1、2019/5/5,1,1,CHAPTER 7 Flexible Budgets, Direct-Cost Variances, and Management Control,2019/5/5,2,2,Controlling Costs,Measure Actual,COMPARE Actual Vs Standard,Predetermined or Set Standard,Variance,3,3,Basic Concepts,Variance difference between an actual and an expected (budgeted) amount Purpose of
2、 variance Management by exception Performance evaluation Motivate managers Prompt strategy change,2019/5/5,4,4,Basic Concepts,Management by Exception the practice of focusing attention on areas not operating as expected (budgeted),2019/5/5,5,5,Management by Exception,Direct Material,Managers focus o
3、n quantities and costs that exceed standards, a practice known as management by exception.,Type of Product Cost,Amount,Direct Labor,Standard,2019/5/5,6,6,Static and Flexible Budgets,Static budget Prepared for only one level of activity. It is based on the level of output planned at the start of the
4、budget period. The master budget is an example of a static budget. Flexible budget Developed using budgeted revenues or cost amounts based on the level of output actually achieved in the budget period. Key difference is the use of the actual output level in the flexible budget.,2019/5/5,7,7,2019/5/5
5、,8,8,2019/5/5,9,9,Static Budget,Assume that Webb manufactures and sells jackets. Budgeted variable costs per jacket are as follows: Direct materials cost $ 60 Direct manufacturing labour 16 Variable manufacturing overhead 12 Total variable costs $88,2019/5/5,10,10,Static Budget,Budgeted selling pric
6、e is $120 per jacket. Fixed manufacturing costs are expected to be $276,000 within a relevant range between 0 and 12,000 suits. Variable and fixed period costs are ignored in this example. The static budget for April 2008 is based on selling 12,000 suits. What is the static-budget operating profit?,
7、2019/5/5,11,11,Static Budget,Revenues (12,000 $120) $1,440,000 Less Expenses: Variable (12,000 $88) 1,056,000 Fixed 276,000 Budgeted operating profit $ 108,000Assume that Webb produced and sold 10,000 suits at $125 each with actual variable costs of $95.01 per suit and fixed manufacturing costs of $
8、285,000.,2019/5/5,12,12,Static Budget,What was the actual operating profit? Revenues (10,000 $125) $1,250,000 Less Expenses: Variable (10,000 $95.01) 950,100 Fixed 285,000 Actual operating profit $ 14,900What is the static-budget variance of operating profit?,2019/5/5,13,13,2019/5/5,14,14,Static-Bud
9、get Variance,A static-budget variance is :(Actual result - Budgeted amount in the static budget). A favourable (F) variance is a variance that increases operating profit relative to the budgeted amount. An unfavourable (U) variance is a variance that decreases operating profit relative to the budget
10、ed amount.,2019/5/5,15,15,Static-Budget Variance,Level 0 analysis compares actual operating profit with budgeted operating profit. This is the highest level of analysis, a super-macro view of operating results. The Level 0 analysis is nothing more than the difference between actual and static-budget
11、 operating income Answers: “How much were we off?”Actual operating profit $ 14,900 Budgeted operating profit 108,000 Static-budget variance of operating profit $93,100 U,2019/5/5,16,16,Static-Budget Variance,Level 1 analysis provides more detailed information on the operating profit static- budget v
12、ariance. 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?”,2019/5/5,17,17,2019/5/5,18,18,Hmm! Comparing static budgets with actual costs is like comparing apples and oranges.,2019/5/5,19,1
13、9,Reasons for variance,Inaccurate forecasting of output units soldOr Webbs performance in manufacturing and selling 10 000 jackets,2019/5/5,20,20,Flexible Budgets,Developed using budgeted revenues or cost amounts based on the actual output in the budget period. Prepared at the end of the period, onc
14、e actual costs are known 3 step process,2019/5/5,21,21,2019/5/5,22,22,Steps in Developing Flexible Budgets,Determine budgeted selling price, budgeted variable cost per unit and budgeted fixed cost. The budgeted selling price is $120, the budgeted variable cost is $88 per suit, and the budgeted fixed
15、 cost is $276,000.,2019/5/5,23,23,Steps in Developing Flexible Budgets,Step 1: Determine the actual output. In April 2008, 10,000 suits were produced and sold.Step 2: Determine the flexible budget for revenues based on budgeted selling price and actual output. $120 10,000 = $1,200,000,2019/5/5,24,24
16、,Steps in Developing Flexible Budgets,Step 3: Determine the flexible budget for costs based on budgeted variable costs per output unit, actual output and the budgeted fixed costs. Flexible budget: Variable costs(10,000 $88) $880,000 Fixed costs 276,000 Total costs $1,156,000,2019/5/5,25,25,Variances
