Slide 1Cost Classification According to a Time-Frame PerspectivePerformance Report CharacteristicsThe Flexible BudgetStandard Cost Variance AnalysisSlide 6Materials Variances SummaryLabor Variances SummaryVariable Overhead Variances SummaryAnalysis of Fixed Overhead VariancesSlide 11Accounting for VariancesMethods of Evaluating SegmentsAnalysis of Investment CentersResidual Income – Another MeasureThe Balanced Scorecard15-1McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-1© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.McGraw-Hill/IrwinCopyright © 2011 by The McGraw-Hill Companies, Inc., All Rights Reserved.Chapter 15Cost Control15-2McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-2Cost Classification AccordingCost Classification Accordingto a Time-Frame Perspectiveto a Time-Frame PerspectiveTimeDegree of ControlCosts that may notbe controllable in theshort run are controllablein the long run.Costs that may notbe controllable in theshort run are controllablein the long run.L O 115-3McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-3Performance Report CharacteristicsPerformance Report Characteristics ActivityBudgetAmountActualAmountExplanation–=Favorable•Actual revenues > Budgeted revenues•Actual costs < Budgeted costsUnfavorable•Actual revenues < Budgeted revenues•Actual costs > Budgeted costsFavorable•Actual revenues > Budgeted revenues•Actual costs < Budgeted costsUnfavorable•Actual revenues < Budgeted revenues•Actual costs > Budgeted costsVarianceL O 215-4McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-4 To a budget for different activity levels, we must know how costs behave with changes in activity levels.•Total variable costs changein direct proportion to changes in activity.•Total fixed costsremain unchangedwithin the relevantrange. FixedVariableThe Flexible BudgetThe Flexible BudgetL O 315-5McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-5Price VarianceStandard Cost VariancesThe difference betweenthe actual price and thestandard priceUsage VarianceThe difference betweenthe actual quantity andthe standard quantityStandard Cost Variance AnalysisStandard Cost Variance AnalysisL O 415-6McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-6 AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard PricePrice Variance Usage VarianceStandard Cost Variance AnalysisStandard Cost Variance AnalysisL O 415-7McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-7Materials Variances Materials Variances SummarySummaryPrice variance$1,125 favorableUsage variance$1,470 unfavorable 22,500 yds. 22,500 yds. 21,800 yds. × × × $2.05 per yd. $2.10 per yd. $2.10 per yd. = $46,125 = $ 47,250 = $45,780 Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard PriceL O 515-8McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-8Rate variance$381 unfavorableEfficiency variance$768 favorable Actual Hours Actual Hours Standard Hours × × × Actual Price Standard Price Standard Price 2,540 hours 2,540 hours 2,600 hours × × × $12.95 per hr. $12.80 per hr. $12.80 per hr. = $32,893 = $32,512 = $33,280 Labor Variances SummaryLabor Variances SummaryL O 515-9McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-9Spending variance$0Efficiency variance$192 favorable 2,540 hours 2,540 hours 2,600 hours × × × $3.20 per hour $3.20 per hour $3.20 per hour = $8,128 = $8,128 = $8,320 Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard RateVariable OverheadVariable OverheadVariances SummaryVariances SummaryL O 515-10McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-10Analysis of FixedAnalysis of FixedOverhead VariancesOverhead VariancesEstimated Fixed OverheadPOHAR =Overhead costs are applied to products and services using a predetermined overhead application rate (POHAR):Applied Overhead = POHAR × Standard ActivityEstimated Total Direct Labor HoursL O 615-11McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-11Analysis of FixedAnalysis of FixedOverhead VariancesOverhead VariancesBudget VarianceVolume VarianceResults from paying moreor less than expected foroverhead items.Results from operatingat an activity leveldifferent from theplanned activity.L O 615-12McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-12Product cost included inAccounting for VariancesAccounting for VariancesAccounting for VariancesAccounting for VariancesProduct cost allocated betweenProduction inefficiency costs included inCurrent PeriodCostCost of GoodsSoldInventoryNet UnfavorableVarianceInsignificant Net FavorableVarianceSignificant Net FavorableVarianceL O 715-13McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-13CostCenterActual costs are compared to budgeted costsProfitCenterInvestmentCenterActual Return on investmentis compared to budgetedreturn on investmentEvaluation MeasuresActual segment margin iscompared to budgetedsegment marginMethods of Evaluating Methods of Evaluating SegmentsSegmentsSegmentL O 815-14McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.1-14Analysis of Investment CentersAnalysis of Investment Centers Return on investment (ROI) is the ratio ofsegment margin to the investment used to generate the segment margin.ROI = Segment margin Divisional operating assetsL O 9SalesOperating assetsROI = Segment