Presentation on theme: "Budgeting and Variances"— Presentation transcript:
1Budgeting and Variances Uses of budgetsProduction variances
2Agenda Discussion of budgeting Discussion of variances MaterialsLaborOverheadDemonstration problemsThursday’s classGroup work
3Master BudgetBudget = quantitative expression of a firm’s strategic plan of actionMaster budget = prepared before the accounting period beginsAlso static budgetStandard costs
4Preparing the budget Project sales Plan production activity level Sales predictionCurrent finished goods inventoryDesired ending finished goods inventoryPlan purchases, employmentEstimate fixed costsPrepare estimated income statements and balance sheets
5Uses of budgets Planning Performance evaluation Control Operational plans (short-term)Capital budgets (long-term)Company strategyPerformance evaluationVariancesResponsibility centersControl
6Behavioral aspects of budgeting: Participative budgetingBetter informationBetter cooperationBudgetary slackDysfunctional responsesCompulsion to spend all discretionary fundsShort-run emphasis on budget onlyQuestionable actions designed only to balance the budget
7Flexible budget:Flexible budget = the master budget you would have prepared if you had known before the accounting period started how much you would actually produce during the period.Flexible budget = “standard cost allowed for good output achieved”
9Variances“unfavorable variance” = NI is reduced from the budgeted expectation“favorable variance” = NI is increased from budgeted expectationNote: Do not interpret directly as “bad” or “good” behavior on the part of management.
11Variable cost variances Direct materialsprice variance: usage price variancepurchase price variance(actual price - std. price) x actual usage(actual price - std. price) x actual purchasesquantity variance: based on usage(actual usage - std. usage) x std. priceactual usage = total actual materials usedstandard usage = std. allowed per unit x actual units
12Variable cost variances Direct laborrate variance: (actual price - std. price) x actual usageefficiency variance:(actual usage - std. usage) x std. priceactual usage = total actual labor hrs. usedstandard usage = std. allowed per unit x actual units
13Example: Chemical, Inc.Chemical, Inc., has set up the following standards for materials and direct labor:Materials: 10 $3 $30 per batchDirect labor: .5 $20/hr. $10 per batchThe number of finished units budgeted for the periodwas 10,000. The number of actual batches producedwas 9,810. During the month, purchases amounted to 100,000 lbs. at a total cost of $310,000. The actual price paid for labor was $21 per hour. Price variances areisolated upon purchase. Actual inputs used were: 98,073 lbs. of material and 4,900 hours of labor.
14Direct material price variances What might cause a direct material price variance?Price change in marketPurchase discountsTransportation costsGrade of materialsTherefore, purchasing department
15Direct material quantity variance What could cause a direct material efficiency variance?Defect in materialInexperienced workersPoor supervisionPoor schedulingTherefore, production department
16DM variance computations Direct material purchase price variance:U$310,000 - ($3 x 100,000) = $10,000Or: ($ $3.00) x 100,000 = $10,000Direct material quantity variance:[98,073 - (10 lbs. x 9,810 batches)]x $3 = $81FOr: ( ) x 9,810 batches x $3 = $82
17(9,810 batches - 10,000 batches) x $3 x 10 lbs. = $5,700 DM activity variance(actual output - budgeted output) x standard price per unit of direct material x standard quantity of direct material per unit of output(9,810 batches - 10,000 batches) x $3 x 10 lbs. = $5,700F?????
18Direct labor variances What would cause a direct labor rate variance?The actual rate = approximately average wage paid, including fringesExperience of workersUnion contractOvertimeChange in fringesTherefore, human resources or management
19Direct labor variances What would cause a direct labor efficiency variance?SkillMotivationSupervision/schedulingQuality of materialsLate timeTherefore, production, human resources, purchasing
20Labor variance computations Rate variance:($21 - $20) x 4,900 hours = $4,900UEfficiency variance:(4,900 hours - (9,810/2)) hours) x $20 = $100FActivity variance:(9,810 batches - 10,000 batches) x $20 x .5 = $1,900F
21Overhead variances1. By definition, fixed overhead does not vary with the level of planned production.Flexible budget FOH = Master budget FOH2. By definition, fixed overhead is incurred as a lump sum expenditure and there are no partial input-output relationships.Therefore, the “Std. Input” column is undefined.
