ies 342 industrial cost analysis & control | dr. karndee prichanont, siit 1 the flexible budget...
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
The Flexible Budget and Standard Costing
Chapter 13Objectives:• Develop and use flexible budgets to analyze operating results• Set proper standard cost for planning, control, and performance evaluation
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Effectiveness vs Efficiency
Anoperation
is _________ ifit has attainedor exceeded
its goals.
Anoperation
is _________ ifit has attainedor exceeded
its goals.
Anoperation
is __________ if ithas not wasted
resources.
Anoperation
is __________ if ithas not wasted
resources.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Assessing EffectivenessCheese Company
Actual MasterResults Budget Variances
Unit sales 8,000 10,000 2,000 U
Sales revenue 80,000$ 100,000$ $ 20,000 ULess variable costs: Manufacturing 25,500 30,000 4,500 F Marketing and admin. 17,100 20,000 2,900 FContribution margin 37,400 50,000 12,600 ULess fixed costs: Manufacturing 12,000 12,000 0 Marketing and admin. 13,000 13,000 0
Operating income 12,400$ 25,000$ $ 12,600 U
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Flexible Budget
____________________________________________________________________________
____________________________________________________________________________
Reveal variances due to good cost control or lack of cost control.
Improve performance evaluation.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Flexible Budget
• Step 1:______________________________
• Step 2: :______________________________ in the master budget to calculate the sales revenues and variable expenses.
• Step 3: Determine the budget amount of fixed cost and compute the flexible budget operating income
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Ex: Flexible Budget in Cheese Company
TotalPer Unit Fixed Actual FlexibleAmount Costs Results Budget Variances
Unit sales 8,000 8,000 0
Sales revenue 10.00$ Less variable costs: Manufacturing 3.00 Mkt. and Admin. 2.00 Contribution margin 5.00 Less fixed costs: Manufacturing 12,000$ Mkt. and Admin. 13,000
Operating income
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Ex: Flexible Budget in Cheese Company
TotalPer Unit Fixed Actual FlexibleAmount Costs Results Budget Variances
Unit sales 8,000 8,000 0
Sales revenue 10.00$ 80,000$ 80,000$ 0Less variable costs: Manufacturing 3.00 25,500 24,000 1,500 U Mkt. and Admin. 2.00 17,100 16,000 1,100 UContribution margin 5.00 37,400 40,000 2,600 ULess fixed costs: Manufacturing 12,000$ 12,000 12,000 0 Mkt. and Admin. 13,000 13,000 13,000 0
Operating income 12,400$ 15,000$ $ 2,600 U
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Assessing EfficiencyEx: Cheese Company
Flexible Sales Actual Budget Flexible Volume Master Results Variance Budget Variance Budget
Unit sales 8,000 - 8,000 2,000 U 10,000
Sales revenue 80,000$ -$ 80,000$ 20,000 U 100,000$ Less variable costs: Manufacturing 25,500 1,500 U 24,000 6,000 F 30,000 Mkt. and Admin. 17,100 1,100 U 16,000 4,000 F 20,000 Contribution margin 37,400 2,600 U 40,000 10,000 U 50,000 Less fixed costs: Manufacturing 12,000 - 12,000 - 12,000 Mkt. and Admin. 13,000 - 13,000 - 13,000
Operating income 12,400$ $ 2,600 U 15,000$ 10,000 U 25,000$
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Selling Price Variance
A selling price variance is the difference between the total sales revenue received and the total sales revenue of the flexible budget.
In the Cheese Company example, the budgetedand actual selling price was $10 per unit.
Now assume that the selling price changes to $11 per unit, with all other information unchanged.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Standard Cost
Cost
____________________
____________________Standard Costs are
____________________
____________________
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Standard Cost Variance
Pro
du
ct C
ost
Standard
A standard cost varianceis the amount by which
an actual cost differs fromthe standard cost.
This variance is unfavorable because the actual cost
exceeds the standard cost.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Types of Standard
• An ideal standard demands perfect implementation and maximum efficiency in every aspect of the operation
• A currently attainable standard sets the performance criterion at a level that a person with proper training and experience can attain most of the time without having to exert extraordinary effort
Should we havestandards that aredifficult to achieve
or standards that canbe achieved withminimal effort?
Should we havestandards that aredifficult to achieve
or standards that canbe achieved withminimal effort?
Standards should be set at levels that are currently attainable with reasonable and efficient effort.
Unattainable standards are discouraging while standards that are too easy to achieve provide little motivation.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Standard
Source of Standard Non-financial Measure
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Direct Material Standards
Use product design specifications.
Use competitivebids for the quality
and quantity desired.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Direct Material Standards
The standard material cost for one unit of product is: The standard material cost for one unit of product is:
×
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Direct Labor Standards
EfficiencyStandards
RateStandards
Use time and motion studies for
each labor operation.
Use wage surveys and
labor contracts.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Direct Labor Standard
The standard labor cost for one unit of product is:
standard number standard wage rate of labor hours for one hour for one unit of product
×
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
A General Model of Variance Analysis
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 Price
Price or RateVariance
Usage or Efficiency Variance
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Standard Cost Variances
Standard Cost Variances
Efficiency VariancePrice Variance
The difference betweenthe actual price and the
standard price
The difference betweenthe actual quantity andthe standard quantity
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Material Variance Example
Determine the followings:• What is the actual price per pound paid for the material?• What is Hanson’s material price variance (MPV) for the month?• What is the standard quantity of material that should have been used to
produce 1,000 X’s?• What is Hanson’s material usage variance (MUV) for the month?
Hanson Inc. has the following direct material standard to manufacture one unit of X:
1.5 pounds per X at $4.00 per pound
Last month 1,700 pounds of material were purchased and used to make 1,000 X’s. The material cost a total of $6,630.
X
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Material Variance Example
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb.
$6,630 $ 6,800 $6,000
Price variance$170 favorable
Usage variance$800 unfavorable
X
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Labor Variance Example
Hanson Inc. has the following direct labor standard to manufacture one X:
1.5 standard hours per X at $12.00 per direct labor hour
Last month 1,550 direct labor hours were worked at a total labor cost of $18,910 to make 1,000 X’s.
X
Determine the followings:
What is actual rate for labor for the month?
What is Hanson’s labor rate variance (LRV) for the month?
What are the standard hours (SH) of labor that should have been worked to produce 1,000 X’s?
What is Hanson’s labor efficiency variance (LEV) for the month?
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Labor Variance Example
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Rate variance$310 unfavorable
Efficiency variance$600 unfavorable
1,550 hours 1,550 hours 1,500 hours × × ×$12.20 per hour $12.00 per hour $12.00 per hour
$18,910 $18,600 $18,000
X
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