Kế toán, kiểm toán - Chapter 08: Flexible budgets, standard costs, and variance analysis

Flexible Budgets, Standard Costs, and Variance AnalysisChapter 08Variance Analysis CycleConduct next period’s operationsIdentify questionsReceive explanationsTake correctiveactionsAnalyze variancesPrepare standard cost performance reportBeginCharacteristics of Flexible Budgets Planning budgetsare prepared fora single, plannedlevel of activity. Performance evaluation is difficult when actual activity differs from the planned level of activity.Hmm! Comparingstatic planning budgets with actual costsis like comparingapples and oranges.Improve performance evaluation.May be prepared for any activity level in the relevant range.Show costs that should have beenincurred at the actual level ofactivity, enabling “apples to apples”cost comparisons.Help managers control costs.Let’s look at Larry’s Lawn Service.Characteristics of Flexible BudgetsLarry’s Lawn Service provides lawn care in a planned community where all lawns are approximately the same size.At the end of May, Larry prepared his June budget based onmowing 500 lawns. Since all of the lawns are similar in size,Larry felt that the number of lawns mowed in a month wouldbe the best way to measure overall activity for his business. Larry’s Budget Deficiencies of the Static Planning BudgetDeficiencies of the Static Planning BudgetLarry’s Planning BudgetDeficiencies of the Static Planning BudgetLarry’s Actual ResultsDeficiencies of the Static Planning BudgetLarry’s Actual Results Compared with the Planning BudgetDeficiencies of the Static Planning BudgetLarry’s Actual Results Compared with the Planning BudgetF = Favorable variance that occurs when actual costs are less than budgeted costs.U = Unfavorable variance that occurs when actual costs are greater than budgeted costs.F = Favorable variance that occurs when actual revenue is greater than budgeted revenue.Deficiencies of the Static Planning BudgetLarry’s Actual Results Compared with the Planning BudgetSince these variances are favorable, has Larry done a good job controlling costs?Since these variances are unfavorable, has Larry done a poor job controlling costs? I don’t think Ican answer thequestions usinga static budget.Actual activity is above planned activity. So, shouldn’t the variablecosts be higher if actualactivity is higher?Deficiencies of the Static Planning BudgetThe relevant question is . . . “How much of the cost variances are due to higher activity and how much are due to cost control?”To answer the question,we mustthe budget to theactual level of activity. Deficiencies of the Static Planning BudgetHow a Flexible Budget Works To a budget, we need to know that:Total variable costs changein direct proportion to changes in activity.Total fixed costs remainunchanged within therelevant range. FixedVariableLet’s prepare a budgetfor Larry’s Lawn Service.How a Flexible Budget WorksPreparing a Flexible BudgetLarry’s Flexible BudgetRevenue and Spending VariancesFlexible budget revenueActual revenueThe difference is a revenue variance.Flexible budget costActual costThe difference is a spending variance.Now, let’s use budgetingconcepts to compute revenue and spending variances for Larry’s Lawn Service. Revenue and Spending VariancesRevenue and Spending VariancesLarry’s Flexible Budget Compared with the Actual Results$1,750 favorablerevenue varianceLarry’s Flexible Budget Compared with the Actual ResultsRevenue and Spending VariancesSpending variancesMore than one cost driver may be needed toadequately explain all ofthe costs in an organization. The cost formulas usedto prepare a flexiblebudget can be adjustedto recognize multiplecost drivers.Flexible Budgets with Multiple Cost DriversBecause of the large unfavorable wages and salaries spendingvariance, Larry decided to add an additional cost driver for wages and salaries. The variance is due primarily to the number of hours required for the additional edging and trimming. So Larry estimates the additional hours and builds those hours into both his revenue and expense budget formulas. Larry’s New Budget Flexible