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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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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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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Flexible Budget

____________________________________________________________________________

____________________________________________________________________________

Reveal variances due to good cost control or lack of cost control.

Improve performance evaluation.

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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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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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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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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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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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Standard Cost

Cost

____________________

____________________Standard Costs are

____________________

____________________

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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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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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Standard

Source of Standard Non-financial Measure

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Direct Material Standards

Use product design specifications.

Use competitivebids for the quality

and quantity desired.

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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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Direct Labor Standards

EfficiencyStandards

RateStandards

Use time and motion studies for

each labor operation.

Use wage surveys and

labor contracts.

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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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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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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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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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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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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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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

ies 342 industrial cost analysis & control | dr. karndee prichanont, siit 1 the flexible budget...

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