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10 Standard Costs andVariance Analysis
Chapter
Fewer units sold
Fewer units produced
DM and DL usage and prices are different than anticipated
How do you compare?
Comparison of Actual vs. Budgetfor Beal Manufacturing
ActualStatic
Budget
Sales
CGS
Sell & Admin
Var
Fixed
Gross Marg
Oper Inc
$1,800,000
1,252,213
108,000
271,000
$ 547,787
7500 units
$ 168,787
$1,975,000
1,264,000
110,600
280,000
7900 units
$ 320,400
$ 711,000
Comparing actual results to the static budget is not very useful. Some of the
difference is due to sales volume.
Some is due to inefficiency.
A flexible budget is helpful.
ActualFlexibleBudget
StaticBudget
Sales
CGS
Sell & Admin
Var
Fixed
Gross Marg
Oper Inc
$1,800,000
1,252,213
108,000
271,000
$ 547,787
7500 units
$ 168,787
$1,975,000
1,264,000
110,600
280,000
7900 units
$ 320,400
$ 711,000
Flexible budget based on budgeted rates and actual units
sold
ActualFlexibleBudget
Variance
FlexibleBudget
SalesVolume
Variance
StaticBudget
Sales
CGS
Sell & Admin
Var
Fixed
Gross Marg
Oper Inc
$1,800,000
1,252,213
108,000
271,000
$ 547,787
7500 units
$ 168,787
$1,975,000
1,264,000
110,600
280,000
7900 units
$ 320,400
$ 711,000
$1,875,000
1,200,000
105,000
280,000
$ 675,000
7500 units
$290,000
Net impact of low sales volume.
Deserves a closer look.
Actual
DM
DL
Manuf OH
Variable
Fixed
CG Manuf
$120,120
585,460
236,590
363,410
7800 units
$1,305,580
23,100 lbs
$5.20
40,100 hrs
$14.60
?
DM - input- price
DL - input- price
VOH - rate $5.90
FlexibleBudget
$ 117,000
585,000
234,000
320,000
$1,256,000
7800 units
List the detail for actual production
costs.
List corresponding detail for a flexible
budget.
ActualPrice
Variance
Act Inputx
Budg Price
UsageVariance
FlexibleBudget
DM
DL
Manuf OH
Variable
Fixed
CG Manuf
$120,120
585,460
236,590
363,410
7800 units
$1,305,580
23,100 lbs
$5.20
40,100 hrs
$14.60
$5.90
DM - input- price
DL - input- price
VOH - rate
$ 117,000
585,000
234,000
320,000
$1,256,000
7800 units
23,400 lbs
$5.00
39,000 hrs
$15.00
$6.00
ActualFlexibleBudget
DM Usage Variance
DM - input- price
DL - input- price
VOH - rate
7800 units
23,400 lbs
$5.00
39,000 hrs
$15.00
$6.00
23,100 lbs
$5.20
40,100 hrs
$14.60
$5.90
7800 units
Diff in Usage x Budg Price
Diff in Price x Actual Used DM Price Variance
Diff in Price x Actual Purch or…..
Quick Calculationsfor theCPA Exam
DL Usage Variance Diff in Usage x Budg Price
Diff in Price x Actual Used DL Price Variance
ActualFlexibleBudget
DM - input- price
DL - input- price
VOH - rate
7800 units
23,400 lbs
$5.00
39,000 hrs
$15.00
$6.00
23,100 lbs
$5.20
40,100 hrs
$14.60
$5.90
7800 units
Quick Calculationsfor theCPA Exam
DM Usage Variance
$ 4,620 U
$ 1,500 F
DM Price Variance
DL Usage Variance
$16,040 F
$16,500 U
DL Price Variance
Possible Causes of Variances
Unfavorable variances might indicate potential problems.
excessively high prices from suppliers high defect rate poor production scheduling etc.
Favorable variances might indicate potential problems.
poor quality materials workers lacking necessary skills corners cut in production
Understanding Variances
Problems might be beyond the control of the production manager.
poor product design rush orders causing congestion
Understanding Variances
Journal Entries to Record Variances
Two ways of recording DM and DL record DM and DL at actual cost (Chpt 3)
report variances in statements that compare actual to budget
record DM and DL at standard cost (Chpt 10)
record variances at time of transaction
Raw Materials (25,000 @ $5) 125,000
5,000
A/P (25,000 @ $5.20) 130,000
Standard cost
Actual cost