Direct Input Variances, and Management Control: I

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Direct Input Variances,and Management Control I

• Chapter 7

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Overview

• Standards
• Variances
• Static vs. Flexible budgets
• Calculate variances for direct inputs (DM DL)
• EoP Adjustments
• When to investigate variances

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Standard Budget

• Here budgeted amount standard amount.
• We will use these terms interchangeably in this
  course.

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Variances

• Variance budgeted actual results
• If operating income is greater than expected
  (budget), then you have a favorable variance.
• Not all favorable variances are good.

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Static and Flexible Budgets
Planned level of output at start of the budget
period
Based on
Static Budget
Budgeted revenues and cost based on actual level
of output
Based on
Flexible Budget
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Example

• Calculate Variances

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Useful Format to Calculate DM and DL Variances

• Actual Noname Flexible Static
• Results Budget Budget Budget
• Actual input Actual input Flex-budget
  input Static-budget input
• X X
  X X
• Actual price Budget price Budget
  price Budget price
• 0,1 --------------- Static Budget
  Var.----------------
• 2 ----- Flexible Budget Var.------- Sales
  Volume Var. --
• 3 ---- Price -------- Usage ----

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Price Variance material
Direct-material price variance
Actual price Budgeted price
Actual Quantity used


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Price Variance labor
Direct-labor price variance
Actual price Budgeted price
Actual Quantity used


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Efficiency Variance DM
Direct-material efficiency variance
Actual quantity Standard quantity
Standard price


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Efficiency Variance labor
Direct-labor efficiency variance
Actual quantity Standard quantity
Standard price


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Example calculate variances

• The Boing Company (largest maker of toy
  airplanes) has provided you with the following
  data on burppa wood costs for 2004. Burppa wood
  rots very fast. All wood is used in the period
  in which it is purchased.
• Actual
  Budgeted
• Toy planes (units) 10,000 9,000
• Input (bd. ft.) 5,200 4,500
• Price (/bd. ft.) 0.49 0.50

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Calculation of Variances

• Please calculate the five variances for burppa
  wood
• Static-budget variance
• Flexible-budget variance
• Sales-volume variance
• Price variance
• Usage (efficiency) variance

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Performance MeasurementUsing Variances
Effectiveness is the degree to which
a predetermined objective or target is met.
Efficiency is the relative amount of inputs used
to achieve a given level of output.
Variances should not solely be used to evaluate
performance.
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End-of-period Adjustments

• Variance accounts are disposed of using one of
  the approaches outlined in chapter 4.
• W/O all to CoGS
• Prorate to CoGS, FG, WIP based on
• Ending total amount in accounts.
• amount of IDCost in the respective accounts.
• (Over- or under-allocated overhead is a variance)

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When to Investigate Variances
When should variances be investigated?
Subjective judgments
Rules of thumb as investigate all
variances exceeding 10,000 or 25 of expected
cost, whichever is lower.
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End of Chapter 7