Budgets with Multiple Cost DriversFlexible Budgets with Multiple Cost DriversLarry’s Budget Based on More than One Cost DriverStandard CostsStandards are benchmarks or “norms” formeasuring performance. In managerial accounting,two types of standards are commonly used.Quantity standardsspecify how much of aninput should be used tomake a product orprovide a service.Price standardsspecify how muchshould be paid foreach unit of theinput.Examples: Firestone, Sears, McDonald’s, hospitals, construction, and manufacturing companies.Setting Direct Materials Standards Standard Priceper UnitSummarized in a Bill of Materials.Final, deliveredcost of materials,net of discounts.Standard Quantityper UnitSetting Direct Labor Standards Use time and motion studies foreach labor operation.Standard Hoursper UnitOften a singlerate is used that reflectsthe mix of wages earned.Standard Rateper HourSetting Variable Manufacturing Overhead Standards The rate is the variable portion of the predetermined overhead rate.PriceStandardThe quantity is the activity in the allocation base for predetermined overhead.QuantityStandardThe Standard Cost Card A standard cost card for one unit of product might look like this:Using Standards in Flexible BudgetsStandard costs per unit for direct materials, direct labor, and variable manufacturing overhead can be used to compute activity and spending variances.Spending variances become more useful by breaking them down into quantity and price variances.A General Model for Variance AnalysisVariance AnalysisPrice VarianceDifference betweenactual price and standard priceQuantity VarianceDifference betweenactual quantity andstandard quantityQuantity and Price StandardsQuantity and price standards are determined separately for two reasons: The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used. The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production. Variance AnalysisMaterials price varianceLabor rate varianceVOH rate varianceMaterials quantity varianceLabor efficiency varianceVOH efficiency varianceA General Model for Variance AnalysisQuantity VariancePrice VarianceA General Model for Variance AnalysisQuantity Variance(2) – (1)Price Variance(3) – (2)(1)Standard QuantityAllowed for Actual Output,at Standard Price(SQ × SP)(2)Actual Quantityof Input,at Standard Price(AQ × SP)(3)Actual Quantityof Input,at Actual Price (AQ × AP)Spending Variance(3) – (1)A General Model for Variance AnalysisActual quantity is the amount of direct materials, direct labor, and variable manufacturing overhead actually used.Quantity Variance(2) – (1)Price Variance(3) – (2)(1)Standard QuantityAllowed for Actual Output,at Standard Price(SQ × SP)(2)Actual Quantityof Input,at Standard Price(AQ × SP)(3)Actual Quantityof Input,at Actual Price (AQ × AP)Spending Variance(3) – (1)A General Model for Variance Analysis Standard quantity is the standard quantity allowed for the actual output of the period.Quantity Variance(2) – (1)Price Variance(3) – (2)(1)Standard QuantityAllowed for Actual Output,at Standard Price(SQ × SP)(2)Actual Quantityof Input,at Standard Price(AQ × SP)(3)Actual Quantityof Input,at Actual Price (AQ × AP)Spending Variance(3) – (1)A General Model for Variance Analysis Actual price is the amount actuallypaid for the input used.Quantity Variance(2) – (1)Price Variance(3) – (2)(1)Standard QuantityAllowed for Actual Output,at Standard Price(SQ × SP)(2)Actual Quantityof Input,at Standard Price(AQ × SP)(3)Actual Quantityof Input,at Actual Price (AQ × AP)Spending Variance(3) – (1)A General Model for Variance Analysis Quantity Variance(2) – (1)Price Variance(3) – (2)(1)Standard QuantityAllowed for Actual Output,at Standard Price(SQ × SP)(2)Actual Quantityof Input,at Standard Price(AQ × SP)(3)Actual Quantityof Input,at Actual Price (AQ × AP)Spending Variance(3) – (1)Standard price is the amount that shouldhave been paid for the input used. Glacier Peak Outfitters has the following direct materials standard for the fiberfill in its mountain parka.0.1 kg. of fiberfill per parka at $5.00 per kg. Last month 210 kgs. of fiberfill were purchased and used to make 