
Assessing Efficiency
Sales
Volume
Variance
Flexible
Budget
2,000 U
8,000
0
8,000
Sales revenue
$ 100,000 $20,000 U
Less variable costs:
Manufacturing
30,000
6,000 F
Mkt. and Admin.
20,000
4,000 F
Contribution margin
50,000 10,000 U
Less fixed costs:
Manufacturing
12,000
0
Mkt. and Admin.
13,000
0
$ 80,000
0
$ 80,000
Operating income
$ 15,000 $ 2,600 U
Master
Budget
Unit sales
McGraw-Hill/Irwin
10,000
$ 25,000 $10,000 U
Flexible
Budget
Variance
Actual
Results
24,000
16,000
40,000
1,500 U
1,100 U
2,600 U
25,500
17,100
37,400
12,000
13,000
0
0
12,000
13,000
$ 12,400
© The McGraw-Hill Companies, Inc., 2002
Slide
15-28
15
Assessing Efficiency
Variances due to
activity change
Sales
Volume
Variance
Flexible
Budget
2,000 U
8,000
0
8,000
Sales revenue
$ 100,000 $20,000 U
Less variable costs:
Manufacturing
30,000
6,000 F
Mkt. and Admin.
20,000
4,000 F
Contribution margin
50,000 10,000 U
Less fixed costs:
Manufacturing
12,000
0
Mkt. and Admin.
13,000
0
$ 80,000
0
$ 80,000
Operating income
$ 15,000 $ 2,600 U
Master
Budget
Unit sales
McGraw-Hill/Irwin
10,000
$ 25,000 $10,000 U
Flexible
Budget
Variance
Actual
Results
24,000
16,000
40,000
1,500 U
1,100 U
2,600 U
25,500
17,100
37,400
12,000
13,000
0
0
12,000
13,000
$ 12,400
© The McGraw-Hill Companies, Inc., 2002
Slide
15-29
15
Assessing Efficiency
Variances due
to cost
control
Sales
Master
Budget
Flexible
Budget
Variance
Volume
Variance
Flexible
Budget
2,000 U
8,000
0
8,000
Sales revenue
$ 100,000 $20,000 U
Less variable costs:
Manufacturing
30,000
6,000 F
Mkt. and Admin.
20,000
4,000 F
Contribution margin
50,000 10,000 U
Less fixed costs:
Manufacturing
12,000
0
Mkt. and Admin.
13,000
0
$ 80,000
0
$ 80,000
Operating income
$ 15,000 $ 2,600 U
Unit sales
McGraw-Hill/Irwin
10,000
$ 25,000 $10,000 U
Actual
Results
24,000
16,000
40,000
1,500 U
1,100 U
2,600 U
25,500
17,100
37,400
12,000
13,000
0
0
12,000
13,000
$ 12,400
© The McGraw-Hill Companies, Inc., 2002
Slide
15-30
15
Selling Price Variance
A selling price variance is the difference between
the total sales revenue received and the
total sales revenue of the flexible budget.
In the Cheese Company example, the budgeted
and actual selling price was $10 per unit.
Now assume that the selling price changes to $11
per unit, with all other information unchanged.
Continue
McGraw-Hill/Irwin
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Slide
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Selling Price Variance
8,000 units × $10 per unit
8,000 units × $11 per unit
Selling
Price
Variance
Flexible
Budget
Variance
0
0
8,000
Sales revenue
$ 80,000
Less variable costs:
Manufacturing
24,000
Mkt. and Admin.
16,000
Contribution margin
40,000
Less fixed costs:
Manufacturing
12,000
Mkt. and Admin.
13,000
$ 8,000 F
0
$ 88,000
0
0
0
0
Operating income
$ 8,000 F
$ 2,600 U
Flexible
Budget
Unit sales
McGraw-Hill/Irwin
8,000
$ 15,000
0
0
8,000 F
1,500 U
1,100 U
2,600 U
Actual
Results
25,500
17,100
45,400
12,000
13,000
$ 20,400
© The McGraw-Hill Companies, Inc., 2002
Slide
15-32
15
Selling Price Variance
8,000 units × ($11 per unit – $10 per unit)
Selling
Price
Variance
Flexible
Budget
Variance
0
0
8,000
Sales revenue
$ 80,000
Less variable costs:
Manufacturing
24,000
Mkt. and Admin.
16,000
Contribution margin
40,000
Less fixed costs:
Manufacturing
12,000
Mkt. and Admin.
