Introduction to Management Accounting ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 1 Introduction to Management Accounting Chapter 8 Flexible Budgets and Variance Analysis ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 2 With over 28,000 locations, how does McDonald’s maintain cost and quality control? It uses standards, budgets and variance analysis The material standard for a hamburger is the same in every location Material variances are computed for every ingredient by comparing what was actually used with what should have been used for the number of hamburgers sold each day What are these standards? It also has nonfinancial standards such as average drive-through time Knowing what went wrong and what went right helps managers plan ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 3 Favorable and Unfavorable Variances Favorable variances arise when actual results exceed budgeted. Unfavorable variances arise when actual results fall below budgeted. Favorable (F) versus Unfavorable (U) Variances Actual > Expected Actual < Expected Profit Revenue Costs F F U U U F ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 4 Learning Objective 1 Static and Flexible Budgets A static budget is prepared for only one level of a given type of activity. Differences between actual results and the static budget for level of output achieved are static-budget variances. A flexible budget (variable budget) adjusts for different levels of activities. Differences between actual results and the flexible budget are flexible-budget variances. ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 5 Learning Objective 2 Flexible Budget Formulas To develop a flexible budget, managers determine revenue and cost behavior (within the relevant range) with respect to cost drivers. Note that the static budget is just the flexible budget for a single assumed level of activity. ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 6 Learning Objective 4 Evaluation of Financial Performance Actual results may differ from the master budget because... 1) sales and other cost-driver activities were not the same as originally forecasted, or 2) revenue or variable costs per unit of activity and fixed costs per period were not as expected. ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 7 Evaluation of Financial Performance Units Sales Variable costs Contribution margin Fixed costs Operating income Actual results at actual activity level (1) Flexiblebudget variances Flexible budget for actual sales activity SalesActivity Variance Static Budget (2) = (1)-(3) (3) (4) = (3)–(5) (5) 2,000U $62,000 U 43,600 F $18,400 U – $18,400 U 9,000 $279,000 196,200 $ 82,800 70,000 $ 12,800 7,000 – 7,000 $217,000 – $217,000 158,200 5,670 U 152,600 $ 58,730 $ 5,670 U $ 64,400 70,300 300 U 70,000 $ (11,570) $5,970 U $(5,600) ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 8 Isolating the Causes of Variances Managers use comparisons among actual results, master budgets, and flexible budgets to evaluate organizational performance. ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 9 Isolating the Causes of Variances Effectiveness is the degree to which a goal, objective, or target is met. Efficiency is the degree to which inputs are used in relation to a given level of outputs. Performance may be effective, efficient, both, or neither. ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 10 Learning Objective 5 Flexible-Budget Variances Total flexible-budget variance = Total actual results – Total flexible-budget planned results Actual results $(11,570) $5,970 Unfavorable Flexible budget $(5,600) Flexible-budget variances ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 11 Sales-Activity Variances Total sales - activity variance = Actual sales unit – Master budgeted sales units × Flexible budget Budgeted contribution margin per unit (7,000 – 9,000) × $9.20 = Master budget $18,400 Unfavorable Activity-level variances ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 12 Setting Standards A standard cost is a carefully developed cost per unit that should be attained. An expected cost is the cost that is most likely to be attained. Perfection (ideal) standards are expressions of the most efficient performance possible under the best conceivable conditions, using existing specifications and equipment. No provision is made for waste, spoilage, machine breakdowns, and the like. ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 13 Currently Attainable Standards... are levels of performance that managers can achieve by realistic levels of effort. They make allowances for normal defects, spoilage, waste, and nonproductive time. ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 14 Trade-Offs Among Variances Improvements in one area could lead to improvements in others and vice versa. Likewise, substandard performance in one area may be balanced by superior performance in others. ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 15 When to Investigate Variances When should management investigate a variance? Many organizations have developed such rules of thumb as “investigate all variances exceeding $5,000 or 25% of expected cost, whichever is lower.” ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 16 Comparison with Prior Periods Some organizations compare the most recent budget period’s actual results with last year’s results for the same period. These comparisons are not as useful as comparisons of actual outcomes with planned results. ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 17 Flexible-Budget Variance in Detail Standard per unit of output: Std. inputs expected Direct Material Direct Labor 5 pounds ½ hour Std. price expected Flexible Budget Amount $ 2 /pound $16/hour $10 $ 8 ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 18 Variances from Material and Labor Standards Actual results for 7,000 units produced: Direct material Pounds purchased and used: 36,800 Price/pound: $1.90 Total actual cost: $69,920 Direct labor Hours used: 3,750 Actual price (rate): $16.40 Total actual cost: $61,500 ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 19 Variances from Material and Labor Standards Flexible Budget or Total Standard Cost Allowed = Units of good output achieved × Input allowed per unit of output × Standard unit price of input ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 20 Variances from Material and Labor Standards Standard Direct-Materials Cost Allowed: 7,000 units X 5 pounds X $2.00 per pound = $70,000* Standard Direct-Labor Cost Allowed: 7,000 units X 1/2 hour X $16 per hour = $56,000** (1) Actual Costs Direct Materials $69,920 Direct Labor 61,500 (2) Flexible Budget *$70,000 **$56,000 (3) Flexible Budget Variance $ 80 F $5,500 U ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 21 Learning Objective 6 Price and Quantity Variances (Actual price – Standard Price) × Actual quantity used (Actual quantity used – standard quantity allowed for actual output) × Standard price ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 22 Price Variance Computations ($1.90 – $2.00) per pound × 36,800 pounds = $3,680 F ($16.40 – $16.00) per hour × 3,750 hours = $1,500 U ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 23 Quantity (Usage) Variance Computations [36,800 – (7,000 × 5)] pounds × $2 per pound = $3,600 U [3,750 – (7,000 × ½)] hours × $16 per hour = $4,000 U ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 24 Favorable or Unfavorable Variance? To determine whether a variance is Favorable or unfavorable, use logic rather than memorizing a formula. A price variance is favorable is the actual price is less than the standard. A quantity variance is favorable if the actual quantity used is less than the standard quantity allowed. ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 25 Direct Materials Flexible Budget Variance Direct-Materials Flexible-budget variance: $3,680 favorable + $3,600 unfavorable = $80 favorable Direct-Labor Flexible-budget variance: $1,500 unfavorable + $4,000 unfavorable = $5,500 unfavorable ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 26 Interpretation of Price and Usage Variances Price and usage variances are helpful because they provide feedback to those responsible for managing inputs. Managers should not use these variances alone for decision making, control, or evaluation. ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 27 Learning Objective 7 Variable-Overhead Spending and Efficiency Variances A variable-overhead efficiency variance occurs when actual cost-driver activity differs from the standard amount allowed for the actual output achieved. A variable-overhead spending variance occurs when the difference between the actual variable overhead and the amount of variable overhead budgeted for the actual level of cost-driver activity. ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 28 Variable-Overhead Variances variableoverhead efficiency variance variableoverhead spending variance = = actual cost-driver activity actual variable overhead - - standard cost-driver activity allowed X standard variable-overhead rate per unit of cost-driver standard variable-overhead rate per cost-driver unit X actual cost-driver activity used ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 29 Learning Objective 8 Fixed Overhead Spending Variance The difference between actual fixed overhead and budgeted fixed overhead Is the fixed overhead spending variance. ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 30 The End End of Chapter 8 ©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 31
© Copyright 2024