Managerial Accounting: An Introduction To Concepts, Methods, And

Uses

Chapter 12Cost Center

Performance Evaluation

Maher, Stickney and Weil

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Learning Objectives (Slide 1 of 3)

Explain how variable production cost variances are calculated and why they occur.

Explain how fixed production cost variances are calculated and why they occur.

Explain the difference between price and efficiency variances.

Explain how to analyze variances using the variable cost variance model.

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Learning Objectives (Slide 2 of 3)

Analyze overhead variances using the variable cost variance model.

Identify the relation between actual, budgeted, and applied fixed manufacturing costs.

Explain how to apply activity-based costing to variance analysis.

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Learning Objectives (Slide 3 of 3)

Describe the impact of technology on variance analyses.

Identify tools managers use to decide when to investigate variances.

Explain how to calculate the mix variance portion of the efficiency variance.

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Responsibility For Production Variances (Slide 1

of 2)

Purchasing Department The materials price variance, used to

evaluate the purchasing dept.'s performance, is calculated as follows:

(Actual price - Standard Price) X Quantity Purchased

Measures the difference between actual and standard prices paid for materials

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Responsibility For Production Variances (Slide 2

of 2) The production dept. is responsible for the

following variances: Fixed manufacturing cost variance Remaining variable manufacturing cost

variance not assigned to purchasing including:

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead

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Reasons for Variances Variances occur for a variety of

reasons: A variance is simply the difference

between a predetermined norm (an expected amount) and actual results so some differences should be expected

The standards may be biased Systematic reasons

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Reasons for Materials Variances

Generally, materials variances are attributable to two areas: Usage of materials Price paid for materials

Examples: Accounting may fail to take purchase

discounts on materials Employees may be poorly trained leading

to higher waste

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Reasons for Labor Variances

Generally, labor variances are attributable to two areas: Usage of labor hours Price (or wage) paid for labor

Examples: New employee is hired for less than

expected wage rate Union contract may call for wage rate

higher than forecast amount

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Reasons for Variable Manufacturing Overhead

Variances Generally, variable manufacturing

overhead variances are attributable to two areas: Usage of allocation base (e.g., machine

hours) Price of overhead items

Example: Utility company lowers rates for electricity resulting in a favorable variance

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Fixed Manufacturing Cost Variances

Difference between actual and budgeted fixed costs Fixed costs do not vary with the level of

activity Managers simply investigate what

caused the difference Example: Rent on production facility

was unexpectedly raised causing an unfavorable variance

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Variable Overhead in Service Organizations

Variable overhead is often significant for service firms, governmental agencies and nonprofit groups These types of organizations set

standards, perform variance analysis and establish flexible budgets

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Separating Variances into Price & Efficiency

Components Variable manufacturing cost variances

can be spit into two components Price variance - the difference between the

budgeted (or standard) price and the actual price paid

Efficiency variance - measures the difference between the actual quantity of inputs used and those allowed at standard to make a unit of output

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Variable Cost Variance Model (Slide 1 of 2)

Actual(AP X AQ)

(1)

Inputs at Standard(SP X AQ)

(2)

Flexible Production Budget

(SP X SQ)(3)

Price Variance(1) - (2)

(AP - SP) X AQ

Efficiency Variance(2) - (3)

SP X (AQ - SQ)Total Variance

(1) - (3)

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Variable Cost Variance Model (Slide 2 of 2)

General model can be used to calculate the following variances:

Input Price Variance Efficiency Variance

Direct Materials Price Variance Quantity Variance

Direct Labor Rate Variance Efficiency Variance

Variable Ovrhd Spending Variance Efficiency Variance

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Reasons for Materials Price & Efficiency

Variances Materials price variances may result

from: Failure to take purchase discounts Purchasing higher or lower quality material

Materials efficiency variances may result from: Purchasing inferior materials Using materials more or less efficiently

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Reasons for Labor Price & Efficiency

Variances Labor price variances may result from:

Failure to correctly anticipate changes in wage rates

Hiring new employees at wage rates different from standard

Labor efficiency variances may result from: Workers being poorly trained Faulty equipment Scheduling problems

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Variable Overhead Price and Efficiency Variances

Price and efficiency variances for variable overhead are computed using the same method as for other variable manufacturing costs Requires a measure of overhead input activity

such as machine hours or direct labor hours Care should be taken in interpreting these

variances since the input activity base may be chosen without regard for the true cause of variable overhead costs

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Fixed Manufacturing Cost Variances (Slide 1 of 3)

Manufacturing companies, using full absorption costing, use a predetermined overhead rate to apply fixed overhead to units produced, calculated as follows:

Estimated Fixed Manufacturing Cost per Period

Estimated ProductionVolume per Period

This rate is applied to units produced during the period

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Fixed Manufacturing Cost Variances (Slide 2 of 3)

The production volume variance equals budgeted fixed manufacturing costs minus applied fixed manufacturing costs Only arises when fixed costs are allocated to

units using a predetermined rate and estimated production volume is different from actual production volume achieved

The production volume variance appears to have little benefit for managerial purposes

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Fixed Manufacturing Cost Variances (Slide 3 of 3)

The price (spending) variance for fixed manufacturing costs equals the difference between actual and budgeted costs Used for management and control of

fixed manufacturing costs

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Quality Control and Variance Investigation Managers use a variety of methods to

determine which variances should be investigated, including: Rules of thumb such as investigate

variances > 10% of standard cost Tolerance limits - use predetermined limits

within which variances may fluctuate Variances outside these limits are investigated

Decisions models

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If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact:

Dr. Donald R. Trippeer, CPA donald.trippeer@colostate-pueblo.edu

Colorado State University-Pueblo