13,000
$ 8,000 F
0
$ 88,000
0
0
0
0
Operating income
$ 8,000 F
$ 2,600 U
Flexible
Budget
Unit sales
McGraw-Hill/Irwin
8,000
$ 15,000
0
0
8,000 F
1,500 U
1,100 U
2,600 U
Actual
Results
25,500
17,100
45,400
12,000
13,000
$ 20,400
© The McGraw-Hill Companies, Inc., 2002
Slide
15-33
15
Selling Price Variance
Flexible budget variances are
variances are unchanged.
Selling
Price
Variance
Flexible
Budget
Variance
0
0
8,000
Sales revenue
$ 80,000
Less variable costs:
Manufacturing
24,000
Mkt. and Admin.
16,000
Contribution margin
40,000
Less fixed costs:
Manufacturing
12,000
Mkt. and Admin.
13,000
$ 8,000 F
0
$ 88,000
0
0
0
0
Operating income
$ 8,000 F
$ 2,600 U
Flexible
Budget
Unit sales
McGraw-Hill/Irwin
8,000
$ 15,000
0
0
8,000 F
1,500 U
1,100 U
2,600 U
Actual
Results
25,500
17,100
45,400
12,000
13,000
$ 20,400
© The McGraw-Hill Companies, Inc., 2002
Slide
15-34
15
Standard Costs
Based on carefully
predetermined amounts.
Cost
Standard
Costs are
Used for planning labor, material
and overhead requirements.
The expected level
of performance.
Benchmarks for
measuring performance.
McGraw-Hill/Irwin
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Slide
15-35
15
Standard Costs
Product Cost
Standard
McGraw-Hill/Irwin
A standard cost variance
is the amount by which
an actual cost differs from
the standard cost.
© The McGraw-Hill Companies, Inc., 2002
Slide
15-36
15
Standard Cost Variances
This variance is unfavorable
because the actual cost
exceeds the standard cost.
Product Cost
Standard
McGraw-Hill/Irwin
A standard cost variance
is the amount by which
an actual cost differs from
the standard cost.
© The McGraw-Hill Companies, Inc., 2002
Slide
15-37
15
Standard Cost Variances
Amount
Managers focus on quantities and costs
that exceed standards, a practice known as
management by exception.
Standard
Direct
Labor
Direct
Material
Type of Product Cost
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
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15
Variance Analysis Cycle
Identify
questions
Receive
explanations
Conduct next
period’s
operations
Analyze
variances
Begin
McGraw-Hill/Irwin
Take
corrective
actions
Prepare standard
cost performance
report
© The McGraw-Hill Companies, Inc., 2002
Slide
15-39
15
Types of Standards
Accountants, engineers, personnel
administrators, and production managers
combine efforts to set standards based on
experience and expectations.
McGraw-Hill/Irwin
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Slide
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15
Types of Standards
Should we have
standards that are
difficult to achieve
or standards that can
be achieved with
minimal effort?
McGraw-Hill/Irwin
Standards should be set
at levels that are
currently attainable
with reasonable and
efficient effort.
© The McGraw-Hill Companies, Inc., 2002
Slide
15-41
15
Types of Standards
I agree. Unattainable
standards are
discouraging while
standards that are too
easy to achieve provide
little motivation.
McGraw-Hill/Irwin
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Slide
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15
Selection of a Standard

Activity analysis
 Historical data
 Benchmarking
 Market expectation
 Strategic decisions
McGraw-Hill/Irwin
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15
Nonfinancial Measures
 Friendly service
 On-time delivery
 Quality
 Cleanliness
 Value
McGraw-Hill/Irwin
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Slide
15-44
15
Direct Materials Standards
Price
Standards
Usage
Standards
Use competitive
bids for the quality
and quantity desired.
Use product
design specifications.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-45
15
Direct Materials Standards
The standard material cost for one unit of product is:
standard price for
one unit of material
McGraw-Hill/Irwin
×
standard quantity
of material
required for one
unit of product
© The McGraw-Hill Companies, Inc., 2002
Slide
15-46
15
Direct Labor Standards
Rate
Standards
Efficiency
Standards
Use wage
surveys and
labor contracts.
