Cost accounting
Rawan ageeli
module_3-_acct_315.pptxACCT 315 COST ACCOUNTING
MODULE 3
Flexible Budgets, Direct-Cost Variances, Overhead Cost Variances and Management Control
(Chapter 7 & 8)
YANBU UNIVERSITY COLLEGE
Management Science Department
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© Yanbu University College
1
Discuss static budget and static budget variance
Calculate flexible-budget variances and sales volume variances
Explain why standard costs are often used in variance analysis
Calculate price and efficiency variances for direct cost categories
Describe benchmarking and explain its role in cost management
Learning Objectives For This Module
Slide 2
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Learning Objectives For This Module
Explain how managers plan for variable overhead costs and fixed overhead costs.
Calculate the budgeted variable overhead and budgeted fixed overhead rates
Compute the variable overhead flexible budget variance, the variable overhead efficiency variance and the variable overhead spending variance
Compute the fixed overhead flexible budget variance, the fixed overhead efficiency variance and the fixed overhead production volume variance
Slide 3
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Illustrate how the 4 variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period
Explain the relationship between the sales volume variance and the production-volume variance
Learning Objectives For This Module
Slide 4
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Objective 1
WHAT IS STATIC BUDGET AND STATIC BUDGET VARIANCE?
Slide 5
YANBU UNIVERSITY COLLEGE
Management Science Department
© Yanbu University College
© Yanbu University College
BASIC CONCEPTS
Variance—difference between an actual and an expected (budgeted) amount.
Management by exception—the practice of focusing attention on areas not operating as expected (budgeted).
Static (master) budget is based on the output planned at the start of the budget period.
Slide 6
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Static-budget variance (Level 0)—the difference between the actual result and the corresponding static budget amount
Favorable variance (F)—has the effect of increasing operating income relative to the budget amount
Unfavorable variance (U)—has the effect of decreasing operating income relative to the budget amount
BASIC CONCEPTS
Slide 7
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Variances
Variances may start out “at the top” with a Level 0 analysis.
This is the highest level of analysis, a super-macro view of operating results.
The Level 0 analysis is nothing more than the difference between actual and static-budget operating income.
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8
Variances
Further analysis decomposes (breaks down) the Level 0 analysis into progressively smaller and smaller components.
Answers: “How much were we off?”
Levels 1, 2, and 3 examine the Level 0 variance into progressively more-detailed levels of analysis.
Answers: “Where and why were we off?”
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9
Level 1 Analysis, Illustrated
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10
Evaluation
Level 0 tells the user very little other than how much contribution margin was off from budget.
Level 0 answers the question: “How much were we off in total?”
Level 1 gives the user a little more information: it shows which line-items led to the total Level 0 variance.
Level 1 answers the question: “Where were we off?”
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11
OBJECTIVE 2
WHAT IS A FLEXIBLE BUDGET AND HOW CAN WE DEVELOP A FLEXIBLE BUDGET ?
Slide 12
YANBU UNIVERSITY COLLEGE
Management Science Department
© Yanbu University College
© Yanbu University College
Flexible Budget
Flexible budget—shifts budgeted revenues and costs up and down based on actual operating results (activities)
Represents a blending of actual activities and budgeted dollar amounts
Will allow for preparation of Level 2 and 3 variances
Answers the question: “Why were we off?”
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13
OBJECTIVE 3
CALCULATE FLEXIBLE BUDGET VARIANCE AND SALES VOLUME VARIANCE
Slide 14
YANBU UNIVERSITY COLLEGE
Management Science Department
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© Yanbu University College
Level 2 Analysis, Illustrated
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15
Level 3 Analysis, Illustrated
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16
Level 3 Variances
All product costs can have Level 3 variances. Direct materials and direct labor will be handled next. Overhead variances are discussed in detail in a later chapter.
Both direct materials and direct labor have both price and efficiency variances, and their formulae are the same.
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Variance Summary
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18
Level 3 Variances
Price variance formula:
Efficiency variance formula:
(c) 2012 Pearson Prentice Hall. All rights reserved.
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19
Variances and Journal Entries
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.
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20
OBJECTIVE 4
WHY STANDARD COSTS ARE USED IN VARIANCE ANALYSIS?
Slide 21
YANBU UNIVERSITY COLLEGE
Management Science Department
© Yanbu University College
© Yanbu University College
What is a standard Cost system?
A standard cost system is a method of setting cost targets and evaluating performance.
Targets or expected costs are set based on a variety of criteria, and actual performance relative to expected targets is measured.