2,000 parkas. The materials cost a total of $1,029.Materials Variances – An Example 200 kgs. 210 kgs. 210 kgs. × × × $5.00 per kg. $5.00 per kg. $4.90 per kg. = $1,000 = $1,050 = $1,029 Quantity variance$50 unfavorablePrice variance$21 favorableMaterials Variances SummaryStandard Quantity Actual Quantity Actual Quantity × × ×  Standard Price Standard Price Actual PriceMaterials Variances Summary 200 kgs. 210 kgs. 210 kgs. × × × $5.00 per kg. $5.00 per kg. $4.90 per kg. = $1,000 = $1,050 = $1,029 Quantity variance$50 unfavorablePrice variance$21 favorableStandard Quantity Actual Quantity Actual Quantity × × ×  Standard Price Standard Price Actual Price0.1 kg per parka  2,000 parkas = 200 kgsMaterials Variances Summary 200 kgs. 210 kgs. 210 kgs. × × × $5.00 per kg. $5.00 per kg. $4.90 per kg. = $1,000 = $1,050 = $1,029 Quantity variance$50 unfavorablePrice variance$21 favorableStandard Quantity Actual Quantity Actual Quantity × × ×  Standard Price Standard Price Actual Price$1,029  210 kgs = $4.90 per kgMaterials Variances:Using the Factored EquationsMaterials quantity varianceMQV = (AQ × SP) – (SQ × SP) = SP(AQ – SQ) = $5.00/kg (210 kgs – (0.1 kg/parka  2,000 parkas)) = $5.00/kg (210 kgs – 200 kgs) = $5.00/kg (10 kgs) = $50 UMaterials price varianceMPV = (AQ × AP) – (AQ × SP) = AQ(AP – SP) = 210 kgs ($4.90/kg – $5.00/kg) = 210 kgs (– $0.10/kg) = $21 FMaterials Price VarianceMaterials Quantity VarianceProduction ManagerPurchasing ManagerThe standard price is used to compute the quantity varianceso that the production manager is not held responsible forthe purchasing manager’s performance.Responsibility for Materials VariancesI am not responsible for this unfavorable materialsquantity variance. You purchased cheapmaterial, so my peoplehad to use more of it.Your poor scheduling sometimes requires me to rush order materials at a higher price, causing unfavorable price variances. Responsibility for Materials VariancesProduction ManagerPurchasing Manager Glacier Peak Outfitters has the following direct labor standard for its mountain parka.1.2 standard hours per parka at $10.00 per hour Last month, employees actually worked 2,500 hours at a total labor cost of $26,250 to make 2,000 parkas. Labor Variances – An ExampleEfficiency variance$1,000 unfavorableRate variance$1,250 unfavorable Standard Hours Actual Hours Actual Hours × × ×  Standard Rate Standard Rate Actual RateLabor Variances Summary 2,400 hours 2,500 hours 2,500 hours × × ×$10.00 per hour $10.00 per hour $10.50 per hour = $24,000 = $25,000 = $26,250 Labor Variances SummaryEfficiency variance$1,000 unfavorableRate variance$1,250 unfavorable Standard Hours Actual Hours Actual Hours × × ×  Standard Rate Standard Rate Actual Rate 2,400 hours 2,500 hours 2,500 hours × × ×$10.00 per hour $10.00 per hour $10.50 per hour = $24,000 = $25,000 = $26,250 1.2 hours per parka  2,000 parkas = 2,400 hoursLabor Variances SummaryEfficiency variance$1,000 unfavorableRate variance$1,250 unfavorable Standard Hours Actual Hours Actual Hours × × ×  Standard Rate Standard Rate Actual Rate 2,400 hours 2,500 hours 2,500 hours × × ×$10.00 per hour $10.00 per hour $10.50 per hour = $24,000 = $25,000 = $26,250 $26,250  2,500 hours = $10.50 per hourLabor Variances: Using the Factored EquationsLabor efficiency varianceLEV = (AH × SR) – (SH × SR) = SR (AH – SH) = $10.00 per hour (2,500 hours – 2,400 hours) = $10.00 per hour (100 hours) = $1,000 unfavorableLabor rate varianceLRV = (AH × AR) – (AH × SR) = AH (AR – SR) = 2,500 hours ($10.50 per hour – $10.00 per hour) = 2,500 hours ($0.50 per hour) = $1,250 unfavorableResponsibility for Labor VariancesProduction ManagerProduction managers areusually held accountablefor labor variancesbecause they caninfluence the:Mix of skill levelsassigned to work tasks. Level of employee motivation.Quality of production supervision.Quality of training provided to employees.I am not responsible for the unfavorable laborefficiency variance! You purchased cheapmaterial, so it took moretime to process it. I think it took more time to process the materials because the Maintenance Department has poorly