Use time and
motion studies for
each labor operation.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-47
15
Direct Labor Standards
The standard labor cost for one unit of product is:
standard wage rate
for one hour
McGraw-Hill/Irwin
×
standard number
of labor hours
for one unit
of product
© The McGraw-Hill Companies, Inc., 2002
A General Model for
Variance Analysis
15
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price or Rate
Variance
Slide
15-48
Standard Quantity
×
Standard Price
Usage or Efficiency
Variance
The total variance is the flexible budget variance.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
A General Model for
Variance Analysis
15
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Slide
15-49
Standard Quantity
×
Standard Price
Price or Rate
Usage or Efficiency
Variance
Variance
Standard price is the amount that should
have been paid for the resources acquired.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
A General Model for
Variance Analysis
15
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Slide
15-50
Standard Quantity
×
Standard Price
Price or Rate
Usage or Efficiency
Variance
Variance
Standard quantity is the quantity
allowed for the actual good output.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
A General Model for
Variance Analysis
15
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price or Rate
Variance
Materials
price- SP)
variance
AQ(AP
Labor rate variance
AQ =Variable
Actual overhead
Quantity
AP = spending
Actual Price
variance
McGraw-Hill/Irwin
Slide
15-51
Standard Quantity
×
Standard Price
Usage or Efficiency
Variance
Materials
quantity
variance
SP(AQ
- SQ)
Labor efficiency variance
SP
= Standard
Price
Variable
overhead
SQ
= Standard
Quantity
efficiency
variance
© The McGraw-Hill Companies, Inc., 2002
Slide
15-52
Standard Cost Variances
15
Standard Cost Variances
Price Variance
Efficiency Variance
The difference between
the actual price and the
standard price
The difference between
the actual quantity and
the standard quantity
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-53
15
Standard Costs
Let’s use the
concepts of the
general model to
calculate standard
cost variances,
starting with
direct material.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-54
15
Material Variances Example
Jerf
Hanson Inc. has the following direct material
standard to manufacture one Jerf:
1.5 pounds per Jerf at $4.00 per pound
Last month 1,700 pounds of material were
purchased and used to make 1,000 Jerfs.
The material cost a total of $6,630.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-55
15
Material Variances Question 1
Jerf
What is the actual price per pound
paid for the material?
a.
b.
c.
d.
$4.00 per pound.
$4.10 per pound.
$3.90 per pound.
$6.63 per pound.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-56
15
Material Variances Question 1
Jerf
What is the actual price per pound
paid for the material?
a.
b.
c.
d.
$4.00 per pound.
$4.10 per pound.
$3.90 per pound.
$6.63 per pound.
McGraw-Hill/Irwin
AP = $6,630 ÷ 1,700 lbs.
AP = $3.90 per lb.
© The McGraw-Hill Companies, Inc., 2002
Slide
15-57
15
Material Variances Question 2
Jerf
Hanson’s material price variance (MPV) for
the month was:
a.
b.
c.
d.
$170 unfavorable.
$170 favorable.
$800 unfavorable.
$800 favorable.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-58
15
Material Variances Question 2
Jerf
Hanson’s material price variance (MPV) for
the month was:
a.
b.
c.
d.
$170 unfavorable.
$170 favorable.
$800 unfavorable.
MPV = AQ(AP - SP)
$800 favorable. MPV = 1,700 lbs. × ($3.90 - 4.00)
McGraw-Hill/Irwin
MPV = $170 Favorable
© The McGraw-Hill Companies, Inc., 2002
Slide
15-59
15
Material Variances Question 3
Jerf
The standard quantity of material that
should have been used to produce
1,000 Jerfs is:
a.
b.
c.
d.
1,700 pounds.
1,500 pounds.
2,550 pounds.
2,000 pounds.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-60
15
Material Variances Question 3
Jerf
The standard quantity of material that
should have been used to produce
1,000 Jerfs is:
a.
b.
c.
d.
1,700 pounds.
1,500 pounds.
2,550 pounds.
SQ = 1,000 units × 1.5 lbs per unit
2,000 pounds.SQ = 1,500 lbs
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-61
15
Material Variances Question 4
Jerf
Hanson’s material usage variance (MUV)
for the month was:
a.
b.
c.
d.
$170 unfavorable.
$170 favorable.
$800 unfavorable.
$800 favorable.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-62
15
Material Variances Question 4
Jerf
Hanson’s material usage variance (MUV)
for the month was:
a.
b.
c.
d.
$170 unfavorable.
$170 favorable.
$800 unfavorable.
$800 favorable.MUV = SP(AQ - SQ)
MUV = $4.00(1,700 lbs - 1,500 lbs)
MUV = $800 unfavorable
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-63
15
Material Variances Summary
Jerf
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Standard Quantity
×
Standard Price
1,700 lbs.
×
$3.90 per lb.
1,700 lbs.
×
$4.00 per lb.
1,500 lbs.
×
$4.00 per lb.
$ 6,800
$6,000
$6,630
Price variance
$170 favorable
McGraw-Hill/Irwin
Usage variance
$800 unfavorable
© The McGraw-Hill Companies, Inc., 2002
Slide
15-64
15
Reporting Material Variances
I need the variances as soon
as possible so that I can
better identify problems
and control costs.
You accountants just don’t
understand the problems we
production managers have.
McGraw-Hill/Irwin
Okay. I’ll start computing
the price variance when
material is purchased and
the usage variance as
soon as material is used.
© The McGraw-Hill Companies, Inc., 2002
Responsibility for
Material Variances
15
I am not responsible
for this unfavorable
material usage
variance.