22Overhead variances: FOH FOH budget variance = Actual FOH - Budgeted FOHFOH efficiency variance =Is undefinedFOH applied =(Predetermined rate/unit) x actual unitsProduction volume variance = Applied FOH - Budgeted FOH
24Overhead variances Over- or underapplied overhead = Actual overhead spending - Overhead appliedOrThe net of all the variances computed
25Example: Murray Manufacturers VOH Rate = $3 per DL hourFOH Rate = $4 per DL hourOne unit requires 2 hours of laborDenominator volume is 1,000 units of outputActual production was only 800 units.Actual costs were $5,800 for variable overhead and $8,130 for fixed overhead; 1,590 DL hrs. were worked.
27Example: Murray Manufacturers FOH budget variance =$8,130 - $8,000 = $130UFOH production volume variance =(800 units x 2 hrs. x $4) - $8,000= $1,600U
28Example: The Vanguard Company The Vanguard Company manufactures one product. Its standard cost system incorporates flexible budgets andassigns indirect costs on the basis of standard DL hrs.At denominator activity, the standard cost per unit is:Direct materials, 3 $ $15.00Direct labor, .4 $Variable indirect costs, .4 $Fixed indirect costs, .4 $Total $27.00
30Example: The Vanguard Company Direct materials were quoted at $5.50 per pound through-out September and October to all suppliers. There was no purchase-price variance for materials in October; the price variance shown relates solely to the materials usedduring October.Wage standards were set in accordance with an annualunion contract, but a shortage of workers in the localareas has resulted in rates higher than standard.There were no beginning or ending inventories of work in process.
31Example: The Vanguard Company 1. How many units were produced?Use the standard cost column.All the units manufactured cost $243,000One unit at standard costs $27.00Units produced = $243,000 / $27.00 = 9,000 units
32Example: The Vanguard Company 2. What were the actual number of direct labor hours used?Efficiency variance = (actual hrs./unit - std. hrs./unit) x actual units x std. price= [actual DL hrs. - (.4 x 9,000)] x $20$4,000 = actual DL hrs. x $20 - $72,000$76,000 = actual DL hrs. x $203,800 = actual DL hrs.
33Example: The Vanguard Company 3. What was the actual wage rate?Labor price variance = (actual rate - std. rate) x actual labor hours$1,900 = (actual wage rate - $20.00) x 3,800 hrs.$1,900 = actual wage rate x 3,800 hrs - $76,000$77,900 = actual wage rate x 3,800 hrs$20.50 = actual wage rate
34Example: The Vanguard Company 4. What was the budget for fixed indirect costs.FOH budget variance = Budgeted FOH - Actual FOH$200 = Budgeted FOH - $15,800Actual FOH < Budgeted FOH$16,000 = Budgeted FOH
35Example: The Vanguard Company 5. Denominator activity expressed in direct labor hours.Denominator Volume = 4,000 DL hrs.
36Example: The Vanguard Company 6. How many pounds of direct materials were used?DM quantity variance = (actual quantity used std. quantity for output) x standard price$5,000 = (actual quantity used - (3 lbs. x 9,000) x $5.00$5,000 = actual quantity used x $ $135,000$140,000 = actual quantity used x $5.0028,000 lbs. = actual quantity used
38Group exerciseUse example company: Look at the numbers and determine what they all mean.ComputeDirect material price, quantity and activity variancesDirect labor rate, quantity and activity variancesOverhead variances: spending/budget, efficiency (if applicable), and PVV