Significant differences between expectations and actual results are investigated.
Standard cost systems are a means of helping managers with decision making and control.
Slide 22
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Standard Costing
Targets or standards are established for direct material and direct labor.
The standard costs are recorded in the accounting system.
Actual price and usage amounts are compared to the standard and variances are recorded.
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23
Standard Costs can be a Useful Tool
Price and efficiency variances provide feedback to initiate corrective actions.
Standards are used to control costs.
Managers use variance analysis to evaluate performance after decisions are implemented.
Part of a continuous improvement program.
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24
OBJECTIVE 5
HOW MANAGERS USE VARIANCE?
Slide 25
YANBU UNIVERSITY COLLEGE
Management Science Department
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© Yanbu University College
MANAGEMENT USES OF VARIANCE
TO EVALUATE PERFORMANCE AFTER DECISIONS ARE IMPLEMENTED
CAUSES OF VARIANCE
POOR DESIGN OF PRODUCT OR PROCESSES
POOR WORK ON PRODUCTION LINE
INAPPROPRIATE ASSIGNMENT OF LABOR OR MACHINE
CONGESTION DUE TO SCHEDULING LARGE NUMBER OF ORDERS
WHEN TO EVALUATE
PERFORMANCE MEASUREMENT
EFFECTIVENESS
EFFICIENCY
TO TRIGGER ORGANIZATION LEARNING
CONTINOUS IMPROVEMENT
Slide 26
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OBJECTIVE 6
WHAT IS BENCHMARKING AND ITS ROLE IN COST MANAGEMENT.
Slide 27
YANBU UNIVERSITY COLLEGE
Management Science Department
© Yanbu University College
© Yanbu University College
Benchmarking and Variances
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.
Variances can be extended to include comparison to other entities.
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Benchmarking Example: Airlines
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OBJECTIVE 7
HOW MANAGERS PLAN VARIABLE OVERHEAD COSTS AND FIXED OVERHEAD COSTS?
YANBU UNIVERSITY COLLEGE
Management Science Department
© Yanbu University College
© Yanbu University College
30
Planning and Overhead
Variable overhead—as efficiently as possible, plan only essential activities
Fixed overhead—as efficiently as possible, plan only essential activities, especially because fixed costs are predetermined well before the budget period begins
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Standard Costing
Traces direct costs to output by multiplying the standard prices or rate by the standard quantities of inputs allowed for actual outputs produced
Allocates overhead costs on the basis of the standard overhead-cost rates times the standard quantities of the allocation bases allowed for the actual outputs produced
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OBJECTIVE 8
HOW ARE BUDGETED VARIABLE OVERHEAD AND BUDGETED FIXED OVERHEAD RATES CALCULATED?
Slide 33
YANBU UNIVERSITY COLLEGE
Management Science Department
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© Yanbu University College
A Roadmap: Variable Overhead
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34
A Roadmap: Fixed Overhead
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35
Overhead Variances
Overhead is the most difficult cost to manage, and is the least understood.
Overhead variances involve taking differences between equations as the analysis moves back and forth between actual results and budgeted amounts.
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36
OBJECTIVE 9
HOW TO DEVELOP BUDGETED VARIABLE OVERHEAD COSTS RATE?
Slide 37
YANBU UNIVERSITY COLLEGE
Management Science Department
© Yanbu University College
© Yanbu University College
Developing Budgeted Variable Overhead Cost Rates
Choose the period to be used for the budget.
Select the cost-allocation bases to use in allocating variable overhead costs to output produced.
Identify the variable overhead costs associated with each cost-allocation base.
Compute the rate per unit of each cost-allocation base used to allocate variable overhead costs to output produced.
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The Details: Variable OH Variances
Variable overhead flexible-budget variance measures the difference between actual variable overhead costs incurred and flexible-budget variable overhead amounts.
(c) 2012 Pearson Prentice Hall. All rights reserved.
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39
The Details: Variable OH Variances
Variable overhead efficiency variance is the difference between actual quantity of the cost-allocation base used and budgeted quantity of the cost per unit of the cost-allocation base.
(c) 2012 Pearson Prentice Hall. All rights reserved.
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40
The Details: Variable OH Variances
Variable overhead spending variance is the difference between actual and budgeted variable overhead cost per unit of the cost-allocation base, multiplied by actual quantity of variable overhead cost-allocation base used for actual output.
(c) 2012 Pearson Prentice Hall. All rights reserved.
