Direct Input Variances, and Management Control: I

1. Direct Input Variances,and Management Control: I Chapter 7

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

3. Standard = Budget • Here budgeted amount = standard amount. • We will use these terms interchangeably in this course.

4. 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.”

5. 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

6. Example Calculate Variances

7. Useful Format to Calculate DM and DL Variances Actual “Noname” Flexible Static Results Budget BudgetBudget 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----|

8. Price Variance: material Direct-material price variance Actual price – Budgeted price Actual Quantity used × =

9. Price Variance: labor Direct-labor price variance Actual price – Budgeted price Actual Quantity used × =

10. Efficiency Variance: DM Direct-material efficiency variance Actual quantity – Standard quantity Standard price × =

11. Efficiency Variance: labor Direct-labor efficiency variance Actual quantity – Standard quantity Standard price × =

12. 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

13. 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

14. 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.

15. 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)

16. 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.”

17. End of Chapter 7