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10 Standard Costs and Variance Analysis Chapter  Fewer units sold  Fewer units produced  DM and DL usage and prices are different than anticipated 

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Presentation on theme: "10 Standard Costs and Variance Analysis Chapter  Fewer units sold  Fewer units produced  DM and DL usage and prices are different than anticipated "— Presentation transcript:

1 10 Standard Costs and Variance Analysis Chapter  Fewer units sold  Fewer units produced  DM and DL usage and prices are different than anticipated  How do you compare? Comparison of Actual vs. Budget for Beal Manufacturing

2 Actual Static Budget Sales CGS Sell & Admin Var Fixed Gross Marg Oper Inc $1,800,000 1,252,213 108,000 271,000 $ 547,787 7500 units $ 168,787 $1,975,000 1,264,000 110,600 280,000 7900 units $ 320,400 $ 711,000 Comparing actual results to the static budget is not very useful.  Some of the difference is due to sales volume.  Some is due to inefficiency.  A flexible budget is helpful.

3 Actual Flexible Budget Static Budget Sales CGS Sell & Admin Var Fixed Gross Marg Oper Inc $1,800,000 1,252,213 108,000 271,000 $ 547,787 7500 units $ 168,787 $1,975,000 1,264,000 110,600 280,000 7900 units $ 320,400 $ 711,000 Flexible budget based on budgeted rates and actual units sold

4 Actual Flexible Budget Variance Flexible Budget Sales Volume Variance Static Budget Sales CGS Sell & Admin Var Fixed Gross Marg Oper Inc $1,800,000 1,252,213 108,000 271,000 $ 547,787 7500 units $ 168,787 $1,975,000 1,264,000 110,600 280,000 7900 units $ 320,400 $ 711,000 $1,875,000 1,200,000 105,000 280,000 $ 675,000 7500 units $290,000 Net impact of low sales volume. Deserves a closer look.

5 Actual DM DL Manuf OH Variable Fixed CG Manuf $120,120 585,460 236,590 363,410 7800 units $1,305,580 23,100 lbs $5.20 40,100 hrs $14.60 ? DM- input - price DL- input - price VOH - rate $5.90 Flexible Budget $ 117,000 585,000 234,000 320,000 $1,256,000 7800 units List the detail for actual production costs. List corresponding detail for a flexible budget.

6 Actual Price Variance Act Input x Budg Price Usage Variance Flexible Budget DM DL Manuf OH Variable Fixed CG Manuf $120,120 585,460 236,590 363,410 7800 units $1,305,580 23,100 lbs $5.20 40,100 hrs $14.60 $5.90 DM- input - price DL- input - price VOH - rate $ 117,000 585,000 234,000 320,000 $1,256,000 7800 units 23,400 lbs $5.00 39,000 hrs $15.00 $6.00

7 Actual Flexible Budget DM Usage Variance DM- input - price DL- input - price VOH - rate 7800 units 23,400 lbs $5.00 39,000 hrs $15.00 $6.00 23,100 lbs $5.20 40,100 hrs $14.60 $5.90 7800 units Diff in UsagexBudg Price Diff in PricexActual Used DM Price Variance Diff in PricexActual Purch or….. Quick Calculations for the CPA Exam

8 DL Usage Variance Diff in UsagexBudg Price Diff in PricexActual Used DL Price Variance Actual Flexible Budget DM- input - price DL- input - price VOH - rate 7800 units 23,400 lbs $5.00 39,000 hrs $15.00 $6.00 23,100 lbs $5.20 40,100 hrs $14.60 $5.90 7800 units Quick Calculations for the CPA Exam

9 DM Usage Variance $ 4,620 U $ 1,500 F DM Price Variance DL Usage Variance $16,040 F $16,500 U DL Price Variance Possible Causes of Variances

10  Unfavorable variances might indicate potential problems.  excessively high prices from suppliers  high defect rate  poor production scheduling  etc.  Favorable variances might indicate potential problems.  poor quality materials  workers lacking necessary skills  corners cut in production Understanding Variances

11  Problems might be beyond the control of the production manager.  poor product design  rush orders causing congestion Understanding Variances

12 Journal Entries to Record Variances Two ways of recording DM and DL  record DM and DL at actual cost (Chpt 3)  report variances in statements that compare actual to budget  record DM and DL at standard cost (Chpt 10)  record variances at time of transaction Raw Materials (25,000 @ $5)125,000 5,000 A/P (25,000 @ $5.20)130,000 Standard cost Actual cost

13 WIP (7,800 x 3 lbs x $5 / lb)117,000 1,500 Raw Mater (23,100 x $5 / lb)115,500 Standard usage WIP (7,800 x 5 hrs x $15 / hr)585,000 DL Price Variance Wages Pay. (40,100 x $14.60)585,460 DL Usage Variance Actual usage Standard usage and cost Actual usage and cost


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