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41
OBJECTIVE 10
HOW TO DEVELOP BUDGETED FIXED OVERHEAD COSTS RATE?
42
YANBU UNIVERSITY COLLEGE
Management Science Department
© Yanbu University College
© Yanbu University College
Developing Budgeted Fixed Overhead Cost Rates
Choose the period to be used for the budget.
Select the cost-allocation bases to use in allocating fixed overhead costs to output produced.
Identify the fixed overhead costs associated with each cost-allocation base.
Compute the rate per unit of each cost-allocation base used to allocate fixed overhead costs to output produced.
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43
The Details: Fixed OH Variances
Fixed overhead flexible-budget variance is the difference between actual fixed overhead costs and fixed overhead costs in the flexible budget.
This is the same amount for the fixed overhead spending variance.
(c) 2012 Pearson Prentice Hall. All rights reserved.
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44
The Details: Fixed OH Variances
Production-volume variance is the difference between budgeted fixed overhead and fixed overhead allocated on the basis of actual output produced.
This variance is also known as the denominator-level variance or the output-level overhead variance.
(c) 2012 Pearson Prentice Hall. All rights reserved.
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45
Production-Volume Variance
Interpretation of this variance is difficult due to the nature of the costs involved and how they are budgeted.
Fixed costs are by definition somewhat inflexible. While market conditions may cause production to flex up or down, the associated fixed costs remain the same.
Fixed costs may be set years in advance, and may be difficult to change quickly.
Contradiction: Despite this, examination of the fixed overhead budget formulae reveals that it is budgeted similar to a variable cost.
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LET US NOW SEE THE ILLUSTRATION
Slide 47
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Variable Overhead Variance Analysis Illustrated
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48
Fixed Overhead Variance Analysis Illustrated
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49
Production-Volume Variance
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50
Integrated Variance Analysis Illustrated
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Slide 52
END OF LECTURE
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PriceActual PriceBudgeted PriceActual Quantity
VarianceOf InputOf InputOf Input
X
=
{
-
}
EfficiencyActual QuantityBudgeted Quantity of Input Budgeted Price
VarianceOf Input UsedAllowed for Actual Output Of Input
X
=
{
-
}
Level 1
| Static-Budget | |||||
| Actual Results | Variances | Static Budget | |||
| Units Sold | 100 | 10 | F | 90 | |
| Revenues | $ 3,500 | $ 800 | F | $ 2,700 | |
| Variable Costs: | |||||
| Direct Materials | 700 | 160 | U | 540 | |
| Direct Labor | 1,000 | 100 | U | 900 | |
| Variable Factory Overhead | 500 | (40) | F | 540 | |
| Contribution Margin | 1,300 | 580 | F | 720 | |
| Fixed Costs | 600 | (100) | F | 700 | |
| Operating Income | $ 700 | $ 680 | F | $ 20 |
Operating Indicators
| Actual | Static | |||
| Indicator | Results | Budget | ||
| Units Sold | 100 | 90 | ||
| Selling Price | $ 35 | $ 30 | ||
| Direct Material Cost per Unit | $ 7 | $ 6 | ||
| Direct Labor Cost per Unit | $ 10 | $ 10 | ||
| Variable Manufacturing Overhead per Unit | $ 5 | $ 6 | ||
| Fixed Costs | $ 600 | $ 700 |
Level 3
| Price | = | { | Actual Price | - | Budgeted Price | } | X | Actual Quantity | Efficiency | = | { | Actual Quantity | - | Budgeted Quantity of Input | } | X | Budgeted Price | ||
| Variance | Of Input | Of Input | Of Input | Variance | Of Input Used | Allowed for Actual Output | Of Input |
Level 2
| Flexible-Budget | Sales-Volume | |||||||
| Actual Results | Variances | Flexible Budget | Variances | Static Budget | ||||
| Units Sold | 100 | - 0 | N/A | 100 | 10 | F | 90 | |
| Revenues | $ 3,500 | $ 500 | F | $ 3,000 | $ 300 | F | $ 2,700 | |
| Variable Costs: | ||||||||
