budgeting and standard cost
TRANSCRIPT
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AF5231-2012 7-1
AF5231Managerial Accounting &
Information SystemsBudgeting & Standard Costing
NOT Required:PP. 567 - 569,
Supplementary Note,Appendices 12A, B
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AGENDA
Nature & Purpose of Standard CostsThe Master Budget
Characteristics of a good budgetary system
Budget application of decision control
Static and Flexible Budgets
Variance Analysis
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Standard Costs
StandardCosts are
Predetermined.
Used for planning labor, materialand overhead requirements.
Benchmarks formeasuring performance.
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To Facilitate product costingPlanning future operations
Monitoring current operationsMotivating manager and employee behaviorEvaluating Performance
Purpose of Standards
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Historical data Use
the
cost
predicted
by
the
costfunctionasstandardcost.
Task analysis /Engineering estimate Analyzetheproduction
process
to
determine
how
muchaproductshouldcost.
Sources for Setting Standards
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Ideal standards demand
maximum efficiency and can beachieved only if everythingoperates perfectly.
Currently attainable/Practicalstandards can be achieved underefficient operating conditions.
Kaizen standards reflect aplanned improvement and are atype of currently attainablestandard.
Establishing Standards
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Are standards thesame as budgets?
A budget is set for
total costs.
Standards vs. Budgets
A standard is a perunit cost.
Standards are often
used whenpreparing budgets.
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The Master BudgetFunctions of budgets Translateanorganizationsstrategiesintoaformalized
financialplan
Assembleknowledge
&
communicate
among
managers
(decisionmanagement)
Defineareasofresponsibilityandmeasureperformance(decisioncontrol)
A master budget is Acomprehensiveplanfortheupcomingaccountingperiod.
Usuallyprepared
for
aone
year
period.
Comprisedofacollectionofbudgets,startingfromsalestobalancesheet.
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Master Budget Components
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Characteristics of aGood Budgetary System
Frequent feedback on performance
Monetary and non-monetary incentives
Participative Budgeting
Realistic Standards
Controllability of CostsMultiple Measures of Performance
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Frequent Feedback on Performance
Enable managers to take corrective
actions and change plans promptly.Management by exception is oftenadopted. Managerswillonlyinvestigatesignificant
variancesonareaswhichrequirestheirattention.
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Monetary & Non-monetaryIncentives
Incentive are the means that are usedto encourage goal congruent behavior.
Incentive can be both positive andnegative Positive:Bonus,stockoptions
Negative:Dismissal
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Participative Budgeting
Facilitate managers to get involvedinto the budgetary process.
Advantages: Managerscanobtainasenseofresponsibility
Enhancesgoalcongruence
Managers
will
work
harder
to
achieve
these
objectivesasitsbeingsetbythem
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Participative Budgeting
Problems: Settingstandardsthatareeithertoohighortoo
low.
Intentionallyunderestimaterevenueandoverestimatecost (paddingthebudget)
Buildingslack(budgetaryslack)intothebudget
Pseudoparticipation
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Realistic Standards
Budgets should be developed based on
realistic conditions and expectations.It should reflect operating realities: Actualactivitylevels
Seasonalvariations,efficienciesandgeneraleconomictrends
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Cost Controllability
Managers should be accountable forcosts in which they can control in orderto maintain fairness in performanceevaluation.
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Applications to Decision ControlLine Item Budget
Authorize
managers
to
spend
only
up
to
the
specified
amountoneachlineitem.
Advantages:
Tight control reduces opportunities for managers totake actions inconsistent with firm goals
Disadvantages:
Inflexible in responding to unanticipated needs Little incentive for cost savings
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Applications to Decision ControlBudget Lapsing
A
requirement
that
funds
allocated
for
a
particular
yearcannotbecarriedovertothefollowingyear.
Advantages:
Tighter control than budgets that do not lapse
Prevents risk-averse managers from accumulatingfunds
Disadvantages: Encourages wasteful spending near end of fiscal year
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Static vs. Flexible BudgetStatic Budget Abudgetpreparedforasinglelevelofsalesvolume.
Prepared
at
the
beginning
of
the
year. Example:Masterbudget
Static budgets are good planning devices, butusing static budgets for control (performanceevaluation) purposes can be problematic.
Static Budget Variances Difference
between
actual
results
&
the
static
budget.
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Static vs. Flexible BudgetFlexible Budget Abudgetpreparedforamultiplelevelsofsalesvolume.
Preparedatthebeg.oftheyearforplanningpurposesand
at
the
end
of
the
year
for
performance
evaluation.
Flexible budgets are usually used for controlpurposes by expressing the static budgetunder the actual output level. Managersperformanceisinsulatedfromoutputvolume
changes.
Flexible budget Variances Differencesbetweenactualresults&theflexiblebudget
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Flexible Budget - Example
Fixed costs areexpressed as atotal amount.
Variable costs are expressed as aconstant amount per hour.
$40,000 10,000 hours is$4.00 per hour.
CheeseCo
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Flexible Budget - Example
$4.00 per hour 8,000 hours = $32,000
CheeseCo
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Flexible Budget - Example
Total fixed costsdo not change in
the relevantrange.
CheeseCo
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Flexible Budget - ExampleCheeseCo
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Variance Analysis Cycle
Prepare standardcost performance
report
Analyzevariances
Begin
Identify
questions
Receive
explanations
Take
correctiveactions
Conduct nextperiods
operations
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Management by Exception
DirectMaterial
Managers focus on quantities and coststhat exceed standards, a practice known as
management by exception.
Type of Product Cost
Amount
Direct
Labor
Manufacturing
Overhead
Standard
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Standard Cost Variances
Cost
Standard
This variance is unfavorablebecause the actual cost
exceeds the standard cost.
