Transcript Managerial Accounting: Chapter 12 Cost Center Performance Evaluation

Managerial Accounting:
An Introduction To Concepts, Methods, And Uses
Chapter 12
Cost Center
Performance Evaluation
Maher, Stickney and Weil
Learning Objectives
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(Slide 1 of 3)
Explain how variable production cost
variances are calculated and why they occur.
Explain how fixed production cost variances
are calculated and why they occur.
Explain the difference between price and
efficiency variances.
Explain how to analyze variances using the
variable cost variance model.
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Learning Objectives
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(Slide 2 of 3)
Analyze overhead variances using the variable
cost variance model.
Identify the relation between actual,
budgeted, and applied fixed manufacturing
costs.
Explain how to apply activity-based costing to
variance analysis.
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Learning Objectives
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(Slide 3 of 3)
Describe the impact of technology on
variance analyses.
Identify tools managers use to decide when
to investigate variances.
Explain how to calculate the mix variance
portion of the efficiency variance.
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Responsibility For
Production Variances (Slide 1 of 2)
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Purchasing Department
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The materials price variance, used to
evaluate the purchasing dept.'s
performance, is calculated as follows:
(Actual price - Standard Price) X Quantity Purchased
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Measures the difference between actual
and standard prices paid for materials
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Responsibility For
Production Variances (Slide 2 of 2)
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The production dept. is responsible for the following
variances:
 Fixed manufacturing cost variance
 Remaining variable manufacturing cost variance
not assigned to purchasing including:
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Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
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Reasons for Variances
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Variances occur for a variety of reasons:
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A variance is simply the difference between
a predetermined norm (an expected
amount) and actual results so some
differences should be expected
The standards may be biased
Systematic reasons
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Reasons for
Materials Variances
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Generally, materials variances are
attributable to two areas:
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Usage of materials
Price paid for materials
Examples:
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Accounting may fail to take purchase
discounts on materials
Employees may be poorly trained leading
to higher waste
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Reasons for
Labor Variances
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Generally, labor variances are
attributable to two areas:
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Usage of labor hours
Price (or wage) paid for labor
Examples:
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New employee is hired for less than
expected wage rate
Union contract may call for wage rate
higher than forecast amount
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Reasons for Variable Manufacturing
Overhead Variances
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Generally, variable manufacturing
overhead variances are attributable to
two areas:
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Usage of allocation base (e.g., machine
hours)
Price of overhead items
Example: Utility company lowers rates
for electricity resulting in a favorable
variance
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Fixed Manufacturing
Cost Variances
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Difference between actual and
budgeted fixed costs
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Fixed costs do not vary with the level of
activity
Managers simply investigate what caused
the difference
Example: Rent on production facility was
unexpectedly raised causing an
unfavorable variance
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Variable Overhead
in Service Organizations
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Variable overhead is often significant for
service firms, governmental agencies
and nonprofit groups
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These types of organizations set standards,
perform variance analysis and establish
flexible budgets
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Separating Variances into Price
& Efficiency Components
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Variable manufacturing cost variances
can be spit into two components
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Price variance - the difference between the
budgeted (or standard) price and the
actual price paid
Efficiency variance - measures the
difference between the actual quantity of
inputs used and those allowed at standard
to make a unit of output
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Variable Cost Variance Model
(Slide 1 of 2)
Actual
Inputs at Standard
Flexible Production
Budget
(AP X AQ)
(1)
(SP X AQ)
(2)
(SP X SQ)
(3)
Efficiency Variance
(2) - (3)
SP X (AQ - SQ)
Price Variance
(1) - (2)
(AP - SP) X AQ
Total Variance
(1) - (3)
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Variable Cost Variance Model
(Slide 2 of 2)
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General model can be used to calculate
the following variances:
Input
Direct Materials
Direct Labor
Variable Ovrhd
Price Variance
Price Variance
Rate Variance
Spending Variance
Efficiency Variance
Quantity Variance
Efficiency Variance
Efficiency Variance
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Reasons for Materials
Price & Efficiency Variances
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Materials price variances may result
from:
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Failure to take purchase discounts
Purchasing higher or lower quality material
Materials efficiency variances may result
from:
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Purchasing inferior materials
Using materials more or less efficiently
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Reasons for Labor
Price & Efficiency Variances
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Labor price variances may result from:
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Failure to correctly anticipate changes in wage
rates
Hiring new employees at wage rates different from
standard
Labor efficiency variances may result from:
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Workers being poorly trained
Faulty equipment
Scheduling problems
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Variable Overhead Price
and Efficiency Variances
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Price and efficiency variances for variable
overhead are computed using the same
method as for other variable manufacturing
costs
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Requires a measure of overhead input activity
such as machine hours or direct labor hours
Care should be taken in interpreting these
variances since the input activity base may be
chosen without regard for the true cause of
variable overhead costs
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Fixed Manufacturing
Cost Variances (Slide 1 of 3)
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Manufacturing companies, using full absorption
costing, use a predetermined overhead rate to apply
fixed overhead to units produced, calculated as
follows:
Estimated Fixed
Manufacturing Cost per Period
Estimated Production
Volume per Period
This rate is applied to units produced during the
period
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Fixed Manufacturing
Cost Variances (Slide 2 of 3)
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The production volume variance equals
budgeted fixed manufacturing costs minus
applied fixed manufacturing costs
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Only arises when fixed costs are allocated to units
using a predetermined rate and estimated
production volume is different from actual
production volume achieved
The production volume variance appears to
have little benefit for managerial purposes
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Fixed Manufacturing
Cost Variances (Slide 3 of 3)
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The price (spending) variance for fixed
manufacturing costs equals the
difference between actual and budgeted
costs
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Used for management and control of fixed
manufacturing costs
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Quality Control
and Variance Investigation
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Managers use a variety of methods to
determine which variances should be
investigated, including:
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Rules of thumb such as investigate
variances > 10% of standard cost
Tolerance limits - use predetermined limits
within which variances may fluctuate
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Variances outside these limits are investigated
Decisions models
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If you have any comments or suggestions concerning this
PowerPoint Presentation for Managerial Accounting, An
Introduction To Concepts, Methods, And Uses, please contact:
Dr. Donald R. Trippeer, CPA
[email protected]
Colorado State University-Pueblo
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