17、,Level 2 analysis provides information on the two components of the static-budget variance. Flexible-budget variance Sales-volume variance,2019/5/5,26,26,Level 2 Analysis, Illustrated,2019/5/5,27,27,Level 2 Analysis, Illustrated,2019/5/5,28,28,Sales-Volume Variance,The sales-volume variance is the d
18、ifference between the static budget for the number of units expected to be sold and the flexible budget for the number of units that were actually sold. The only difference between the static budget and the flexible budget is the output level upon which the budget is based.,2019/5/5,29,29,Sales-Volu
19、me Variance,Sales-Volume Variance (Level 2) in (000)Flexible Static Sales-VolumeBudget Budget Variance units 10 12 2 U Revenue $1,200 $1,440 $240 U Variable costs 880 1,056 176 F Contr. margin $ 320 $ 384 $64 U Fixed costs 276 276 0 Operating profit $ 44 $ 108 $64 U,2019/5/5,30,30,Sales-Volume Varia
20、nce,Actual quantity sold: 10,000 suits,Flexible-budget operating profit $44,000,Static-budget operating profit $108,000,Sales-volume variance$64,000 U,2019/5/5,31,31,Sales-Volume Variance,Why is the sales-budget variance $64,000 unfavourable? Static budget units 12,000 Actual units sold 10,000 Varia
21、nce 2,000 U Budgeted contribution margin per unit: ($120 $88) = $32 2,000 $32= $64,000 unfavourable variance,2019/5/5,32,32,Level 2 Analysis, Illustrated,2019/5/5,33,33,Flexible-Budget Variance,Flexible-Budget Variance (Level 2) in (000)Flexible ActualBudget Results Variance Units 10 10 0 U Revenue
22、$1,200 $1,250 $ 50 F Variable costs 880 950.1 70.1 U Contribution margin $ 320 $ 299.9 $ 20.1 U Fixed costs 276 285 9 U Operating profit $ 44 $ 14.9 $ 29.1U,2019/5/5,34,34,Flexible-Budget Variance,Actual quantity sold:10,000 suits,Actual results operating profit $14,900,Flexible-budget operating pro
23、fit $44,000,Flexible-budget variance $29,100 U,2019/5/5,35,35,Flexible-Budget Variance,The flexible-budget variance arises because the actual selling price, variable costs per unit, quantities and fixed costs differ from the budgeted amount.Actual Budgeted Amount Amount Selling Price $125 $120 Varia
24、ble cost $95.01 $88,2019/5/5,36,36,Flexible-Budget Variance,The flexible-budget variance pertaining to revenues is often called a selling-price variance because it arises solely from differences between the actual selling price and the budgeted selling price: Selling-price variance = ($125 $120) 10,
25、000 = $50,000 F Actual selling price exceeds the budgeted amount by $5.,2019/5/5,37,37,Flexible-Budget Variance,Why is the flexible-budget variance $29,100 unfavourable? Selling-price variance $50,000 F Actual variable costs exceeded flexible budget variable cost 70,100 U Actual fixed costs exceeded
26、 flexible budget fixed costs 9,000 U Total flexible-budget variance $29,100 U,2019/5/5,38,38,Budget Variances,Static-budget variance $93,100 U,Flexible-budget variance$29,100 U,Level 1,Level 2,Sales-volumevariance $64,000 U,2019/5/5,39,39,Level 3 Variances,All Product Costs can have Level 3 Variance
27、s. Direct Materials and Direct Labor will be handled next. Overhead Variances are discussed in detail in a later chapter Both Direct Materials and Direct Labor have both Price and Efficiency Variances, and their formulae are the same,2019/5/5,40,40,Variance Summary,2019/5/5,41,41,Cost Variance Analy
28、sis,2019/5/5,42,42,A General Model for Variance Analysis,Actual Quantity Actual Quantity Budgeted Quantity Actual Price Budgeted Price Budgeted Price,Price Variance,Quantity Variance,2019/5/5,43,43,Level 3 Variances,Price Variance formula:Efficiency Variance formula:,2019/5/5,44,44,Level 3 Analysis,
29、 Illustrated,2019/5/5,45,45,Price and Efficiency Variances,Level 3 analysis separates the flexible-budget variance into price and efficiency variances. The following : Direct materials purchased and used: 22 ,200 square metres Actual price paid per metres: $28,2019/5/5,46,46,Price and Efficiency Var
30、iances,Actual direct manufacturing labour-hours: 9,000 Actual price paid per hour: $22 What is the actual cost of direct materials?22,200 $28 = $621,600 What is the actual cost of direct manufacturing labour?9,000 $22 = $198,000,2019/5/5,47,47,Price Variances,A price variance is the difference betwe
31、en the actual price and the budgeted price of inputs multiplied by the actual quantity of inputs. Input-price variance Rate variance Price variance = (Actual price of inputs Budgeted price of inputs) Actual quantity of inputs.,2019/5/5,48,48,Price Variances,What is the price variance for direct mate
32、rials? ($28 $30) 22,200 = $44,400 F What is the price variance for direct manufacturing labour? ($22 $20) 9,000 = $18,000 U,2019/5/5,49,49,Price Variances,Actual Quantity Actual Quantityof Inputs at of Inputs atActual Price Budgeted Price22,200 $28 22,200 $30= $621,600 = $666,000$44,400 FMaterials p
