McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 15 Cost Control

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Cost Classification According to a Time-Frame Perspective Time Degree of Control Costs that may not be controllable in the short run are controllable in the long run. L O 1

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Performance Report Characteristics Activity Budget Amount Actual Amount Explanation – = Favorable Actual revenues > Budgeted revenues Actual costs < Budgeted costs Unfavorable Actual revenues < Budgeted revenues Actual costs > Budgeted costs Favorable Actual revenues > Budgeted revenues Actual costs < Budgeted costs Unfavorable Actual revenues < Budgeted revenues Actual costs > Budgeted costs Variance L O 2

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved To a budget for different activity levels, we must know how costs behave with changes in activity levels. Total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range. Fixed Variable The Flexible Budget L O 3

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Price Variance Standard Cost Variances The difference between the actual price and the standard price Usage Variance The difference between the actual quantity and the standard quantity Standard Cost Variance Analysis L O 4

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price VarianceUsage Variance Standard Cost Variance Analysis L O 4

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Materials Variances Summary Price variance $1,125 favorable Usage variance $1,470 unfavorable 22,500 yds. 22,500 yds. 21,800 yds. × × × $2.05 per yd. $2.10 per yd. $2.10 per yd. = $46,125 = $ 47,250 = $45,780 Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price L O 5

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Rate variance $381 unfavorable Efficiency variance $768 favorable Actual Hours Actual Hours Standard Hours × × × Actual Price Standard Price Standard Price 2,540 hours 2,540 hours 2,600 hours × × × $12.95 per hr. $12.80 per hr. $12.80 per hr. = $32,893 = $32,512 = $33,280 Labor Variances Summary L O 5

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Spending variance $0 Efficiency variance $192 favorable 2,540 hours 2,540 hours 2,600 hours × × × $3.20 per hour $3.20 per hour $3.20 per hour = $8,128 = $8,128 = $8,320 Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate Variable Overhead Variances Summary L O 5

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Analysis of Fixed Overhead Variances Estimated Fixed Overhead POHAR = Overhead costs are applied to products and services using a predetermined overhead application rate (POHAR): Applied Overhead = POHAR × Standard Activity Estimated Total Direct Labor Hours L O 6

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Analysis of Fixed Overhead Variances Budget Variance Volume Variance Results from paying more or less than expected for overhead items. Results from operating at an activity level different from the planned activity. L O 6

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Product cost included in Accounting for Variances Product cost allocated between Production inefficiency costs included in Current Period Cost Cost of Goods Sold Inventory Net Unfavorable Variance Insignificant Net Favorable Variance Significant Net Favorable Variance L O 7

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Cost Center Actual costs are compared to budgeted costs Profit Center Investment Center Actual Return on investment is compared to budgeted return on investment Evaluation Measures Actual segment margin is compared to budgeted segment margin Methods of Evaluating Segments Segment L O 8

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Analysis of Investment Centers Return on investment (ROI) is the ratio of segment margin to the investment used to generate the segment margin. ROI = Segment margin Divisional operating assets L O 9 Sales Operating assets ROI = Segment margin Sales × Margin Turnover

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Segment margin less required return on operating assets Residual Income – Another Measure L O 9 Segment margin – Required return = Residual income Operating assets × Required ROI = Required return

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Financial Perspective How do we look to the firm’s owners? Learning and Growth Perspective How can we continually improve and create value? Internal Business Process Perspective In which activities must we excel? Customer Perspective How do our customers see us? Integrated measures The Balanced Scorecard L O 9