Flexible Budgets Cost DAY ONE: DM & DL Page 1
Quantity Price Book Buying Example: You went to the university bookstore to purchase books for this class, and you spent more than you expected to … WHY? The reason is some combination of two possible explanations. Page 2
valid for only one level of activity (actual results are compared to original budget) ** generally what you have seen so far in class** geared toward all levels of activity within the relevant range; is dynamic ** based on per-unit standards ** total forecasted amount per unit budget (Standard × No. Units = Budget) Asset account DM The first three have the same “picture” DL Expense accounts VOH FOH Page 3
Cost Flexible Budgets • DAY 1: • Lands’ End Men’s Suits • DM variances • Pirates, Inc. • DL variances • Extra: • Smith Company • DM and DL variances • DAY 2: • DAY 3: Page 4
Flexible Budgets Cost DAY TWO:VOH & FOH Page 5
MOH MOH Actual Applied: Actual Activity × PDOR Actual Applied: Std Allowed for Actual Output (“Actual Activity”) × PDOR Underapplied Underapplied Overapplied Overapplied Page 6
Cost Flexible Budgets • DAY 1: • DAY 2: • True-Blue Corporation • VOH variances • Strange Fire, P.C. • VOH variances • The Costume Company • FOH variances • Extra: • Tallyho Company • FOH variances • Frostee Freeze Company • VOH and FOH variances • (Benton Company) • *Difficult* VOH and FOH variances • DAY 3: Page 8
Flexible Budgets Cost DAY Three:Review & Practice Page 9
Occurs because prices paid for materials was higher than expected. Can be used to evaluate the Purchasing Manager; however, in manycases price (driven by a market economy) is largely out of the manager’scontrol. The price variance can be influenced by such things as material quality,quantity discounts, distance from factory (shipping required), etc. Price Occurs because used more material than expected. The Production Manager is usually held responsible. Minimizing scrap, waste and rework reduce unfavorable variances. Can be caused by the purchase of poor quality materials. Usage Occurs because paid more for labor than expected. Who to assign blame? Perhaps the Production Manager. Unexpected overtime can cause variance. A new union contract, labor rates can be largely market-driven. Using more skilled workers to perform less skilled tasks (or vice versa)will influence rate variances. Rate Efficiency Occurs because more labor was used than expected. Often the Production Manager is held responsible. Why occurs?? Lazy/poorly motivated workers. Poor manufacturing process/system.Downtime from frequent equipment breakdowns.Poorly trained/low skill workers. Poor quality materials.
Occurs because more was spent on variable overhead than expected. Complicated! Consumption of Indirect Materials can be traced to responsible manager. Utilities are a joint cost—not traceable,. Spending Efficiency Typically related to Labor Efficiency. Spending FOH is comprised of costs like Salaries, Depreciation, Taxes, Insurance. These are largely influenced by long-run decisions, and often beyondthe immediate control of management. Usually, budget variances are small. Volume The Volume Variance measures capacity utilization—how much theproduction facility was used. May try to hold Production Manager responsible. However, what if poor quality materials were purchased; rework time could cause an unfavorable volume variance. In this case, responsibilityrests with purchasing, not production. As you can see, determining the cause ofvariances is complicated as production activitiesare all inter-related.
Cost Flexible Budgets • DAY 1: • DAY 2: • DAY 3: [students practice] • Beale Street Blues, Inc. • Ballycanally Corporation • Brötchen Bakery Page 12