1. COST ANALYSIS FOR CONTROL
CHAPTER 15
COST ANALYSIS FOR CONTROL
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2. Learning Objectives
Why are all costs controllable by someone at some time, but in the short run some costs may be classified as noncontrollable?
How does performance reporting facilitate the management-by-exception process?
How can the operating results of segments of an organization be reported most meaningfully?
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3. Learning Objectives What is a flexible budget, and how is it used?
How and why are the two components of a standard cost variance calculated?
What are the specific names assigned to variances for different product inputs?
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4. Learning Objectives
How do the control and analysis of fixed overhead variances and variable cost variances differ?
What are the alternative methods of accounting for variances?
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5. Learning Objective 1
Why are all costs controllable by someone at some time, but in the short run some costs may be classified as noncontrollable?
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6. Performance Reporting
Involves the comparison of actual results with planned results
The objective is highlighting those activities where planned and actual results differ
Appropriate actions may be taken to address the causes of the favorable or unfavorable variances
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7. Planning and Control Cycle
Strategic, Operational, and Financial Planning
Planning and Control Cycle
Performance Analysis: Plans vs. Actual Results (Controlling)
Executing Operational Activities (Managing)
Revisit Plans
Implement Plans
Data Collection and Performance Feedback
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8. Relationship of Total Costs to Volume of Activity
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Any differences between achieved and planned performances should be evaluated
As the level of activity changes from the planned activity, total variable costs should change
The total amount of fixed costs should not change with changes in levels of activity
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9. Cost Classification According to a Time-Frame Perspective
A noncontrollable cost is one which the manager can do nothing to influence the amount of the cost
Noncontrollable costs occur in the short run
In the long run every cost is controllable by someone in the organization
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10. Learning Objective 2
How does performance reporting facilitate the management-by-exception process?
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11. Characteristics of the Performance Report
A performance report compares actual results to budgeted amounts
It is an integral part of the control process
The general format is as follows: Budget Actual Activity Amount Amount Variance Explanation
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12. Variances
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Variances are usually described as either favorable or unfavorable
A favorable variance occurs when results exceed planned activities in a positive manner – revenues are larger than expected
An unfavorable variance occurs when results exceed planned activities in a negative manner – expenses are larger than expected
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13. Responsibility Reporting
The explanation column in the performance report is to communicate to upper-level management the causes of variances
In responsibility reporting, higher levels of management receive less details regarding lower levels in the chain of command
Managers want to eliminate unfavorable variances and retain favorable variances
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14. Management by Exception
Managers concentrate their efforts only on those activities that are not performing according to the plan
To aid in this effort, variances are often expressed in percentages
Only those variances that exceed a predetermined percentage are investigated
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15. Frequency of Performance Reports
Performance reports should be issued soon after the period in which the activity takes place
If later, actions are forgotten or confused
A question regarding performance reports is whether noncontrollable expenses should be reported
May want managers to be aware of all costs, or may want managers to deal only with controllable costs
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16. Learning Objective 3
How can the operating results of segments of an organization be reported most meaningfully?
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17. Reporting for Segments of an Organization
A segment is a division, product line, or other organizational unit
Using the contribution margin format, sales, variable expenses, contribution margin, fixed expenses, and operating income are calculated for each segment
Fixed expenses should be divided into direct fixed expenses and common fixed expenses
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18. Segment Fixed Expenses
Direct fixed expenses would be eliminated if the segment were eliminated
Common fixed expenses are an allocated portion of the organization’s fixed expenses
Common fixed expenses would not be eliminated if the segment were eliminated
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19. Types of Segments
A responsibility center is an element of the organization over which a manager has responsibility and authority
Cost center – does not generate revenue for the organization
Profit center – generates revenue for the organization
Investment center – generates revenue and controls assets of the organization
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20. Evaluating Segments
Cost centers are evaluated by comparing actual costs incurred to budgeted costs
Profit centers are evaluated by comparing actual segment margin to budgeted segment margin
Investment centers are evaluated by comparing actual and budgeted return on investment based on segment margin and assets controlled by the segment
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21. Learning Objective 4 What is a flexible budget, and how is it used?
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22. Flexible Budget
A flexible budget is one that reflects budgeted amounts for actual activity
Flexible budgeting does not affect the predetermined overhead application rate
Therefore, fixed overhead will be overapplied or underapplied
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23. Learning Objective 5
How and why are the two components of a standard cost variance calculated?
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24. Analysis of Variable Cost Variances
The total variance for a cost component is called the budget variance
The budget variance is caused by two factors:
The difference between the standard and actual quantity
The difference between the standard and actual unit cost
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25. Variance Terminology
Different variances are the responsibility of different managers
Must separate total variances so that each manager can take appropriate action
Quantity variances often called usage or efficiency variances
Cost per unit of input variances often called price, rate, or spending variances
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26. Direct Labor Variances
Direct labor efficiency variance is the quantity variance for direct labor
The direct labor efficiency variance is the difference between standard hours allowed and actual hours worked
Direct labor rate variance is the cost per unit of input variance
The direct labor rate variance is the difference between actual and standard hourly pay rates
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27. Learning Objective 6
What are the specific names assigned to variances for different product inputs?
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28. Variance Names
Cost per unit Input Quantity of Input Raw materials Usage Price Direct labor Efficiency Rate Variable overhead Efficiency Spending
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29. General Variance Model
Quantity variance = Standard Actual Standard quantity - quantity X cost per allowed used unit
Cost per unit of input variance = Standard Actual Standard quantity - quantity X cost per allowed used unit
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30. Graphical Representation
Actual quantity used Actual quantity used Standard quantity allowed X X X
Actual cost per unit Standard cost per unit Standard cost per unit
Cost per unit of
Input variance
Quantity
variance
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31. Variance Analysis Objectives
Objective is to highlight deviations from planned results
Want to eliminate unfavorable variances and capture favorable variances
Need to analyze variances for each standard
Usually raw materials usage variances and direct labor efficiency variances are reported frequently
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32. Raw Materials Purchase Variance
Many firms calculate and report raw materials price variances at the time the materials are purchased rather than when they are used
Modified purchase price variance: Standard Actual Actual cost per - cost per X quantity unit unit purchased
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33. Learning Objective 7
How do the control and analysis of fixed overhead variances and variable cost variances differ?
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34. Analysis of Fixed Overhead
Analyzed differently from variable cost variances
The focus is on the difference budgeted fixed overhead and actual fixed overhead expenditures
This difference is divided into a budget variance and a volume variance
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35. Fixed Overhead Volume Variance
Volume variance is the difference between the amount of fixed overhead applied to production and that planned to be applied
It is not appropriate to make per unit fixed overhead variance calculations because fixed costs do not behave on a per unit basis
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36. Fixed Overhead Budget Variance
The budget variance is the difference between budgeted fixed overhead for the period and the actual fixed overhead for the period
Fixed overhead is difficult to control on a short-term basis
But is a significant cost, so it receives management’s attention
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37. Learning Objective 8
What are the alternative methods of accounting for variances?
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38. Accounting for Variances
If the total of all of the variance is not significant, it is included with cost of goods sold in the income statement
Standard costs also are released to cost of goods sold
Therefore, cost of goods sold reports the actual cost of the items
If variances are large, the variances are allocated between inventory and cost of goods sold
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