11CHAPTERS 10 & 112Budget Variances3• Firms compare budgeted costs to actual costs– Evaluate employee performance – Evaluate budget process• Problem with static budget• actual ≠ budgeted activity4• For VCs budgeted & actual costs need to same activity level–Example• DLC budget $100K (based on 10,000 units) • Actual DLC $90K (produced 9K units)5• Need same activity level to make budget variance valuable• Not problem for FC– # of units (activity level) doesn’t affect FC6• For VCs Use Flexible Budgets for Variances– Cost function – E.g., DLC = $30/unit produced– Budget and actual costs now reflect same activity level27Price & Quantity Variances8• 2 reasons for Budget Variance: – E.g., DLCs exceed budget:• Reason 1: Salaries higher than budgeted• Reason 2: Workers used more time (DLHs) than expected9• 1stReason Ask HRM department why?• 2ndReason Ask project supervisor why?• We subdivide Variances to identify reason10• Budget Variance (BVar) Total difference • BVar for each component of cost:– Material BVar– Labor BVar– Manufacturing MO/H BVar• Fixed MO/H BVar• Variable MO/H BVar11• BVar divided into Price Variance & Quantity Variance – Price Variance How much of BVar is due to Reason 1– Quantity Variance How much of BVar is due to Reason 212Standard Price & Standard Quantity313• Companies develop standards:• Standard Price (SP) is estimated price per unit of cost component– E.g., $10 per hour for DLCs14• Standard Quantity (SQ) estimated amount of cost component needed to make 1 unit of product– E.g., 3 DLHs to make 1 computer15• For Quantity Variances SQ means estimated amount of cost component needed to make all of the units of product made– E.g., we need 3K DLHs to make 1K computers– Linked to actual output16• SQ relates to actual number of units produced,• SP x SQ Flexible Budget –$10 x(3 DLHs x 1K units) = $30K– $10 x(3K DLHs) = $30K17• Companies develop standards using variety of sources• Standards can either be attainable (practical) or ideal.18Actual Price & Actual Quantity419• To compute variances need info on actual costs:• Actual Price (AP)– E.g. $11 per DLH • Actual Quantity (AQ) – E.g. 3,300 DLHs 1K computers20• Difference is BVar • In Standard Costing system– Standard cost is treated as cost of each unit– Right column added to WIPActual CostFlexible BudgetAP X AQ SP X SQ21Subdividing Budget Variances22• Left - Middle:(AP x AQ) - (SP x AQ) • Factor out common AQ:AQ (AP - SP)• Price VarianceActual CostMixedFlexible BudgetAP X AQ SP X AQ SP X SQ|______ ______| |_____ _______|(-)Price Variance (-)Quantity VarianceAQ (AP – SP) SP (AQ – SQ)23• Middle - Right:(SP x AQ) - (SP x SQ) • Factor out common SP:SP (AQ - SQ)• Quantity VarianceActual CostMixedFlexible BudgetAP X AQ SP X AQ SP X SQ|______ ____| |_____ _______|(-)Price Variance (-)Quantity VarianceAQ (AP – SP) SP (AQ – SQ)24• Always subtract budget (standard) from actual• If Over-budget– Actual > Standard– Positive number– Unfavorable variance525• If Under-budget– Actual < Standard– Negative number– Favorable variance26Favorable Variance NegativeUnfavorable Variance Positive27• Eg: Estimated DM cost of shirt: – $ 2/yd2for DM– 3 yd2of DM per shirt • Make 1K shirts– Actual DM cost = $5,880– Paid $2.10/yd2for DM– Used 2,800 yd2of DM28Actual Cost Mixed Flexible BudgetAP X AQ SP X AQ SP X SQ$2.10 x 2,800 yd2$2.00 x 2,800 yd2$2.00 x 3,000 yd2$5,880|_________$5,600__________| |______$6,000_________|(-)Price Variance (-)Quantity Variance$5,880 - $5,600 = $280 U $5,600 - $6,000 = - $400 FBVar $5,880 - $6,000 = -$120 F (280 + - 400 = -120)29• Same calculations for all VCs• VC Variances use following names:Input Type Variance NameDMs: Price: Materials Price VarianceQuantity: Materials Quantity, Efficiency or UsageVar,DL: Price: Labor Rate VarianceQuantity: Labor Efficiency VarianceV MO/H: Price: Variable OH Spending VarianceQuantity: Variable Efficiency Variance30Special Rule For Material Price Variance631•We have assumed we buy just DM that we use– Can buy different amount– If different, DM Price Variance uses: • Amount purchased as AQ• Not amount used as AQ32• If Co bought 5K yd2of DM• Calculate DM Variances:Actual Cost Mixed Flexible BudgetAP X AQ SP X AQ SP X AQ SP X SQ$2.10 x 5,000yd2$2 x 5,000yd2$2 x 2,800yd2$2 x 3,000yd2$10,500|________$10,000________|$5,600|________$6,000________|(-)Price Variance(-)Quantity Variance $10,500 - $10,000 = $500 U $5,600 - $6,000 = - $400 F33Fixed Overhead Variances34• Fixed MO/H variances calculated differently– Before VCs– Now FCs• With FCs, BVar should compare actual costs to Static Budget– Not Flexible Budget35– VCs Budgets should change as # of units changes• Use Flexible Budget– FC budget shouldn’t change as # of units changes • Use Static Budget36• Eg: FO/H Application Rate uses following estimates:– Estimated F/OH = $100K– Estimated Driver = 10K units• FO/H application rate = $10/unit737• Co produces 9K units• Flexible Budget # is $90K– $10 x 9K units– SP x SQ• With Standard Costing $90K placed in WIP– Right Column: SP x SQ38• BUT F/OH Budget is $100K• Using BVar based on $90K (Flexible Budget) is wrong• Need to use Static Budget for FO/H BVar39•Flexible Budget (right column) isn’t real FO/H budget• With Standard Costing, right column still represents cost added to WIP for FO/H40• Replace Middle Column with real FO/H budget• 2 Variances– Budget Variance•AKA FO/H Spending Variance– FO/H Volume Variance41Actual CostStatic BudgetStandard AmountAP X AQ|________FO/H Budget_______| ________SP X SQ______|(-)Budget Variance (-)Volume Variance 42• If FO/H Static Budget not given you might be able to calculate it:– Remember that the SP is a Predetermined MO/H rate– How do you calculate this?• At beginning of year:– Estimated O/H / Estimated Driver843• Plug in what you know and solve for FO/H BudgetSP = FO/H Budget / Estimated # of UnitsSP x Estimated # of Units = FO/H Budget• Est. # of Units = Normal Capacity44Standard Costing(Not responsible for Journal Entries)45• Actual Costing actual costs• Normal Costing – DM & DL actual costs – MO/H SP x AQ• Standard Costing – DM, DL & MO/H SP x SQ46• Standard Costing
View Full Document
Unlocking...