Session 15

Overview

Standards Variances Static vs. Flexible budgets Calculate variances for direct inputs (DM & DL) EoP Adjustments When to investigate variances

2009 Foster School of Business Cost Accounting L.DuCharme

Standard = Budget

Here budgeted amount = standard amount. We will use these terms interchangeably in this course.

2009 Foster School of Business Cost Accounting L.DuCharme

Variances

Variance = budgeted actual results If operating income is greater than expected (budget), then you have a favorable variance. Not all favorable variances are good.

2009 Foster School of Business Cost Accounting L.DuCharme

Static and Flexible Budgets

Based on

Static Budget

Planned level of output at start of the budget period

Budgeted revenues and cost based on actual level of output

Flexible Budget
2009 Foster School of Business Cost Accounting L.DuCharme

Based on

Example
Calculate Variances

2009 Foster School of Business Cost Accounting L.DuCharme

Useful Format to Calculate DM and DL Variances

Actual Results
Actual input X Actual price

Noname Budget
Actual input X Budget price

Flexible Budget
Flex-budget input X Budget price

Static Budget
Static-budget input X Budget price

0,1 |--------------- Static Budget Var.----------------| 2 |----- Flexible Budget Var.-----|-- Sales Volume Var. --| 3 |---- Price ----|---- Usage ----|
2009 Foster School of Business Cost Accounting L.DuCharme 7

Price Variance: material

Direct-material price variance

Actual price Budgeted price

Actual Quantity used

2009 Foster School of Business Cost Accounting L.DuCharme

Price Variance: labor

Direct-labor price variance

Actual price Budgeted price

Actual Quantity used

2009 Foster School of Business Cost Accounting L.DuCharme

Efficiency Variance: DM

Direct-material efficiency variance

Actual quantity Standard quantity

Standard price

2009 Foster School of Business Cost Accounting L.DuCharme

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Efficiency Variance: labor

Direct-labor efficiency variance

Actual quantity Standard quantity

Standard price

2009 Foster School of Business Cost Accounting L.DuCharme

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Example: calculate variances

The Boing Company (largest maker of toy airplanes) has provided you with the following data on burppa wood costs for 2004. Burppa wood rots very fast. All wood is used in the period in which it is purchased. Actual Budgeted Toy planes (units) 10,000 9,000 Input (bd. ft.) 5,200 4,500 Price ($/bd. ft.) $0.49 $0.50
2009 Foster School of Business Cost Accounting L.DuCharme 12

Calculation of Variances
Please calculate the five variances for burppa wood:
Static-budget variance Flexible-budget variance Sales-volume variance Price variance Usage (efficiency) variance

2009 Foster School of Business Cost Accounting L.DuCharme

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Performance Measurement Using Variances

Effectiveness is the degree to which a predetermined objective or target is met. Efficiency is the relative amount of inputs used to achieve a given level of output.

Variances should not solely be used to evaluate performance.

2009 Foster School of Business Cost Accounting L.DuCharme 14

End-of-period Adjustments

Variance accounts are disposed of using one of the approaches outlined in chapter 4.
W/O all to CoGS Prorate to CoGS, FG, & WIP based on:

Ending total $ amount in accounts. $ amount of IDCost in the respective accounts.

(Over- or under-allocated overhead is a variance)

2009 Foster School of Business Cost Accounting L.DuCharme 15

When to Investigate Variances

When should variances be investigated?

Subjective judgments
Rules of thumb as investigate all variances exceeding $10,000 or 25% of expected cost, whichever is lower.
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Examples

http://accounting-financialtax.com/2009/07/mix-and-yield-varianceanalysis/ http://www.futureaccountant.com/standardcosting-variance-analysis/study-notes/materialmix-variance.php http://www.futureaccountant.com/standardcosting-variance-analysis/study-notes/materialyield-variance.php

Significance of Variances

Materials Price Variance

Different Sources of Supply

Material Usage Variance

Wage Rate Variance

Unexpected General Price Increases

Alteration in quantity discounts. Substitution of a different grade of material Standards set at a mid-year price

Labor Efficiency Variance Variable OH Variance Fixed OH Expenditure Variance Fixed OH Volume Variance

Significance of Variances

Materials Price Variance

Higher & Lower Incidence of scrap Alteration to Product Design

Material Usage Variance

Wage Rate Variance Labor Efficiency Variance Variable OH Variance Fixed OH Expenditure Variance Fixed OH Volume Variance

Substitution of a different grade of material

Significance of Variances

Materials Price Variance

Unexpected Regulatory wage award Overtime / bonus payments that were different from plan Substitution of labor with different skill level

Material Usage Variance

Wage Rate Variance Labor Efficiency Variance Variable OH Variance Fixed OH Expenditure Variance Fixed OH Volume Variance

Significance of Variances

Materials Price Variance

Improvements in method or working conditions Variations in unavoidable idle time

Material Usage Variance

Wage Rate Variance Labor Efficiency Variance Variable OH Variance Fixed OH Expenditure Variance Fixed OH Volume Variance

Introduction of incentive scheme

Substitution of labor with different skill level

Significance of Variances

Materials Price Variance

Unexpected price changes for OH Items Labor Efficiency Variances

Material Usage Variance

Wage Rate Variance Labor Efficiency Variance Variable OH Variance Fixed OH Expenditure Variance Fixed OH Volume Variance

Significance of Variances

Materials Price Variance

Material Usage Variance

Wage Rate Variance Labor Efficiency Variance Variable OH Variance Fixed OH Expenditure Variance Fixed OH Volume Variance

Change in prices relating to Fixed OH items (for example an increase in rent) Seasonal effects (for example greater use of central heating in winter)

Significance of Variances

Materials Price Variance

Material Usage Variance

Wage Rate Variance Labor Efficiency Variance Variable OH Variance Fixed OH Expenditure Variance Fixed OH Volume Variance

Change in production volume due to change in demand Change in productivity due to change in machinery or technology Production lost through strikes

Example

http://www.hockinternational.com/forum/vie wtopic.php?f=13&t=682