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ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 13 Professor Jeff Yu

ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 13 Professor Jeff Yu. Review:. Cash Budget : (1) determine the amount of cash excess or deficiency; (2) determine required borrowing if cash deficiency; (3) calculate interest expense. Budgeted Balance Sheet

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ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 13 Professor Jeff Yu

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  1. ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 13 Professor Jeff Yu

  2. Review: Cash Budget: (1) determine the amount of cash excess or deficiency; (2) determine required borrowing if cash deficiency; (3) calculate interest expense. Budgeted Balance Sheet Budgeted Income Statement

  3. Chapter 10: Flexible Budget • The master budgets discussed in Chapter 9 could also be called STATIC budgets because they are prepared based on a fixed level of future activity. • A static budget (also called “planning budget”) is suitable for planning, but is inadequate for evaluating cost control.

  4. Hmm! Comparingstatic budgets withactual costs is likecomparing applesand oranges. Static Budget and Performance Analysis Static budgets are prepared fora single, planned levelof activity. Performance evaluation is difficult when actual activity level differs from the planned activity level.

  5. Example: Inference using Static Budget

  6. Example: Inference using Static Budget Did the firm do a good job in cost control? I do know thatactual activity is belowbudgeted activity which is unfavorable. But shouldn’t variable costsbe lower if actual activityis below budgeted activity? I don’t think I can answer this question using a static budget.

  7. The relevant question? How much of the favorable cost variance in the example is due to lower activity level and how much is due to good cost control? To answer the question, we must thebudget to the actual level of activity.

  8. May be prepared for any activity level in the relevant range. Show costs that should have beenincurred at the actual activity level, enabling “apples to apples”cost comparisons. Help managers control costs. Improve performance evaluation. Flexible Budgets

  9. Example: Preparing a Flexible Budget

  10. Flexible Budget Performance Report Flexible budget is prepared for the same activity level as actually achieved.

  11. Activity Cost control This $15,000F variance is due to lower actual activity than budgeted. (Activity Variance) This $3,300Uvariance is dueto poor cost control. (Spending Variance) Flexible Budget Performance Report Variance Analysis

  12. Summary: Flexible Budget Flexible budgetis prepared based on the actual activity level and is used for performance evaluation (control) purpose. Activity Variance = Flexible budget amount – planning (static) budget amount Spending Variance = Actual cost – flexible budget cost Spending variance is unfavorable if positive, favorable if negative; Spending variance captures the efficiency of cost control. Revenue Variance = Actual revenue – flexible budget revenue Revenue variance is favorable if positive, unfavorable if negative;

  13. Practice Problem: flexible budget Harrald’s Fish House has following data for April, 2009 operations (Q refers to the number of meals served): Q: (1) Prepare the planning budget for April assuming Q=1800. (2) prepare a flexible budget for the actual Q of 1700 meals served. (3) Calculate activity variances for revenue and all three expenses. (4) Compute revenue variance; (5) Compute spending variances for all three expenses.

  14. Practice Problem: multiple cost drivers Aly Tours operates tours of glaciers on its tour boat with data below. Aly’s planning budget for July is based on 24 cruises and 1,400 passengers using the historical cost formula as in columns 2-4. The actual activity levels are 20 cruises and 1,500 passengers. Q: Compute activity variances and spending variances for all three expenses.

  15. Chapter 11 Standard Costs Standards are benchmarks or “norms” for measuring performance. Two types of standards are commonly used. Price standards specify how much should be paid for each unitof the input. Quantity standardsspecify how much of aninput should be used tomake one unit of the product.

  16. Standard Cost • Standard vs. Budget: • A budget is set for total costs; • A standard is set for per unit cost; • Standards are often used when preparing for budgets. • Quantity standardsare set for each unit of production (How much units of input are needed for each unit of output?) Price standards are set for each unit of input (How much should be paid for each unit of input?) • Standard quantity per unitand Standard price (SP) for DM; • Standard hoursper unit and Standard rate per hour (SR) for DL; • Standard activity level (allocation base for POHR) per unit and Standard rate (variable portion of POHR)for MOH

  17. Example: Standard Cost

  18. Management by Exception Compare the actual quantities and costs of inputs to the quantity and coststandards we have set for performance evaluation purposes. If the actual quantity or cost departs significantly from the standard, managers investigate the discrepancy. Goal: Find the cause of the problem and eliminate it. The act of computing and interpreting the deviation (variance) is called VARIANCE ANALYSIS.

