1. Flexible Budgets, Direct-Cost Variances, and Management Control Dr. Hisham Madi

2. Journal Entries Using Standard Costs  Each variance may be journalized.  Favorable variances are credits; unfavorable variances are debits  The focusing is on direct materials and direct manufacturing labor

3. Journal Entries Using Standard Costs JOURNAL ENTRY 1A  Isolate the direct materials price variance at the time of purchase by increasing (debiting) Direct Materials Control at standard prices.

4. Journal Entries Using Standard Costs JOURNAL ENTRY 1B  Isolate the direct materials efficiency variance at the time the direct materials are used by increasing (debiting) Work-in-Process Control at standard quantities allowed for actual output units manufactured times standard prices

5. Journal Entries Using Standard Costs JOURNAL ENTRY 2:  Isolate the direct manufacturing labor price variance and efficiency variance at the time this labor is used by increasing (debiting) Work-in-Process Control at standard quantities allowed for actual output units manufactured at standard prices

6. Journal Entries Using Standard Costs  Variance accounts are generally closed into cost of goods sold at the end of the period, if immaterial

7. Standard Costs can be a Useful Tool  Managers and management accountants use variances to evaluate performance after decisions are implemented.  Variance analysis enables managers to evaluate the effectiveness of the actions and performance of personnel in the current period.  Standards are used to control costs  Part of a continuous improvement program

8. Benchmarking and Variance Analysis  Benchmarking is the continuous process of comparing the levels of performance in producing products and services against the best levels of performance in competing companies.  When benchmarks are used as standards, managers and management accountants know that the company will be competitive in the marketplace if it can attain the standards

9. Benchmarking and Variance Analysis  Companies develop benchmarks and calculate variances on items that are the most important to their businesses.  Consider the cost per available seat mile (ASM) for United Airlines; ASMs equal the total seats in a plane multiplied by the distance traveled, and are a measure of airline size.

10. Benchmarking and Variance Analysis

11. Thank You