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Learning Objective 1
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Flexible Budget
Based on
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Learning Objective 2 Develop a flexible budget and compute flexible-budget variances and sales-volume variances.
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Variances
Level 2 analysis provides information on the two components of the static-budget variance. 1. Flexible-budget variance 2. Sales-volume variance
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Flexible-Budget Variance
Flexible-Budget Variance (Level 2) in (000)
Suits Revenue Variable costs Contribution margin Fixed costs Operating income
Flexible Budget 10 $1,550 1,150 $ 400 286 $ 114 Actual 10 $1,600 1,200 $ 400 300 $ 100 Variance 0 $ 50 F 50 U $ 0 14 U $ 14 U
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Flexible-Budget Variance
Actual quantity sold: 10,000 suits Actual results operating income $100,000 Flexible-budget operating income $114,000
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Flexible-Budget Variance
Total flexible-budget variance = Total actual results Total flexible budget for actual sales level
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Flexible-Budget Variance
Actual Amount $160 120 $ 40 Budgeted Amount $155 115 $ 40
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Flexible-Budget Variance
Why is the flexible-budget variance $14,000 U? Selling-price variance Actual variable costs exceeded flexible budget variable costs Actual fixed costs exceeded flexible budget fixed costs Total flexible-budget variance $50,000 F
50,000 U
14,000 U $14,000 U
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Sales-Volume Variance
Sales-Volume Variance (Level 2) in (000)
Suits Revenue Variable costs Contr. margin Fixed costs Operating income
Flexible Budget 10 $1,550 1,150 $ 400 286 $ 114 Static Sales-Volume Budget Variance 13 3U $2,015 $465 U 1,495 295 F $ 520 $120 U 286 0 $ 234 $120 U
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Sales-Volume Variance
Actual quantity sold: 10,000 suits Flexible-budget operating income $114,000 Static-budget operating income $234,000
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Sales-Volume Variance
Actual sales unit Master budgeted sales units 13,000 10,000 = 3,000
=
Total sales-volume variance $120,000 U
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Budget Variances
Level 1 Static-budget variance $134,000 U
Level 2
Learning Objective 3 Explain why standard costs are often used in variance analysis.
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Standards
Pasadenas budgeted cost for each variable direct cost item is computed as follows:
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Standards
4.00 square yards allowed per output unit at $16.25 standard cost per square yard. Standard cost per output unit 4.00 $16.25 = $65.00
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Standards
2.00 manufacturing labor-hours of input allowed per output unit at $13.00 standard cost per hour. Standard cost per output unit 2.00 $13.00 = $26.00
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Learning Objective 4 Compute price variances and efficiency variances for direct-cost categories.
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Actual Data
Direct materials purchased and used: 42,500 square yards at $15.95 Cost of direct materials = $677,875 Labor hours: 21,500 at $12.90 Cost of direct manufacturing labor = $277,350
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= =
Actual quantity
= =
Actual quantity
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= =
Standard price
= =
Standard price
Efficiency Variance
What is the journal entry to record materials used? Work in Process Control 650,000 Direct-Materials Efficiency Variance 40,625 Materials Control 690,625 To record direct materials used
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Work in Process Control 260,000 Direct Manufacturing Labor Efficiency Variance 19,500 Direct-Manufacturing Labor Price Variance 2,150 Wages Payable 277,350 To record liability for direct manufacturing labor
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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$12,750 F $27,875 U
$40,625 U
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$2,150 F $17,350 U
$ 19,500 U
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Variance Analysis
Level 1 Static-budget variance Materials $167,125 F Labor 60,650 F Total $227,775 F
Variance Analysis
Level 2 Flexible-budget variance Materials $27,875 U Labor 17,350 U Total $45,225 U
Learning Objective 5 Explain why purchasing performance measures should focus on more factors than just price variances.
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Rules of thumb as investigate all variances exceeding $10,000 or 25% of expected cost, whichever is lower.
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Continuous Improvement
Assume that the budgeted direct materials cost for each suit that Pasadena Co. manufactures is $65. Pasadena Co. wants to implement continuous improvement budgets based on a target 1% materials cost reduction each period. What should the budgeted cost be for the next 3 subsequent periods?
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Continuous Improvement
Prior Period Budgeted Amount This Period: Period 1: $65.00 Period 2: $64.35 Period 3: $63.71 Reduction in Budget $0.650 $0.644 $0.637 Revised Budgeted Amount $65.00 $64.35 $63.71 $63.07
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Total labor-hours Cost per material-handling labor-hour Total material-handling labor cost
$7,000
$6,786
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Total variance
$696 U
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Benchmarking
It refers to the continuous process of measuring products, services, and activities against the best levels of performance.
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End of Chapter 7
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