| Direct Materials | 700 | 100 | U | 600 | 60 | U | 540 | |
| Direct Labor | 1,000 | - 0 | N/A | 1,000 | 100 | U | 900 | |
| Variable Factory Overhead | 500 | (100) | F | 600 | 60 | U | 540 | |
| Contribution Margin | 1,300 | 500 | F | 800 | 80 | F | 720 | |
| Fixed Costs | 600 | (100) | F | 700 | - 0 | N/A | 700 | |
| Operating Income | $ 700 | $ 600 | F | $ 100 | $ 80 | F | $ 20 |
Level 1
| Static-Budget | |||||
| Actual Results | Variances | Static Budget | |||
| Units Sold | 100 | 10 | F | 90 | |
| Revenues | $ 3,500 | $ 800 | F | $ 2,700 | |
| Variable Costs: | |||||
| Direct Materials | 700 | 160 | U | 540 | |
| Direct Labor | 1,000 | 100 | U | 900 | |
| Variable Factory Overhead | 500 | (40) | F | 540 | |
| Contribution Margin | 1,300 | 580 | F | 720 | |
| Fixed Costs | 600 | (100) | F | 700 | |
| Operating Income | $ 700 | $ 680 | F | $ 20 |
Operating Indicators
| Actual | Static | |||
| Indicator | Results | Budget | ||
| Units Sold | 100 | 90 | ||
| Selling Price | $ 35 | $ 30 | ||
| Direct Material Cost per Unit | $ 7 | $ 6 | ||
| Direct Labor Cost per Unit | $ 10 | $ 10 | ||
| Variable Manufacturing Overhead per Unit | $ 5 | $ 6 | ||
| Fixed Costs | $ 600 | $ 700 |
Level 3
| Price | = | { | Actual Price | - | Budgeted Price | } | X | Actual Quantity | Efficiency | = | { | Actual Quantity | - | Budgeted Quantity of Input | } | X | Budgeted Price | ||
| Variance | Of Input | Of Input | Of Input | Variance | Of Input Used | Allowed for Actual Output | Of Input |
Level 2
| Flexible-Budget | Sales-Volume | |||||||
| Actual Results | Variances | Flexible Budget | Variances | Static Budget | ||||
| Units Sold | 100 | - 0 | N/A | 100 | 10 | F | 90 | |
| Revenues | $ 3,500 | $ 500 | F | $ 3,000 | $ 300 | F | $ 2,700 | |
| Variable Costs: | ||||||||
| Direct Materials | 700 | 100 | U | 600 | 60 | U | 540 | |
| Direct Labor | 1,000 | - 0 | N/A | 1,000 | 100 | U | 900 | |
| Variable Factory Overhead | 500 | (100) | F | 600 | 60 | U | 540 | |
| Contribution Margin | 1,300 | 500 | F | 800 | 80 | F | 720 | |
| Fixed Costs | 600 | (100) | F | 700 | - 0 | N/A | 700 | |
| Operating Income | $ 700 | $ 600 | F | $ 100 | $ 80 | F | $ 20 |
Actual Costs
Incurred:
Actual Input
X
Actual Rate
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
X
Budgeted Rate
Actual Inputs
X
Budgeted Rate
Allocated:
Budgeted
Input Allowed for
Actual Output
X
Budgeted Rate
Spending
Variance
Efficiency
Variance
Never a
Variance
Never a
Variance
Flexible-Budget
Variance
Total Variable Overhead Variance
Over/Under Allocated Variable Overhead
Actual Costs Incurred: Actual Input X Actual Rate
Flexible Budget: Budgeted Input Allowed for Actual Output X Budgeted Rate
Actual Inputs X Budgeted Rate
Allocated: Budgeted Input Allowed for Actual Output X Budgeted Rate
Spending Variance
Efficiency Variance
Never a Variance
Never a Variance
Flexible-Budget Variance
Total Variable Overhead Variance Over/Under Allocated Variable Overhead
Actual Costs
Incurred
Flexible Budget:
Same Budgeted
Lump Sum (as in
Static Budget)
Regardless of
Output Level
Same Budgeted
Lump Sum
(as in Static
Budget)
Regardless of
Output Level
Allocated:
Budgeted
Input Allowed for
Actual Output
X
Budgeted Rate
Spending
Variance
Flexible-Budget
Variance
Total Fixed Overhead Variance
Over/Under Allocated Fixed Overhead
Never a
Variance
Production-
Volume
Variance
Production-
Volume
Variance
Actual Costs Incurred: Actual Input X Actual Rate
Flexible Budget: Budgeted Input Allowed for Actual Output X Budgeted Rate
Actual Inputs X Budgeted Rate
Allocated: Budgeted Input Allowed for Actual Output X Budgeted Rate
Spending Variance
Efficiency Variance
Never a Variance
Never a Variance
Flexible-Budget Variance
Total Variable Overhead Variance Over/Under Allocated Variable Overhead
Actual Costs Incurred
Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level
Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level
Allocated: Budgeted Input Allowed for Actual Output X Budgeted Rate
Spending Variance
Never a Variance
Production-Volume Variance
Production-Volume Variance
Flexible-Budget Variance