33、rice variance,2019/5/5,50,50,Price Variances,Actual Quantity Actual Quantityof Inputs at of Inputs atActual Price Budgeted Price9,000 $22 9,000 $20= $198,000 = $180,000$18,000 ULabour price variance,2019/5/5,51,51,Price Variances,What may be some of the possible causes for WEBBs favourable direct ma
34、terial price variances? webbs purchasing manager negotiated more skillfully than was planned. The purchasing manager changed to a lower-price supplier. The purchasing manager ordered large quantities than the quantities budgeted, thereby obtaining quantity discounts. Direct material prices decreased
35、 unexpectedly because of ,say, industry oversupply. Budgeted material prices were set too high without careful analysis of the market. Low-quality material so that the price is lower.What may be some of the possible causes for WEBBs unfavourable direct labor price variances? Labour prices were set w
36、ithout careful analysis of the market.,2019/5/5,52,52,Efficiency Variances,The efficiency variance is the difference between the actual and budgeted quantity of inputs used multiplied by the budgeted price of input. Efficiency variance = (Actual quantity of inputs used Budgeted quantity of inputs al
37、lowed for actual output) Budgeted price of inputs.,2019/5/5,53,53,Efficiency Variances,What is the efficiency variance for direct materials? (22,200 20,000) $30= $66,000 U What is the efficiency variance for direct manufacturing labour? (9,000 8,000) $20.00 = $20,000 U,2019/5/5,54,Efficiency Varianc
38、es,Actual Quantity Budgeted Quantityof Inputs at Allowed for ActualBudgeted Price Outputs at Budgeted Price22,200 $30 10,000 2 $30= $660,000 = $600,000$66,000 UMaterials efficiency variance,2019/5/5,55,Efficiency Variances,Actual Quantity Budgeted Quantityof Inputs at Allowed for ActualBudgeted Pric
39、e Outputs at Budgeted Price9,000 $20.00 10,000 0.8 $20.00= $180,000 = $160,000$20,000 ULabour efficiency variance,2019/5/5,56,56,Efficiency Variances,What may be some of the causes for Webbs unfavourable efficiency variances? Webbs purchasing manager received lower quality of materials. Webbs produc
40、tion scheduler inefficiently scheduled work. The personnel manager hired under-skilled workers. The maintenance department did not properly maintain machines. Budgeted time standards were set too tight without careful analysis of the operating conditions and the employees skills.,2019/5/5,57,57,Pric
41、e and Efficiency Variances,What is the flexible-budget variance for direct materials? Materials-price variance $44,400 F +Materials-efficiency variance $66,000 U = $21,600U What is the flexible-budget variance for direct manufacturing labour? Labour-price variance $18,000 U + Labour-efficiency varia
42、nce $20,000 U = $38,000 U,2019/5/5,58,58,Variance Summary,2019/5/5,59,59,2019/5/5,60,60,Webb sold 2000 fewer than budgeted,Webb sold units at a higher price than budgeted.,Poor quality of cloth Poor maintenance of machines Underskilled workers,2019/5/5,61,61,Standard Costing,Trace direct costs to ou
43、tput produced by multiplying the standard prices or rates by the standard quantities of inputs allowed for actual outputs produced Allocates overhead costs on the basis of the standard overhead-cost rates times the standard quantities of the allocation bases allowed for actual outputs produced,2019/
44、5/5,62,62,Standard Costing,2019/5/5,63,63,Standard Costing,Budgeted amounts and rates are actually booked into the accounting system These budgeted amounts contrast with actual activity and give rise to Variance Accounts.,2019/5/5,64,64,1a Direct material control(22 200$30) 666 000Direct material pr
45、ice variance(22 200$2) 44 400Accounts payable control(22 200 $28) 621 600 1b Work in process control(10 0002$30) 600 000Direct material efficiency variance(22 200$30) 66 000Direct material control(22 200$30) 666 000,2019/5/5,65,65,2 Work in process control(10 0000.8$20) 160 000Direct manufacturing l
46、abor price variance(9 000$2) 18 000Direct manufacturing labor efficiency variance(1 000$20) 20 000Wages payable control(9 000$22) 198 000,2019/5/5,66,66,Cost of goods sold 59 600Direct material price variance(22 200$2) 44 400Direct material efficiency variance(22 200$30) 66 000Direct manufacturing l
47、abor price variance(9 000$2) 18 000Direct manufacturing labor efficiency variance(1 000$20) 20 000,2019/5/5,67,67,Multiple Causes of Variances,Often the causes of variances are interrelated. A favourable price variance might be due to lower quality materials. It is best to always consider possible interdependencies among variances and to not interpret variances in isolation of each other.,