  19. Materials price varianceLabor rate varianceVOH rate variance A General Model for Variance Analysis Variance Analysis Price Variance Quantity Variance Materials quantity variance Labor efficiency variance VOH efficiency variance

  20. Actual Quantity ActualQuantity StandardQuantity× × × Actual PriceStandard Price StandardPrice Materials Price Variance AQ(AP - SP) Labor/VOH Rate Variance AH(AR – SR) Materials Quantity Variance SP(AQ - SQ) Labor/VOH Efficiency Variance SR(AH – SH) A General Model for Variance Analysis SQ (SH)= Standard quantity (hours) allowed for the actual output = actualproductionin units * standard quantity (hours) per unit

  21. Example: Materials Variances Glacier Peak Outfitters has the following direct material standard for the fiberfill in its mountain parka: 0.1 kg. of fiberfill per parka at $5.00 per kg. Last month 210 kgs of fiberfill were purchased and used to make 2,000 parkas. The actual cost of fiberfill was $4.90 per kg. Q: Compute Materials Variances for the company.

  22. Materials Price variance$21 favorable Materials Quantity variance$50 unfavorable Materials Variances Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 210 kgs. 210 kgs. 0.1kg. * 2000 × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000

  23. Material Variances: Using the Factored Equations Materials price variance MPV = AQ (AP - SP) = 210 kgs ($4.90/kg - $5.00/kg) = 210 kgs (-$0.10/kg) = $21 F Materials quantity variance MQV = SP (AQ - SQ) = $5.00/kg (210 kgs-(0.1 kg/parka 2,000 parkas)) = $5.00/kg (210 kgs - 200 kgs) = $5.00/kg (10 kgs) = $50 U

  24. The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used. • The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production. Material Price and Quantity Variances Price and quantity variances are determined separately for two reasons:

  25. I’ll start computingthe price variancewhen material ispurchased rather thanwhen it’s used. I need the price variancesooner so that I can betteridentify purchasing problems. You accountants just don’tunderstand the problems thatpurchasing managers have. Isolation of Material Variances

  26. Purchasing Manager Production Manager Responsibility for Material Variances Materials Quantity Variance Materials Price Variance The standard price is used to compute the quantity varianceso that the production manager is not held responsible forthe purchasing manager’s performance.

  27. Your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances. I am not responsible for this unfavorable materialquantity variance. You purchased cheapmaterial, so my peoplehad to use more of it. Responsibility for Material Variances

  28. Practice Problem: Materials Variances Bella Inc. has the following direct material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound. Last week 1,700 pounds of material were purchased at a total cost of $6,630 and all 1,700 pounds are used to make 1,000 Zippies. Question: 1.What is the actual price per pound paid for the material? 2.What is Bella’s materials price variance for the week? 3.What is Bella’s materials quantity variance for the week?

  29. Materials Variances: purchased ≠ used When material purchased ≠ material used • To compute the PRICE variance, use the total quantity of raw materials PURCHASED. • To compute the QUANTITY Variance, use only the quantity of raw materials USED.

  30. Practice Problem: Materials Variances Bella has the following material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound. Last week 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000 Zippies. Question: 1) What is Bella’s materials price variance for the week? 2) What is Bella’s materials quantity variance for the week?

  31. Practice Problem: Materials Variances During February, Pisces Co. produced 1000 fishing rods with the following information: Materials quantity variance $6,000 U Materials price variance $1,200 U Standard cost information for materials: 5 ounces at $6 per ounce. Q: If the quantity of materials purchased was equal to the quantity of materials used. What was the actual per ounce cost of materials purchased?

  32. For Next Class • Finish Chapter 11 • Start Chapter 12 • Attempt the assigned HW problems

  33. Homework Problem 1 Harvey Co.’s variable MOH rate is $5 per direct labor hour and fixed MOH is $10,000 per month. Its planning budget for March is based on 6,000 direct labor hours. The actual total MOH cost is $38,000 and the actual activity level is 5,000 direct labor hours in March. Q: (1) what is the amount of Activity Variance for total MOH cost in March? (2) What is the amount of Spending Variance for total MOH cost in March?

  34. Homework Problem 2 In May, Vail Co. produced 10,000 units of Zippies, purchased 20,000 pounds of material at a total cost of $30,000, and used 15,000 pounds of material. Materials quantity variance is $3,000 U. Material quantity standard indicates that 1.4 pounds of material are needed to produce each unit of Zippy. Q: What is Vail’s materials price variance in May?

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