maintained your equipment.Responsibility for Labor Variances Glacier Peak Outfitters has the following direct variable manufacturing overhead labor standard for its mountain parka.1.2 standard hours per parka at $4.00 per hour Last month, employees actually worked 2,500 hours to make 2,000 parkas. Actual variable manufacturing overhead for the month was $10,500. Variable Manufacturing Overhead Variances – An Example 2,400 hours 2,500 hours 2,500 hours × × × $4.00 per hour $4.00 per hour $4.20 per hour = $9,600 = $10,000 = $10,500 Efficiency variance$400 unfavorableRate variance$500 unfavorableVariable Manufacturing Overhead Variances Summary Standard Hours Actual Hours Actual Hours × × ×  Standard Rate Standard Rate Actual RateVariable Manufacturing Overhead Variances Summary 2,400 hours 2,500 hours 2,500 hours × × × $4.00 per hour $4.00 per hour $4.20 per hour = $9,600 = $10,000 = $10,500 Efficiency variance$400 unfavorableRate variance$500 unfavorable Standard Hours Actual Hours Actual Hours × × ×  Standard Rate Standard Rate Actual Rate1.2 hours per parka  2,000 parkas = 2,400 hoursVariable Manufacturing Overhead Variances Summary 2,400 hours 2,500 hours 2,500 hours × × × $4.00 per hour $4.00 per hour $4.20 per hour = $9,600 = $10,000 = $10,500 Efficiency variance$400 unfavorableRate variance$500 unfavorable Standard Hours Actual Hours Actual Hours × × ×  Standard Rate Standard Rate Actual Rate$10,500  2,500 hours = $4.20 per hourVariable Manufacturing Overhead Variances: Using Factored EquationsVariable manufacturing overhead efficiency varianceVMEV = (AH × SR) – (SH – SR) = SR (AH – SH) = $4.00 per hour (2,500 hours – 2,400 hours) = $4.00 per hour (100 hours) = $400 unfavorableVariable manufacturing overhead rate varianceVMRV = (AH × AR) – (AH – SR) = AH (AR – SR) = 2,500 hours ($4.20 per hour – $4.00 per hour) = 2,500 hours ($0.20 per hour) = $500 unfavorableMaterials Variances―An Important SubtletyThe quantity variance is computed only on the quantity used.The price variance is computed on the entire quantity purchased. Glacier Peak Outfitters has the following direct materials standard for the fiberfill in its mountain parka.0.1 kg. of fiberfill per parka at $5.00 per kg. Last month 210 kgs. of fiberfill were purchased at a cost of $1,029. Glacier used 200 kgs. to make 2,000 parkas. Materials Variances―An Important Subtlety 200 kgs. 200 kgs.  × ×  $5.00 per kg. $5.00 per kg. = $1,000 = $1,000 Quantity variance$0 Standard Quantity Actual Quantity  × ×  Standard Price Standard Price Materials Variances―An Important Subtlety 210 kgs. 210 kgs. × × $5.00 per kg. $4.90 per kg. = $1,050 = $1,029 Price variance$21 favorable Actual Quantity Actual Quantity × ×  Standard Price Actual PriceMaterials Variances―An Important SubtletyVariance Analysis and Management by ExceptionHow do I knowwhich variances to investigate? Larger variances, in dollar amount or as a percentage of the standard, are investigated first. Advantages of Standard CostsManagement byexceptionAdvantagesPromotes economy and efficiencySimplifiedbookkeepingEnhances responsibilityaccountingPotentialProblemsEmphasis onnegative mayimpact morale.Emphasizing standardsmay exclude otherimportant objectives.Favorablevariances maybe misinterpreted.Continuous improvement maybe more importantthan meeting standards.Standard costreports maynot be timely.Invalid assumptionsabout the relationshipbetween laborcost and output.Potential Problems with Standard CostsPREDETERMINED OVERHEAD RATES AND OVERHEAD ANALYSIS IN A STANDARD COSTING SYSTEMAppendix 8AVolumevarianceFixed Overhead Volume VarianceFixedOverheadAppliedActualFixedOverheadBudgetedFixedOverheadVolumevarianceFixedoverheadapplied towork in processBudgetedfixedoverhead=–FPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual output SH × FRDH × FRFixed Overhead Volume VarianceVolume varianceFPOHR × (DH – SH)=FixedOverheadAppliedActualFixedOverheadBudgetedFixedOverheadVolumevarianceBudget varianceFixed Overhead Budget VarianceBudgetvarianceBudgetedfixedoverheadActualfixedoverhead=–FixedOverheadAppliedActualFixedOverheadBudgetedFixedOverheadComputing