Transcript Chapter 7 PowerPoint

Flexible Budgets,
Direct-Cost Variances,
and
Management Control
Copyright © 2015 Pearson Education, Inc., All Rights Reserved
1.
2.
3.
4.
Understand static budgets and staticbudget variances
Examine the concept of a flexible budget
and learn how to develop it
Calculate flexible-budget variances and
sales-volume variances
Explain why standard costs are often used
in variance analysis
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-2
5.
6.
7.
Compute price variances and efficiency
variances for direct-cost categories.
Understand how managers use variances
Describe benchmarking and explain its role
in cost management
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-3
 Variance—difference
between actual results
and expected (budgeted) performance.
 Management by exception—the practice of
focusing attention on areas not operating as
expected (budgeted).
 Static (master) budget is based on the output
planned at the start of the budget period.
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-4
 Static-budget
variance—the difference
between the actual result and the
corresponding static budget amount
 Favorable variance (F)—has the effect of
increasing operating income relative to the
budget amount
 Unfavorable variance (U)—has the effect of
decreasing operating income relative to the
budget amount
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-5
 Variances
may start out “at the top” with a
Level 0 analysis.
 This is the highest level of analysis, a supermacro view of operating results.
 The Level 0 analysis is nothing more than the
difference between actual and static-budget
operating income.
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-6
 Further
analysis decomposes (breaks down)
the Level 0 analysis into progressively
smaller and smaller components.

Answers: “How much were we off?”
 Levels
1, 2, and 3 examine the Level 0
variance into progressively more-detailed
levels of analysis.

Answers: “Where and why were we off?”
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-7
 Level
0 tells the user very little other than
how much operating income was off from
budget.

Level 0 answers the question: “How much were we
off in total?”
 Level
1 gives the user a little more
information: it shows which line-items led
to the total Level 0 variance.

Level 1 answers the question: “Where were we
off?”
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-8
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-9
 Flexible
budget—shifts budgeted revenues
and costs up and down based on actual
operating results (activities)
 Represents a blending of actual activities and
budgeted dollar amounts
 Will allow for preparation of Level 2 and 3
variances

Answers the question: “Why were we off?”
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-10
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-11
Some possible reasons we might incur an
unfavorable Sales-Volume Variance include:
1. Failure to execute the sales plan
2. Weaker than anticipated demand
3. Aggressive competitors taking market share
4. Unanticipated market preference away
from the product
5. Quality problems
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-12
 All
product costs can have Level 3 variances.
Direct materials and direct labor will be
handled next. Overhead variances are
discussed in detail in a later chapter.
 Direct materials and direct labor both have
price and efficiency variances, and their
formulae are the same.
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-13
 Price
Price
Variance
variance formula:
=
{
 Efficiency
Efficiency
Variance
=
{
Actual Price
Of Input
-
Budgeted Price
Of Input
} X
Actual Quantity
Of Input
variance formula:
Actual Quantity
Of Input Used
-
Budgeted Quantity of Input
Allowed for Actual Output
}X
Budgeted Price
Of Input
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.
7-14
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-15
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-16
Budgeted input prices and budgeted input
quantities can be obtained from a number of
sources including actual input data from past
periods, data from other companies that have
similar processes and standards developed by
the firm itself.
A standard is a carefully determined price,
cost or quantity that is used as a benchmark
for judging performance.
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-17
 Each
variance may be journalized.
 Each variance has its own account.
 Favorable variances are credits; unfavorable
variances are debits.
 Variance accounts are generally closed into
cost of goods sold at the end of the period, if
immaterial.
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-18
 Targets
or standards are established for
direct material and direct labor.
 The standard costs are recorded in the
accounting system.
 Actual price and usage amounts are
compared to the standard and variances are
recorded.
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-19
 Price
and efficiency variances provide
feedback to initiate corrective actions.
 Standards are used to control costs.
 Managers use variance analysis to evaluate
performance after decisions are
implemented.
 Part of a continuous improvement program.
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-20
 Benchmarking
is the continuous process of
comparing the levels of performance in
producing products and services against the
best levels of performance in competing
companies.
 Variances can be extended to include
comparison to other entities.
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-21
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-22
Terms to Learn
Page Number Reference
Benchmarking
Page 267
Budgeted performance
Page 249
Direct materials mix variance
Page 272
Direct materials yield variance
Page 272
Effectiveness
Page 265
Efficiency
Page 265
Efficiency variance
Page 258
Favorable variance
Page 251
Flexible budget
Page 252
Flexible-budget variance
Page 253
Management by exception
Page 249
Price variance
Page 258
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-23
Terms to Learn
Page Number Reference
Rate variance
Page 258
Sales-volume variance
Page 253
Selling-price variance
Page 255
Standard
Page 257
Standard cost
Page 257
Standard input
Page 257
Standard price
Page 257
Static budget
Page 251
Static-budget variance
Page 251
Unfavorable variance
Page 251
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-24
Terms to Learn
Page Number Reference
Usage variance
Page 258
Variance
Page 249
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall
7-25
26