You purchased cheap
material, so my people
had to use more of it.
McGraw-Hill/Irwin
Slide
15-65
Your poorly trained workers and
poorly maintained equipment
caused the problems.
Also, your poor scheduling
requires rush orders of material
at higher prices, causing
unfavorable price variances.
© The McGraw-Hill Companies, Inc., 2002
Slide
15-66
15
Standard Costs
Now let’s calculate
standard cost
variances for
direct labor.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-67
15
Labor Variances Example
Jerf
Hanson Inc. has the following direct labor
standard to manufacture one Jerf:
1.5 standard hours per Jerf at $12.00 per direct
labor hour
Last month 1,550 direct labor hours were
worked at a total labor cost of $18,910
to make 1,000 Jerfs.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-68
15
Labor Variances Question 1
Jerf
What was Hanson’s actual rate (AR)
for labor for the month?
a.
b.
c.
d.
$12.20 per hour.
$12.00 per hour.
$11.80 per hour.
$11.60 per hour.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-69
15
Labor Variances Question 1
Jerf
What was Hanson’s actual rate (AR)
for labor for the month?
a.
b.
c.
d.
$12.20 per hour.
$12.00 per hour.
$11.80 per hour.
$11.60 per hour.
McGraw-Hill/Irwin
AR = $18,910 ÷ 1,550 hours
AR = $12.20 per hour
© The McGraw-Hill Companies, Inc., 2002
Slide
15-70
15
Labor Variances Question 2
Jerf
Hanson’s labor rate variance (LRV) for the
month was:
a.
b.
c.
d.
$310 unfavorable.
$310 favorable.
$300 unfavorable.
$300 favorable.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-71
15
Labor Variances Question 2
Jerf
Hanson’s labor rate variance (LRV) for the
month was:
a.
b.
c.
d.
$310 unfavorable.
$310 favorable.
LRV = AH(AR - SR)
$300 unfavorable.
LRV = 1,550 hrs($12.20 - $12.00)
$300 favorable.LRV = $310 unfavorable
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-72
15
Labor Variances Question 3
Jerf
The standard hours (SH) of labor that
should have been worked to produce
1,000 Jerfs is:
a.
b.
c.
d.
1,450 hours.
1,500 hours.
1,700 hours.
1,800 hours.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-73
15
Labor Variances Question 3
Jerf
The standard hours (SH) of labor that
should have been worked to produce
1,000 Jerfs is:
a.
b.
c.
d.
1,450 hours.
1,500 hours.
1,700 hours.
SH = 1,000 units × 1.5 hours per unit
SH = 1,500 hours
1,800 hours.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-74
15
Labor Variances Question 4
Jerf
Hanson’s labor efficiency variance (LEV)
for the month was:
a.
b.
c.
d.
$590 unfavorable.
$590 favorable.
$600 unfavorable.
$600 favorable.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-75
15
Labor Variances Question 4
Jerf
Hanson’s labor efficiency variance (LEV)
for the month was:
a.
b.
c.
d.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
unfavorable.
LEV = $600 unfavorable
$590
$590 favorable.
$600 unfavorable.
$600 favorable.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-76
15
Labor Variances Summary
Jerf
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
1,550 hours
×
$12.20 per hour
1,550 hours
×
$12.00 per hour
1,500 hours
×
$12.00 per hour
$18,910
$18,600
$18,000
Rate variance
$310 unfavorable
McGraw-Hill/Irwin
Standard Hours
×
Standard Rate
Efficiency variance
$600 unfavorable
© The McGraw-Hill Companies, Inc., 2002
Labor Rate Variance –
A Closer Look
15
Slide
15-77
Using highly paid skilled workers to
perform unskilled tasks results in an
unfavorable price variance.
High skill,
high rate
Low skill,
low rate
Production managers who make work assignments
are generally responsible for price variances.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Labor Efficiency Variance –
A Closer Look
15
Poorly
trained
workers
Slide
15-78
Poor
quality
materials
Unfavorable
Efficiency
Variance
Poor
supervision
of workers
McGraw-Hill/Irwin
Poorly
maintained
equipment
© The McGraw-Hill Companies, Inc., 2002
Slide
15-79
15
Responsibility for Labor Variances
I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so my people used
more time to process it.
McGraw-Hill/Irwin
You used too much
time because of poorly
trained workers and
poor supervision.
© The McGraw-Hill Companies, Inc., 2002
Slide
15-80
15
Responsibility for Labor Variances
Maybe I can attribute the labor
and material variances to personnel
for hiring the wrong people
and training them poorly.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Slide
15-81
15
End of Chapter 15
Let’s set the
standard a
little higher.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002