Fixed Overhead VariancesComputing Fixed Overhead VariancesPredetermined Overhead RatesPredetermined overhead rateEstimated total manufacturing overhead costEstimated total amount of the allocation base=Predetermined overhead rate$360,00090,000 Machine-hours=Predetermined overhead rate= $4.00 per machine-hourPredetermined Overhead RatesVariable component of thepredetermined overhead rate$90,00090,000 Machine-hours=Variable component of thepredetermined overhead rate= $1.00 per machine-hourFixed component of thepredetermined overhead rate$270,00090,000 Machine-hours=Fixed component of thepredetermined overhead rate= $3.00 per machine-hourApplying Manufacturing OverheadOverheadappliedPredetermined overhead rateStandard hours allowedfor the actual output=×Overheadapplied$4.00 permachine-hour84,000 machine-hours=×Overheadapplied$336,000=Computing the Volume VarianceVolumevarianceFixedoverheadapplied towork in processBudgetedfixedoverhead=–Volumevariance= $18,000 UnfavorableVolumevariance= $270,000 –$3.00 permachine-hour(×$84,000machine-hours)Computing the Volume VarianceFPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual outputVolume varianceFPOHR × (DH – SH)=Volumevariance=$3.00 permachine-hour(×90,000mach-hours–84,000mach-hours)Volumevariance= 18,000 UnfavorableComputing the Budget VarianceBudgetvarianceBudgetedfixedoverheadActualfixedoverhead=–Budgetvariance= $280,000 – $270,000Budgetvariance= $10,000 UnfavorableA Pictorial View of the VariancesFixed OverheadApplied toWork in ProcessActualFixedOverheadBudgetedFixedOverhead 280,000270,000252,000Total variance, $28,000 unfavorableBudget variance,$10,000 unfavorableVolume variance,$18,000 unfavorableFixed Overhead Variances –A Graphic Approach Let’s look at a graph showing fixed overhead variances. We will use ColaCo’s numbers from the previous example. Graphic Analysis of FixedOverhead VariancesMachine-hours (000) Budget$270,00090Denominatorhours00Fixed overhead applied at$3.00 per standard hourGraphic Analysis of FixedOverhead VariancesActual$280,000Machine-hours (000) Budget$270,00090Denominatorhours00Fixed overhead applied at$3.00 per standard hourBudget Variance 10,000 U{Applied$252,000Machine-hours (000) Budget$270,000Graphic Analysis of Fixed Overhead Variances908400StandardhoursFixed overhead applied at$3.00 per standard hourDenominatorhoursBudget Variance 10,000 UVolume Variance 18,000 U{{Actual$280,000Reconciling Overhead Variances and Underapplied or Overapplied OverheadIn a standardcost system:Favorablevariances are equivalentto overapplied overhead.The sum of the overhead variancesequals the under- or overappliedoverhead cost for the period.Reconciling Overhead Variances and Underapplied or Overapplied OverheadComputing the Variable Overhead VariancesVariable manufacturing overhead efficiency varianceVMEV = (AH × SR) – (SH × SR) = $88,000 – (84,000 hours × $1.00 per hour) = $4,000 unfavorableComputing the Variable Overhead VariancesVariable manufacturing overhead rate varianceVMRV = (AH × AR) – (AH × SR) = $100,000 – (88,000 hours × $1.00 per hour) = $12,000 unfavorableComputing the Sum of All VariancesGENERAL LEDGER ENTRIES TO RECORD VARIANCESAppendix 8BGlacier Peak Outfitters ― RevisitedWe will use information from the Glacier Peak Outfittersexample presented earlier in the chapter to illustrate journalentries for standard cost variances. Recall the following:MaterialAQ × AP = $1,029AQ × SP = $1,050SQ × SP = $1,000MPV = $21 FMQV = $50 ULaborAH × AR = $26,250AH × SR = $25,000SH × SR = $24,000LRV = $1,250 ULEV = $1,000 U Now, let’s prepare the entries to recordthe labor and material variances.Recording Materials VariancesRecording Labor Variances Cost Flows in a Standard Cost SystemInventories are recorded at standard cost.Variances are recorded as follows:Favorable variances are credits, representing savings in production costs.Unfavorable variances are debits, representing excess production costs.Standard cost variances are usually closed out to cost of goods sold.Unfavorable variances increase cost of goods sold.Favorable variances decrease cost of goods sold.End of Chapter 08