Tài chính kế toán - Chapter 11: Standard costs for control: flexible budgets and manufacturing overhead

Chapter 11Standard costs for control: flexible budgets and manufacturing overhead11-1Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithOutlineFlexible budgetsInput measures and output measuresOverhead application in a standard costing systemCalculating and interpreting overhead cost variancesStandard costs for product costingAn appraisal of standard costing systemsCriticisms and advantagesActivity-based budgeting11-2Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithFlexible budgetsA detailed budget prepared for a range of levels of activitiesCompared to a static budget which relates to one specific planned level of activityOften restricted to flexing overhead costs to various levels of activityAllow us to select the most appropriate benchmark for cost controlProvide a valid basis for comparing actual and expected costs, for the actual level of activity11-3Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith11-4Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithInput measures and output measuresUnits of output are not usually a meaningful measure of the level of activity in a multi-product firmOutput can be measured as the standard quantity of input allowed, given actual outputMachine hoursDirect labour hoursThe choice between input or output measures becomes important when multiple products are being manufactured11-5Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithFlexible overhead budgetFlexible budget report: shows flexible overhead budgets at various levels of activityFormula flexible budget: allows us to calculate total overhead at various levels of activity using a formula11-6Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith11-7Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithOverhead application in a standard costing systemOverhead application is the method of allocating overhead cost to productsRecorded in the WIP inventory accountOverhead is applied to inventory using the standard overhead rateBased on the standard quantity of input allowed, given actual outputThe activity chosen for the standard overhead rate should be a cost driverAny activity or factor that causes costs to be incurred11-8Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithCalculating overhead cost variancesThe flexible budget provides a tool for controlling manufacturing overhead costsAt the end of an accounting period, the flexible budget can be used to calculate the amount of overhead cost that should have been incurred, given the actual level of activityFour different overhead variances can be calculated to compare the actual overhead cost incurred with the flexible budget11-9Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithCalculating variable overhead cost variances11-10Variable overhead spending varianceA measure of the difference between the actual variable overhead and the standard variable overhead rate multiplied by actual activity = Actual variable overhead – (AH × SVR)Where AH = actual direct labour hours SVR = standard variable overhead rate(cont.)Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithCalculating variable overhead cost variances (cont.)11-11Variable overhead efficiency varianceA measure of the difference between the actual activity and the standard activity allowed, given the actual output multiplied by the standard variable overhead rate = SVR(AH – SH)Where SH = standard direct labour hours allowed for actual output AH = actual direct labour hours SVR = standard variable overhead rateCopyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith11-12Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithInterpreting variable overhead variancesSpending varianceActual cost of variable overhead is greater/less than expected, after adjusting for the actual quantity of cost driver that is usedUsed to control variable overhead costEfficiency variance The cost effects of excessive or minimal use of the particular activity (cost driver)The spending variance is the real control variance for variable overhead11-13Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithCalculating fixed overhead variancesFixed overhead budget varianceThe difference between actual fixed overhead and budgeted fixed overhead= actual fixed overhead – budgeted fixed overhead Fixed overhead volume variance The difference between budgeted fixed overhead and fixed overhead applied to production= budgeted fixed overhead – applied fixed overhead 11-14Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith11-15Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithInterpreting fixed overhead variancesFixed overhead budget varianceUsed for controlAssumes fixed overhead will not change as activity variesFixed overhead volume variance Standard cost driver allowed for actual output is more/less than the planned level of productionReconciles the two purposes of costing systems: product costing and cost control11-16Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith11-17Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithStandard costs for product costingCosts of direct material, direct labour and manufacturing overhead are all charged to inventory at standard costs, not actual costsVariances are closed off at end of the accounting periodTo cost of goods sold expenseProrate between WIP, FG and COGS inventory if the amount is large11-18Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithCriticisms of standard costing systemsVariances are too aggregated and concentrate on consequences rather than the causes of problemsVariance reports are too late to be usefulMonthly reporting may be too late to correct problemsStandard costing systems tend to focus too heavily on cost minimisationMay encourage cost reduction which can adversely affect other areas of strategic importance11-19Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Criticisms of standard costing systems (cont.)11-20Standard costing systems take a departmental perspective rather than a process perspectiveMiss opportunities for cost controlControlling one department’s costs may increase costs in other departmentsToo much emphasis is placed on the cost and efficiency of direct labourThis is of decreasing importance in the face of increasing automationOverhead variances give limited cost control informationCopyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Criticisms of standard costing systems (cont.)11-21Variance analysis does not explicitly encourage continuous improvementDue to 12-month standardsStandard costs become outdated quickly due to shorter product life cyclesStandard costing systems do not capture the full costs of materialsThe full cost of ownership includes cost of ordering and paying for materials, storage, handling, reworkCopyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithAdvantages of standard costingProvides a good basis for cost comparisonsParticularly with the use of flexible budgetsEnables managers to use management by exceptionFocus only on those variances that are significant and save management timeProvides a basis for managerial performance evaluation and determining bonuses11-22Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Advantages of standard costing (cont.) Participation in setting standards and assigning responsibility can have motivational effects on employees May lead to more stable product costs compared to using actual costsUseful for pricing and setting product mixCan be used for external financial reporting11-23Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithActivity-based budgetingA process of building up budgets from the major activities of the businessUses principles of ABC to estimate a firm’s future demand for resourcesABB works in reverse to ABCStart with analysis of the market, estimate sales demand, estimate production activities, required level of production and resources11-24Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)11-25Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith11-26Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithActivity-based budgeting (cont.)Inaccuracies in ABB may include the following:Spending versus consumption of resourcesThe cost of unused resources are not included in ABC product costsEstimates of non-manufacturing activities may be distortedShared resources may not be accounted for accuratelyInformation requirements for ABB are high compared to traditional budgeting systems11-27Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Activity-based budgeting (cont.)Performance evaluation under ABBNeed to compare actual activity costs to budgeted costsBudgeted costs should be based on flexible budgets which show the budgeted cost of activities as various cost drivers changeComplexity would make it difficult to prepare an information reportSuch flexible budgets have the potential to be very complex and costly to design and maintain, with difficulties relating to data collection11-28Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithSummaryA flexible budget can be used to control manufacturing costs, based on a range of different levels of activityCost variances can be calculated for variable and fixed overheads, but their usefulness for controlling overhead costs can be questionedStandard costing systems have been criticised in the light of more modern methods for controlling costs and evaluating performanceActivity-based budgeting may provide more accurate benchmarks than a flexible budget, but may be complex and costly to implement11-29Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith