Session 15-Flexible Budget Variances

Session 15Session 15

2009 Foster School of Business Cost Accounting L.DuCharme 2

OverviewOverview

StandardsStandards VariancesVariances Static vs. Flexible budgetsStatic vs. Flexible budgets Calculate variances for direct inputs Calculate variances for direct inputs

(DM & DL)(DM & DL)

EoP AdjustmentsEoP Adjustments When to investigate variancesWhen to investigate variances


Standard = BudgetStandard = Budget

Here budgeted amount = standard Here budgeted amount = standard amount.amount.

We will use these terms We will use these terms interchangeably in this course.interchangeably in this course.


VariancesVariances

Variance = budgeted – actual Variance = budgeted – actual resultsresults

If operating income is If operating income is greatergreater than expected (budget), then you than expected (budget), then you have a favorable variance.have a favorable variance.

Not all favorable variances are Not all favorable variances are “good.”“good.”


Static and Flexible Static and Flexible BudgetsBudgets

Static BudgetPlanned level ofoutput at start ofthe budget period

Based on

Flexible BudgetBudgeted revenuesand cost based on

actual level of output

Based on


ExampleExample

Calculate VariancesCalculate Variances


Useful Format to Useful Format to Calculate DM and DL Calculate DM and DL

VariancesVariancesActualActual “Noname” “Noname” FlexibleFlexible Static StaticResultsResults Budget Budget BudgetBudget BudgetBudget Actual input Actual inputActual input Actual input Flex-budget input Static-Flex-budget input Static-

budget inputbudget input X XX X X X X X Actual price Budget price Actual price Budget price Budget price Budget Budget price Budget

priceprice

0,1 |--------------- 0,1 |--------------- Static Budget VarStatic Budget Var..----------------|----------------|

2 |-----2 |----- Flexible Budget VarFlexible Budget Var..-----|-----|---- Sales Volume Var.Sales Volume Var. ----||

3 |---- 3 |---- Price Price --------||-------- UsageUsage --------||


Price Variance: materialPrice Variance: material

Direct-material price variance

Actual price – Budgeted

price× Actual

Quantity used=


Price Variance: laborPrice Variance: labor

Direct-labor price variance

Actual price – Budgeted

price× Actual

Quantity used=


Efficiency Variance: DMEfficiency Variance: DM

Direct-material efficiency variance

Actual quantity – Standard quantity

× Standardprice=


Efficiency Variance: Efficiency Variance: laborlabor

Direct-labor efficiency variance

Actual quantity – Standard quantity

× Standardprice=


Example: calculate Example: calculate variancesvariances

The Boing Company (largest maker of toy The Boing Company (largest maker of toy airplanes) has provided you with the airplanes) has provided you with the following data on burppa wood costs for following data on burppa wood costs for 2004. Burppa wood rots very fast. All 2004. Burppa wood rots very fast. All wood is used in the period in which it is wood is used in the period in which it is purchased.purchased.

ActualActual BudgetedBudgetedToy planes (units)Toy planes (units) 10,00010,000 9,0009,000Input (bd. ft.)Input (bd. ft.) 5,2005,200 4,5004,500Price ($/bd. ft.)Price ($/bd. ft.) $0.49$0.49 $0.50$0.50


Calculation of VariancesCalculation of Variances

Please calculate the five variances Please calculate the five variances for burppa wood:for burppa wood: Static-budget varianceStatic-budget variance Flexible-budget varianceFlexible-budget variance Sales-volume varianceSales-volume variance Price variancePrice variance Usage (efficiency) varianceUsage (efficiency) variance


Performance Performance MeasurementMeasurement

Using VariancesUsing Variances

Effectiveness is the degree to which apredetermined objective or target is met.

Efficiency is the relative amount of inputsused to achieve a given level of output.

Variances should not solely be used toevaluate performance.


End-of-period End-of-period AdjustmentsAdjustments

Variance accounts are disposed of Variance accounts are disposed of using one of the approaches outlined using one of the approaches outlined in chapter 4.in chapter 4. W/O all to CoGSW/O all to CoGS Prorate to CoGS, FG, & WIP based on:Prorate to CoGS, FG, & WIP based on:

Ending total $ amount in accounts.Ending total $ amount in accounts. $ amount of IDCost in the respective accounts.$ amount of IDCost in the respective accounts.

(Over- or under-allocated overhead is a (Over- or under-allocated overhead is a variance)variance)


When to Investigate When to Investigate VariancesVariances

When should variances be investigated?

Subjective judgments

Rules of thumb as “investigate all variancesexceeding $10,000 or 25% of expected cost,

whichever is lower.”

ExamplesExamples

http://accounting-financial-tax.com/http://accounting-financial-tax.com/2009/07/mix-and-yield-variance-analysis/2009/07/mix-and-yield-variance-analysis/

http://www.futureaccountant.com/http://www.futureaccountant.com/standard-costing-variance-analysis/study-standard-costing-variance-analysis/study-notes/material-mix-variance.phpnotes/material-mix-variance.php

http://www.futureaccountant.com/http://www.futureaccountant.com/standard-costing-variance-analysis/study-standard-costing-variance-analysis/study-notes/material-yield-variance.phpnotes/material-yield-variance.php

Significance of VariancesSignificance of Variances

Materials Price Materials Price VarianceVariance

Material Usage Material Usage VarianceVariance

Wage Rate VarianceWage Rate Variance

Labor Efficiency Labor Efficiency VarianceVariance

Variable OH VarianceVariable OH Variance

Fixed OH Expenditure Fixed OH Expenditure VarianceVariance

Fixed OH Volume Fixed OH Volume VarianceVariance

Different Sources of Different Sources of SupplySupply

Unexpected General Price Unexpected General Price IncreasesIncreases

Alteration in quantity Alteration in quantity discountsdiscounts.

Substitution of a different Substitution of a different grade of materialgrade of material

Standards set at a mid-Standards set at a mid-year price year price









Higher & Lower Higher & Lower Incidence of scrapIncidence of scrap

Alteration to Product Alteration to Product DesignDesign

Substitution of a Substitution of a different grade of different grade of materialmaterial









Unexpected Unexpected Regulatory wage Regulatory wage awardaward

Overtime / bonus Overtime / bonus payments that were payments that were different from plandifferent from plan

Substitution of labor Substitution of labor with different skill with different skill levellevel









Improvements in Improvements in method or working method or working conditionsconditions

Variations in Variations in unavoidable idle timeunavoidable idle time

Introduction of Introduction of incentive schemeincentive scheme

Substitution of labor Substitution of labor with different skill with different skill levellevel









Unexpected price Unexpected price changes for OH Itemschanges for OH Items

Labor Efficiency Labor Efficiency VariancesVariances









Change in prices Change in prices relating to Fixed OH relating to Fixed OH items (for example items (for example an increase in rent)an increase in rent)

Seasonal effects (for Seasonal effects (for example greater use example greater use of central heating in of central heating in winter)winter)









Change in production Change in production volume due to volume due to change in demandchange in demand

Change in Change in productivity due to productivity due to change in machinery change in machinery or technologyor technology

Production lost Production lost through strikesthrough strikes

ExampleExample

http://www.hockinternational.com/http://www.hockinternational.com/forum/viewtopic.php?f=13&t=682forum/viewtopic.php?f=13&t=682

Session 15-Flexible Budget Variances

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