A standard cost var iance is the amount by whichan actual cost d iffers from the standard cost.
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Standard Cost Variances
Standard Cost Variances
Price Variance
The difference between
the actual price and thestandard price
Quantity Variance
The difference between
the actual quantity andthe standard quantity
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General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quant ity Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Standard price is the amount that shouldhave been paid for the resources acquired.
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Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quant ity Actual Price Standard Price Standard Price
General Model for Variance Analysis
Standard quantity is the quantity of input
allowed for the actual good output.Standard input per unit of output
times amount of good output.
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General Model for Variance Analysis
AQ(AP - SP) SP(AQ - SQ)
AQ = Actual Quantity SP = Standard PriceAP = Actual Price SQ = Standard Quanti ty
Price Variance Quantity Variance
Actual Quanti ty Actual Quanti ty Standard Quanti ty
Actual Price Standard Price Standard Price
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AP x AQ (ActualQuantity at ActualPrice) (1)
SP x AQ (ActualQuantity atStandard Price) (2)
SP x SQ (StandardQuantity atStandard Price)
(3)
Price Variance(1) (2)
Usage Variance(2) (3)
Total Variance(1) (3)
DM Price and Usage Variances
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Glacier Peak Outfitters has the followingdirect 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 werepurchased and used to make 2,000 parkas.
The material cost a total of $1,029.
Material Variances Example
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Price variance Quantity variance
Actual Quantity Actual Quantity Standard Quantity Actual Price Standard Price Standard Price
Material Variances Summary
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Suppose only 190 kgs of fiberfill were usedto make 2,000 parkas. What is thematerials quantity variance? Remember
that the standards call for 0.1 kg offiberfill per parka at a cost of $5 per kg offiberfill.
a.$50F
b.$50U
c.
$100
Fd.$100U
Concept Check
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Hanson Inc. 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 werepurchased at a total cost of $10,920, and1,700 pounds were used to make 1,000
Zippies.
DM Variances Continued
Zippy
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Hanson purchased andused 1,700 pounds.
How are the variances
computed if the amountpurchased differs from
the amount used?
The price variance iscomputed on the entire
quantity purchased.
The quantity varianceis computed only on
the quantity used.
DM Variances Continued
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Actual Quant ity Actual QuantityPurchased Purchased
Actual Price Standard Price
2,800 lbs. 2,800 lbs.
$3.90 per lb. $4.00 per lb.
= $10,920 = $11,200
Price variance$280 favorable
Price variance increasesbecause quantity
purchased increases.
Zippy
DM Variances Continued
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Actual Quant ityUsed Standard Quantity
Standard Price Standard Price
1,700 lbs. 1,500 lbs.
$4.00 per lb. $4.00 per lb.
= $6,800 = $6,000
Quantity variance$800 unfavorable
Quantity variance is
unchanged becauseactual and standard
quantities are unchanged.
Zippy
DM Variances Continued
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Interpretation of DM Variance
Price Variance Usage Variance
Causes
Paying higher or lowerprices than planned
Losing or gainingquantity discounts
Buying higher/lowerquality material
Greater or lower yieldfrom material
The use of high/lowerquality materials
Greater/lower rate ofscrap than anticipated.
Responsibility The Purchasing Manager The Production Manager
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AH x AR (ActualHours at ActualRate) (1)
AH x SR (ActualHours at StandardRate) (2)
SH x SR
(Standard Hours atStandard Rate) (3)
Rate Variance(1) (2)
EfficiencyVariance(2) (3)
Total Variance(1) (3)
DL Rate and Efficiency Variance
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Remarks on DL VariancesRate Variance is conceptually similar to
the Price Variance (General Model) Salaryisnotmeasuredbypricebutbyrateinstead
($x/hour)
Efficiency Variance is conceptually similarto Quantity Variance (General Model)
The
measure
of
quantity
of
labor
used
refers
to
efficiencyoflabor.
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Hanson Inc. has the following direct laborstandard to manufacture one Zippy:
1.5 standard hours per Zippy at $12.00 perdirect labor hour
Last week 1,550 direct labor hours wereworked at a total labor cost of $18,910
to make 1,000 Zippies.
Labor Variances Example
Zippy
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Actual Hours Actual Hours Standard Hours
Actual Rate Standard Rate Standard Rate
Labor Variances Summary
Rate variance Efficiency variance
Zippy
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Interpretation of DL VariancesRate Variance Efficiency Variance
Causes
1.Labor demand/supply2.Higher wages due to
wage award
3.Use of higher/lowergrade of worker
4.Payment of unplannedovertime or bonus
1.Use incorrect labor grade2.Poor staff supervision
3. Incorrectmaterial/machineproblems
4.Lack of staff training
ResponsibilityFor (1) UncontrollableThe Production Manager
The Human ResourceManager
The Production Manager
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Significance of Cost Variances
Size of variance Dollaramount
Percentageofstandard
Recurring variances
Trends
Controllability
Favorable variances
Costs and benefits ofinvestigation
What clues help me
to determine thevariances that I
should investigate?
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Statistical Control Charts
1 2 3 4 5 6 7 8 9
Variance Measurements
Favorable Limit
Unfavorable Limit
Desired Value
Warning signals for investigation
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Advantages of Standard Costs
Management byexception
Improved cost control
and performanceevaluation
Better Information
for planning anddecision making
Possible reductionsin production costs
Advantages
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PotentialProblems
Emphasis onnegative mayimpact morale.
Emphasizing standardsmay exclude other
important objectives.
Favorable variancesmay bemisinterpreted.
Continuousimprovementmay be moreimportant than
meeting standards.
Standard costreports maynot be timely.
Incentives to buildinventories.
Disadvantages of Standard Costs
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The End