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Adapted by Cynthia Fortin, CPA, CMA

Introduction to Managerial Accounting, Brewer, Garrison,Noreen

http://video.wileyaccountingupdates.com/2011/06/15/standard-costs/

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Want to compare what actually happened with what should have

happened

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• Develop Planning budgets before a period begins

• Adjust budgets to reflect actual level of activity => Flexible budget

• Compare Actual revenue and spending to flexible budgets => Evaluate performance

• Compute variances => Highlight significant problems

• Take corrective action to solve problems

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Computes what revenues and costs would have been given the actual level of activity

All costs are either variable or fixed with respect to level of activity

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1. Start with Master budget or Planned budget Income Statement

2. Compute per unit Budget sales price (BSP) , Variable expenses (BV)

3. Identify Fixed expenses4. Determine Actual quantities (AQ) of output5. Compute Flexible Revenue = BSP * AQ6. Compute Flexible Variable expenses = BV *

AQ7. Use Budget Fixed expenses8. Compute Net Operating Income

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1. Start with Master budget or Planned budget Income Statement

2. Compute per unit Budget sales price (BSP) , Variable expenses (BV)

3. Identify Fixed expenses4. Determine Actual quantities (AQ) of output5. Compute Flexible Revenue = BSP * AQ6. Compute Flexible Variable expenses = BV *

AQ7. Use Budget Fixed expenses8. Compute Net Operating Income

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Day 13 mix Chap008 Qianqianhai fish house.xlsx

The Revenue variance =Actual Revenue – Flexible Budget

Revenue

The Spending variance = Actual spending - Flexible budget

spending.

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Developed at all levels during the planning process

DM (weight, units, length, price per unit of measure)

DL (wages, taxes, benefits, mix of workers, rate per hour, labor time)

Variable manufacturing OH (rates, allocation basis)

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Examples:Standard quantity of materials = 2 kg. per unitStandard cost of materials = $8 per kg.Standard cost of materials = $16 per unit

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Direct materials: 2sq metres at $30 per sq metre = $60 per jacket

Direct mfg labour: 0.8 mfg labour-hours of input allowed per output unit manufactured at $20 standard cost per hours = $16 per jacket manufactured.

Direct marketing labour: 0.25 marketing labour-hour of input allowed per output unit sold at $24 standard cost per hour: $6 per jacket sold.

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Variable mfg o/h: Allocated based on 1.20 machine-hours per output unit mfg at $10 standard cost per machine-hour: $12 per unit manufactured.

Variable marketing overhead: Allocated based on 0.125 direct marketing l-h per output unit sold at $40 standard cost per hour: $5 per output unit sold.

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Standard Quantity Actual Quantity of input Actual Quantity of input allowed X actual output × × × Standard Price Standard Price Actual Price

Efficiency Variance Price Variance

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20,000 metres 22,200 metres 22,200 metres × × × $30 / metre $30 / metre $31 / metre

Efficiency Variance Price Variance

Material spending Variance

$66,000U $22,200U

$88,200U

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$600,000 $666,000 $666,000 $688,200

Actual Budget

Direct 22,200 sq metres 20,000 sq metresmaterials $31 per metre $30 per metre

Price variance = (Actual price – Budgeted price) x Actual quantity used= ($31 – $30) x 22,200 = $22,200 U

Efficiency (Usage) variance= (Actual quantity used – Budgeted quantity used) x Budgeted price= (22,200 – 20,000) x $30 = $66,000 U

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Actual Budget

Manufacturing 9,000 hours 8,000 hourslabour $22 per hour $20 per hour

Price (or rate) variance = (Actual price – Budgeted price) x Actual quantity used= ($22 – $20) x 9,000 = $18,000 U

Efficiency variance= (Actual quantity used – Budgeted quantity used) x Budgeted price= (9,000 – 8,000) x $20 = $20,000 U

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UnfavorablePrice

Variance

Poorlymaintainedequipment

Higher rates than expected

Overtimedue to rework

or poor material

Employee mixwith more

experienced staff 19

Actual Budget

Marketing 2,304 hours 2,500 hourslabour $25 per hour $24 per hour

Price (or rate) variance = (Actual price – Budgeted price) x Actual quantity used= ($25 – $24) x 2,304 = $2,304 U

Efficiency variance= (Actual quantity used – Budgeted quantity used) x Budgeted price= (2,304 – 2,500) x $25 = $4,704 F

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UnfavorableEfficiencyVariance

Poorlymaintainedequipment

Poorlytrainedworkers

Poorquality

materials

Poorsupervisionof workers

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Webb’s personnel manager hired under-skilled workers or their training was inadequate.

Webb’s production process is being reorganized or a new machine has been installed, creating addition direct manufacturing time per jacket while the workers learn the new process, etc.

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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

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Variances Used to evaluate performance

Indicate that something was different than expected

Critical to understand why ( the causes) significant variances arise and use this knowledge to promote learning and continuous improvement

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Effectiveness The degree to which organization’s predetermined goals are met

Efficiency

How well inputs were used in relation to a given level of output

1. Always consider possible interdependencies among variances; do not interpret them in isolation.

2. Use broad perspective of actions taken in the supply chain of organizations (supply chain: flow of goods, services, and information from beginning to end of a product or service).

3. Note that improvements in early stages of supply chain can sizably reduce magnitude of variances in subsequent stages .

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4. Understand why variances arise and use knowledge to promote learning and continuous improvement –most important task in variance analysis

5. Emphasize total organizational objectives by design of performance measurement and reward system by top management

6. Use cost-benefit test to decide when and which variances should be investigated

7. Realize that the standard is a range of possible acceptable outcomes

Conduct next period’s operations

Prepare report to management and

new Budget

Determine and analyze

variances

Query ‘material’ variances

Develop explanations

Corrective actions

implemented

Begin

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