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UGA ACCT 2102 - Standard Costs and Variances (Chapter 11)
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ACCT 2102 1st Edition Lecture 31 Outline of Last LectureI. Review II. Segmented Income StatementIII. ROI and RIIV. ROI and RI ExampleOutline of Current Lecture:V. ROI and RI Example #2VI. Standard CostVII. Flexible Budgets and VariancesVIII. Direct Materials VariancesIX. Direct Materials Variances ExampleCurrent Lecture: Standard Costs and Variances (Chapter 11)Finishing Chapter 10:Review:Hurdle rate: Minimum rate company will accept for an investment.Maximize goal congruence: incentivize the manager to accept investment; not acting in company’s best interest if he/she does not accept it.RI fosters goal congruence.V. ROI and RI Example #2Selected data from the prior period operations of Brutus and Nero, two investment centers for Madam Medusa’s Boutique, are as follows:Operating Income Sales Revenue Total AssetsBrutus $36,000 $600,000 $200,000Nero $32,000 $800,000 $200,000Each manager is presented with an $100,000 investment opportunity that will generate operating income of $17,000. The company’s target rate of return is 15%. *Investment’s return is 17% (17,000/100,000).These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Compute the ROI and RI for each.Brutus ROI = 36,000 / 200,000 = 18%Brutus RI = 36,000 – (200,000*15%) = 6,000Nero ROI = 32,000 / 200,000 = 16%Nero RI = 32,000 – (200,000*15%) = 2,000• Determine if the managers will accept the investment opportunity assuming1. They will receive a bonus based solely on their ability to exceed their division’s prior period return on investment. Brutus ROI = 18%Nero ROI = 16%Target = 17%Reject Brutus since 17% < 18%, and we want Brutus to exceed the prior return.Accept Nero since 17% > 16%.2. They will receive a bonus based solely on their ability to exceed their division’s prior period residual income. Brutus RI = 6,000Nero RI = 2,00017,000 – (100,000*15%) = 2,000Accept Brutus and Nero.Investment will have positive RI since 17% > 15%.Now for Chapter 11:VI. How much should it cost to produce one unit?• A standard cost is a mini budget for a single unit of product.• Standards are used at the beginning of the period to help with the budgeting process.• Standards are used at the end of the period to evaluate performance and help control future costs.• Standards are developed for DM, DL, and MOH. We will focus on the two direct product cost categories.Direct MaterialStandard DM Cost per Unit = Standard Quantity of DM* x Standard Price of DM• If a unit requires 2 pounds of DM and the DM costs $5 per pound from the supplier, what is the standard DM cost per unit?o Standard quantity = 2 poundso Standard DM Cost per Unit = 2 lbs/unit x $5/lb = $10/unitDirect LaborStandard DL Cost per Unit = Standard Quantity of DL* x Standard Rate of DL• If a unit requires 5 hours of DL and the DL wage rate if $10 per hour, what is the standard DL cost per unit?o Standard DL Cost per Unit = Hours/unit x wage rateo Standard DL Cost per Unit = 5 hrs/unit x $10/hr = $50/unit* The standard quantity of input is also referred to as an input ratio.VII. Flexible Budgets and Variances . . . at the end of the period• Remember that the Flexible Budget Variance can be further divided into a Price Variance and a Quantity Variance. • Each variance can be labeled as either Favorable (F) or Unfavorable (U).• What do these mean?• Price/Rate Varianceo Price relates to DMo Rate relates to DLo Compares what we paid to what we expected to payo U: pay more than expectedo F: pay less than expected• Quantity/Efficiency Varianceo Quantity relates to DMo Efficiency relates to DLo Compares what we used to what we expected to use during productiono U: used more than expectedo F: use less than expected• Should we only investigate unfavorable variances? No. Should investigate all variance that are material.VIII. Direct Materials Variances• DM Price Varianceo What is it? What you expected to pay compared to what you paido When can it be calculated? At the point of purchase (at the earliest)o Who is responsible for it? Purchasing manager o DM price = qty purchased (act price – std price)o (qty purchased)(act price) – (qty purchased)(std price)- (qty purchased)(act price): total dollar amount of purchase• DM Quantity Varianceo What is it? What you expected to use compared to what you usedo When can it be calculated? At the point of productiono Who is responsible for it? Production managero DM qty = std price (qty used – qty allowed)• Qty allowed = qty should have used for actual level of outputo DM qty = std price [qty used – (output*input ratio)]• Total DM VarianceIX. DM Variances . . . exampleLeave Only Footprints, Inc. manufactures lightweight sleeping bags. During the previous period, 104,000 pounds of direct material were used to produce 20,000 sleeping bags. 106,000 pounds of direct material were purchased during the period at a total cost of $333,900. The company anticipated the direct material cost of each sleeping bag to be $16 and the cost of each pound of direct material to be $3.20.What do the numbers mean?104,000: qty used106,000: qty purchased20,000: output333,900: total amount of purchase$3.20: std price$16: std unit cost: not used in formulas!333,900/106,000 = $3.15: actual price$16/$3.20 = 5lbs/unit: input ratioCalculate all DM variances. Assuming all variances are material, provide a likely explanation for each variance.DM price = qty purchased (act price – std price)DM price = 106,000 [(333,900/106,000) – 3.20)DM price = – $5,300 FDM qty = std price (qty used – qty allowed)DM qty = 3.20 [104,000 – (20,000*5)]DM qty = $12,800 UF: negativeU:


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UGA ACCT 2102 - Standard Costs and Variances (Chapter 11)

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