management accounting: costing and budgeting

UNIT 9: MANAGEMENT ACCOUNTING: COSTING AND BUDGETING

LECTURER: JUDITH ROBB-WALTERS

UNIT 9: MANAGEMENT ACCOUNTING: COSTING AND BUDGETING

LEARNING OBJECTIVE3:Be able to prepare forecasts and budgets for a business

THE BASIC SYLLABUS

1. Be able to analyse cost information within a business.

2.Be able to propose methods to reduce costs and

enhance value within a business.

3. Be able to prepare forecasts and budgets for a

business.

4. Be able to monitor performance against budgets

within a business.

LEARINGING OUTCOMES

Be able to monitor performance against

budgets within a business

At the end of the class the students should be able to:

4.1 Calculate variances, identify possible causes and

recommend corrective actions

OVERVIEW

A variance represents the difference

between the actual and the standard

costs of materials, labor, and

overhead.

Variances measure efficiencies or

inefficiencies in usage and price.

types Variances may be broadly classified into two categories

(A) Cost Variance and (B) Sales Variance.

(A) Cost Variance

Total Cost Variance is the difference between Standards

Cost for the Actual Output and the Actual.Total Cost

incurred for manufacturing actual output. The Total Cost

Variance Comprises the following :

I. Direct Material Cost Variance (DMCV)

II. Direct Labour Cost Variance (DLCV)

III. Overhead Cost Variance (OCV)

types Direct Material Variances

types Direct Labour Cost Variance

types

(B) Sales Variance

Analysis

The evaluation of performance by means

of variances, whose timely reporting

should maximise the opportunity for

managerial action.’

CIMA Official Terminology, 2005

Analysis

Variance analysis involves breaking

down the total variance to explain:

1. How much of it is caused by the

usage of resources differing from the

standard.

2. How much is caused by cost of

resources differing from the standard.

Analysis

Together, variances can help to

reconcile the total cost difference by

comparing actual and standard cost.

The main purpose of variances is to

provide reasons for off-standard

performance. In this way,

management can improve operations,

correct errors and deploy resource s

more effectively to reduce costs.

calculation

Sales variances

calculation

Materials variances

calculation

Labour variances

calculation

Variable variances

Possible causesCauses of material variances

Variance Favourable Adverse

Material Price •Poorer quality

materials

•Discount given for

buying bulk

•Change to a

cheaper supplier

•Incorrect budgeting

•Higher quality

materials

•Change to a more

expensive supplier

•Unexpected price

increase

encountered


Material Usage •Higher quality

materials

•More efficient use of

material

•Change is product

specification


•Poorer quality

materials

•Less experienced

staff using more

materials

•Change is product

specification


Possible causes

Causes of labour variances


Labour rate •Lower skilled staff

•Cut in

overtime/bonus


•Higher skilled staff

•Increase in

overtime/bonus


•Unforeseen wage

increase

Labour efficiency •Higher skilled staff

•Improved staff

motivation


•Lower skilled staff

•Fall in staff

motivation


Possible causes

Causes of variable overhead variances


Var. o/h expenditure •Unexpected saving

in cost of services

•More economic use

of services


•Unexpected

increase in the cost

of service

•Less economic use

of service


Va. o/h efficiency •As for labour

efficiency

•As for labour e

Corrective action

Variance analysis identifies the sources of

major actual value to budget differences.

Companies can use this information to

take corrective action. If the budget

variance analysis shows that more hours

were worked than budgeted, corrective

action may be able to streamline the

work process.

Corrective action

If sales were lower than projected,

corrective action can put in place

measures to increase sales. The company

also can adjust subsequent budgets

accordingly. Through corrective action

based on budget variance analysis, budgets

become more accurate and planning

improves.

Review questions A company manufactures a single product L,

for which the standard material cost is as follows.

$ per unit

Material 14 kg x $3 42

During July, 800 units of L were manufactured, 12,000 kg of material were purchased for $33,600, of which 11,500 kg were issued to production.

SM Co values all inventory at standard cost.

The material price and usage variances for July were:

Review questions 2.A company expected to produce 200 units of its

product, the Bone, in 20X3. In fact 260 units were produced. The standard labour cost per unit was $70 (10 hours at a rate of $7 per hour). The actual labour cost was $18,600 and the labourforce worked 2,200 hours although they were paid for 2,300 hours.

a.What is the direct labour rate variance for the company in 20X3?

b.What is the direct labour efficiency variance for the company in 20X3?

BIBLIOGRAPHY

Anon, (2015). [online] Available at:

http://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_standard_costing_and_variance_analysis_mar08.pdf.pdf [Accessed 29 Sep. 2015].

[online] Available at: http://www.cma-ontario.org/portals/6/Media/CaseExam/Standard%20Cost%20And%20Variance%20Analysis.pdf [Accessed 29 Sep. 2015].

BIBLIOGRAPHY VanDerbeck, E. (2013). Principles of Cost Accounting,. 16th ed. Cengage

Learning.

Anon, (2015). [online] Available at: http://dosen.narotama.ac.id/wp-content/uploads/2013/02/Chapter-28-Standard-Costing-and-Variance-Analysis.pdf [Accessed 29 Sep. 2015].

http://www.unf.edu/~dtanner/dtch/dt_ch44.htm

Unf.edu, (2015). Chapter 46 Overhead Variances. [online] Available at: http://www.unf.edu/~dtanner/dtch/dt_ch46.htm [Accessed 29 Sep. 2015].

Kfknowledgebank.kaplan.co.uk, (2015). [online] Available at: http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Variance%20Analysis.aspx#_x003C_h4_x0020_align_x003D__x0022_left_x0022__x003E_Sales_x0020_variances_0_1_0_1_0_0_0_0_0_0_0_0_0_0_0_0 [Accessed 29 Sep. 2015].

http://www.unf.edu/~dtanner/dtch/dt_ch44.htm

BIBLIOGRAPHY Small Business - Chron.com, (2015). What Is Budget Variance Analysis?.

[online] Available at: http://smallbusiness.chron.com/budget-variance-

analysis-60250.html [Accessed 29 Sep. 2015].