Total Fixed Overhead Variance Over/Under Allocated Fixed Overhead
Variable Overhead Actual CostsFlexible-budget
flexible-budget variance Incurredamount
=-
Sheet1
| Variable Overhead | = | Actual Costs | - | Flexible-budget | |
| flexible-budget variance | Incurred | amount |
Sheet2
Sheet3
Variable Actual quantity of Budgeted quantity of Budgeted variable
Overhead variable overhead variable overhead cost- overhead cost
Efficiency cost-allocation base allocation based allowed per unit of
Varianceused for actual output for actual output cost-allocation base
}
X=
{
-
Sheet1
| Variable Overhead | = | Actual Costs | - | Flexible-budget | |
| flexible-budget variance | Incurred | amount |
Sheet2
| Variable | { | Actual quantity of | Budgeted quantity of | } | Budgeted variable | ||||
| Overhead | = | variable overhead | - | variable overhead cost- | X | overhead cost | |||
| Efficiency | cost-allocation base | allocation based allowed | per unit of | ||||||
| Variance | used for actual output | for actual output | cost-allocation base |
Sheet3
Variable Actual variable Budgeted variable Actual quantity of
Overhead overhead cost overhead cost variable overhead
Spending per unit of per unit of cost-allocation base
Variance cost-allocation base cost-allocation base used for actual output
{ }- X=
simple
| Variable Overhead | = | Actual Costs | - | Flexible-budget | |
| flexible-budget variance | Incurred | amount | |||
| Fixed Overhead | = | Actual Costs | - | Flexible-budget | |
| flexible-budget variance | Incurred | amount |
complex
| Variable | { | Actual quantity of | Budgeted quantity of | } | Budgeted variable | ||||
| Overhead | = | variable overhead | - | variable overhead cost- | X | overhead cost | |||
| Efficiency | cost-allocation base | allocation based allowed | per unit of | ||||||
| Variance | used for actual output | for actual output | cost-allocation base | ||||||
| Variable | { | Actual variable | Budgeted variable | } | Actual quantity of | ||||
| Overhead | = | overhead cost | - | overhead cost | X | variable overhead | |||
| Spending | per unit of | per unit of | cost-allocation base | ||||||
| Variance | cost-allocation base | cost-allocation base | used for actual output |
Sheet3
Fixed Overhead Actual CostsFlexible-budget
flexible-budget variance Incurredamount
=-
simple
| Variable Overhead | = | Actual Costs | - | Flexible-budget | |
| flexible-budget variance | Incurred | amount | |||
| Fixed Overhead | = | Actual Costs | - | Flexible-budget | |
| flexible-budget variance | Incurred | amount |
complex
| Variable | { | Actual quantity of | Budgeted quantity of | } | Budgeted variable | ||||
| Overhead | = | variable overhead | - | variable overhead cost- | X | overhead cost | |||
| Efficiency | cost-allocation base | allocation based allowed | per unit of | ||||||
| Variance | used for actual output | for actual output | cost-allocation base |
Sheet3
Production-VolumeBudgetedFixed Overhead allocated using
VarianceFixed Overheadbudgeted input allowed for
actual output units produced
=-
simple
| Variable Overhead | = | Actual Costs | - | Flexible-budget | |
| flexible-budget variance | Incurred | amount | |||
| Fixed Overhead | = | Actual Costs | - | Flexible-budget | |
| flexible-budget variance | Incurred | amount | |||
| Production-Volume | = | Budgeted | - | Fixed Overhead allocated using | |
| Variance | Fixed Overhead | budgeted input allowed for | |||
| actual output units produced |
complex
| Variable | { | Actual quantity of | Budgeted quantity of | } | Budgeted variable | ||||
| Overhead | = | variable overhead | - | variable overhead cost- | X | overhead cost | |||
| Efficiency | cost-allocation base | allocation based allowed | per unit of | ||||||
| Variance | used for actual output | for actual output | cost-allocation base | ||||||
| Variable | { | Actual variable | Budgeted variable | } | Actual quantity of | ||||
| Overhead | = | overhead cost | - | overhead cost | X | variable overhead | |||
| Spending | per unit of | per unit of | cost-allocation base | ||||||
| Variance | cost-allocation base | cost-allocation base | used for actual output |
