1. 1 Adapted by Cynthia Fortin, CPA, CMA Introduction to Managerial Accounting, Brewer, Garrison,Noreen

2.  http://video.wileyaccountingupdates.com/20 11/06/15/standard-costs/ http://video.wileyaccountingupdates.com/20 11/06/15/standard-costs/ 2

3. Want to compare what actually happened with what should have happened 3

4. Develop Planning budgets before a period begins Adjust budgets to reflect actual level of activity => Flexible budget Compare Actual revenue and spending to flexible budgets => Evaluate performance Compute variances => Highlight significant problems Take corrective action to solve problems 4

5. 5 Computes what revenues and costs would have been given the actual level of activity

6. All costs are either variable or fixed with respect to level of activity 6

7. 7 1. Start with Master budget or Planned budget Income Statement 2. Compute per unit Budget sales price (BSP), Variable expenses (BV) 3. Identify Fixed expenses 4. Determine Actual quantities (AQ) of output 5. Compute Flexible Revenue = BSP * AQ 6. Compute Flexible Variable expenses = BV * AQ 7. Use Budget Fixed expenses 8. Compute Net Operating Income

8. 8 1. Start with Master budget or Planned budget Income Statement 2. Compute per unit Budget sales price (BSP), Variable expenses (BV) 3. Identify Fixed expenses 4. Determine Actual quantities (AQ) of output 5. Compute Flexible Revenue = BSP * AQ 6. Compute Flexible Variable expenses = BV * AQ 7. Use Budget Fixed expenses 8. Compute Net Operating Income

9. 9 Day 13 mix Chap008 Qianqianhai fish house.xlsx

10. The Revenue variance = Actual Revenue – Flexible Budget Revenue The Spending variance = Actual spending - Flexible budget spending. 10

11.  Developed at all levels during the planning process  DM (weight, units, length, price per unit of measure)  DL (wages, taxes, benefits, mix of workers, rate per hour, labor time)  Variable manufacturing OH (rates, allocation basis) 11

12. Examples: Standard quantity of materials = 2 kg. per unit Standard cost of materials = $8 per kg. Standard cost of materials = $16 per unit 12

13.  Direct materials: 2sq metres at $30 per sq metre = $60 per jacket  Direct mfg labour: 0.8 mfg labour-hours of input allowed per output unit manufactured at $20 standard cost per hours = $16 per jacket manufactured.  Direct marketing labour: 0.25 marketing labour-hour of input allowed per output unit sold at $24 standard cost per hour: $6 per jacket sold. 13

14.  Variable mfg o/h: Allocated based on 1.20 machine-hours per output unit mfg at $10 standard cost per machine-hour: $12 per unit manufactured.  Variable marketing overhead: Allocated based on 0.125 direct marketing l-h per output unit sold at $40 standard cost per hour: $5 per output unit sold. 14

15. Standard Quantity Actual Quantity of input Actual Quantity of input allowed X actual output × × × Standard Price Standard Price Actual Price Efficiency VariancePrice Variance 15

16. 20,000 metres 22,200 metres 22,200 metres × × × $30 / metre $30 / metre $31 / metre Efficiency Variance Price Variance Material spending Variance $66,000U$22,200U $88,200U 16 $600,000 $666,000$666,000 $688,200

17. ActualBudget Direct22,200 sq metres20,000 sq metres materials$31 per metre$30 per metre Price variance = (Actual price – Budgeted price) x Actual quantity used =($31 – $30) x 22,200 = $22,200 U Efficiency (Usage) variance =(Actual quantity used – Budgeted quantity used) x Budgeted price =(22,200 – 20,000) x $30 = $66,000 U 17

18. ActualBudget Manufacturing9,000 hours8,000 hours labour$22 per hour$20 per hour Price (or rate) variance = (Actual price – Budgeted price) x Actual quantity used =($22 – $20) x 9,000 = $18,000 U Efficiency variance =(Actual quantity used – Budgeted quantity used) x Budgeted price =(9,000 – 8,000) x $20 = $20,000 U 18

19. Unfavorable Price Variance Poorly maintained equipment Higher rates than expected Overtime due to rework or poor material Employee mix with more experienced staff 19

20. ActualBudget Marketing2,304 hours2,500 hours labour$25 per hour$24 per hour Price (or rate) variance = (Actual price – Budgeted price) x Actual quantity used =($25 – $24) x 2,304 = $2,304 U Efficiency variance =(Actual quantity used – Budgeted quantity used) x Budgeted price =(2,304 – 2,500) x $25 = $4,704 F 20

21. Unfavorable Efficiency Variance Poorly maintained equipment Poorly trained workers Poor quality materials Poor supervision of workers 21

22. Webb’s personnel manager hired under- skilled workers or their training was inadequate. Webb’s production process is being reorganized or a new machine has been installed, creating addition direct manufacturing time per jacket while the workers learn the new process, etc. 22

23.  Each variance may be journalized  Each variance has its own account  Favorable variances are credits; Unfavorable variances are debits  Variance accounts are generally closed into Cost of Goods Sold at the end of the period, if immaterial 23

24. Variances  Used to evaluate performance  Indicate that something was different than expected  Critical to understand why ( the causes) significant variances arise and use this knowledge to promote learning and continuous improvement 24

25. 25 Effectiveness The degree to which organization’s predetermined goals are met Efficiency How well inputs were used in relation to a given level of output

26. 1. Always consider possible interdependencies among variances; do not interpret them in isolation. 2. Use broad perspective of actions taken in the supply chain of organizations (supply chain: flow of goods, services, and information from beginning to end of a product or service). 3. Note that improvements in early stages of supply chain can sizably reduce magnitude of variances in subsequent stages. 26

27. 27 4. Understand why variances arise and use knowledge to promote learning and continuous improvement –most important task in variance analysis 5. Emphasize total organizational objectives by design of performance measurement and reward system by top management 6. Use cost-benefit test to decide when and which variances should be investigated 7. Realize that the standard is a range of possible acceptable outcomes

28. Conduct next period’s operations Prepare report to management and new Budget Determine and analyze variances Query ‘material’ variances Develop explanations Corrective actions implemented Begin 28