© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 CHAPTER 15 Budgetary Control © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 © 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., 9780470777640 Ch 1

Learning Objectives What is budgetary control and why it is important in the overall performance management process? How is a flexible budget different from a master budget? What are the key variances that companies identify when analyzing flexible budget results? How are variances interpreted? How does a company utilize variance information to provide better cost control? © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

What Is Budgetary Control? Ensuring that actual financial results are in line with targets Feedback: investigating variations between actual results and budgeted results and taking appropriate corrective action A favourable variance (F) occurs where income exceeds budget and/or expenses are lower than budget. An unfavourable variance (U) occurs where income is less than budget and/or expenses are greater than budget © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

Actual versus Budget Financial Report © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

Flexible Budgeting Budgeted or Standard costs per unit are applied to the actual level of business activity Flexible budgets provide a better basis for investigating variances, because the volume of production may differ from that planned Flexible budgets take into account variations in the volume of activity © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

Variance Analysis Comparing actual performance against plan, investigating the causes of the variance and taking corrective action to ensure that targets are achieved when: The variance is significant in terms of absolute dollar value and/or percentage The variance will likely occur again The cause of the variance is not easily identifiable The variance can be controlled through changes made to production processes, supplier selection processes, product-mix planning, marketing efforts, or other changes to the organization’s operational plans and strategies © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

Variance Analysis Types of variances 1. Sales variances: price and quantity variances 2. Direct material variances: price and efficiency variances 3. Labour variances: rate and efficiency variances 4. Overhead variances: variable spending and efficiency variances, and fixed spending and production volume variances © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

Variance Analysis - Example © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

Variance Analysis - Example © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

Variance Analysis - Example © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

Sales Variance Sales price variance is the difference between the actual price and the standard price for the actual quantity sold 9,000 x $5 = $45,000 F Sales quantity variance is the difference between the budget and actual quantity sold at the budgeted selling price 1,000 x $17 = $170,000 U © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 Cost Variances Each cost variance, for materials, labour, and overhead, can be split into two types A flexible budget variance The difference between the actual costs and the costs determined by the flexible budget A volume variance The difference between the flexible budget and the master budget © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 © 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., 9780470777640 Ch 1

© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 Cost Variances © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 © 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., 9780470777640 Ch 1

Price and Efficiency Variances Price variances (also called rate or spending variances) Occur because the cost per unit of resources is higher or lower than the standard cost Efficiency variances (also called usage variances) Occur because the actual quantity of materials, labour, or machine hours used is higher or lower than a company planned to use in the production process © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 © 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., 9780470777640 Ch 1

Price and Efficiency Variances © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 © 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., 9780470777640 Ch 1

Materials Price Variances Direct Materials Price Variances © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 © 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., 9780470777640 Ch 1

Materials Efficiency Variances © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 © 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., 9780470777640 Ch 1

Labour Rate Variances © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 © 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., 9780470777640 Ch 1

Labour Efficiency Variances © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 © 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., 9780470777640 Ch 1

Variable Overhead Spending Variance © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 © 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., 9780470777640 Ch 1

Variable Overhead Efficiency Variance © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 © 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., 9780470777640 Ch 1

Summary of Variances Total Materials Variance Efficiency $5,000 U Price 2,800 F Total $2,200 U Total Labour Variance Efficiency $7,500 U Rate 13,750 U Total $21,250 U Total Variable Overhead Variance Efficiency $5,000 U Spending 8,250 U Total $13,250 U © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 © 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., 9780470777640 Ch 1

Fixed Overhead Spending Variance © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 © 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., 9780470777640 Ch 1

Fixed Overhead Production Volume Variance © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15 © 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., 9780470777640 Ch 1

Understanding Variances Efficiency variances Poor productivity Poor production planning Out-of-date bill of materials or labour routing Poor quality material that requires greater skill to work The availability of labour with the right skills Price variances Changes in supplier prices not yet reflected in the bill of materials A negotiated wage increase that has not been included in the labour routing Poor purchasing practices Unplanned overtime © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

Cost Control Reducing costs while maintaining the same levels of productivity or maintaining costs while increasing levels of productivity Through economies of scale or efficiencies in producing goods or services Considered as cost improvement Cost improvement needs to be exercised by all budget holders to ensure that limited resources are effectively utilized and budgets are not overspent Can also be exercised by undertaking a review of horizontal business process © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

Conclusion Flexible Budgets Variance Analysis Sales price and quantity variances Price and efficiency variances Direct materials price variance Direct materials efficiency variance Direct labour rate variance Direct labour efficiency variance Variable overhead spending variance Variable overhead efficiency variance Fixed overhead spending variance Fixed production volume variance Cost control © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15