IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 1 The Flexible Budget and Standard Costing Chapter 13 Objectives: Develop and.

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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 1 The Flexible Budget and Standard Costing Chapter 13 Objectives: Develop and use flexible budgets to analyze operating results Set proper standard cost for planning, control, and performance evaluation

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 2 Effectiveness vs Efficiency An operation is _________ if it has attained or exceeded its goals. An operation is __________ if it has not wasted resources.

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 3 Assessing Effectiveness Cheese Company

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 4 Flexible Budget  ______________________________________ ______________________________________  Reveal variances due to good cost control or lack of cost control.  Improve performance evaluation.

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 5 Flexible Budget Step 1:______________________________ Step 2: :______________________________ in the master budget to calculate the sales revenues and variable expenses. Step 3: Determine the budget amount of fixed cost and compute the flexible budget operating income

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 6 Ex: Flexible Budget in Cheese Company

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 7 Ex: Flexible Budget in Cheese Company

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 8 Assessing Efficiency Ex: Cheese Company

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 9 Selling Price Variance A selling price variance is the difference between the total sales revenue received and the total sales revenue of the flexible budget. In the Cheese Company example, the budgeted and actual selling price was $10 per unit. Now assume that the selling price changes to $11 per unit, with all other information unchanged.

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 10 Standard Cost Cost ____________________ Standard Costs are ____________________

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 11 Standard Cost Variance Product Cost Standard A standard cost variance is the amount by which an actual cost differs from the standard cost. This variance is unfavorable because the actual cost exceeds the standard cost.

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 12 Types of Standard An ideal standard demands perfect implementation and maximum efficiency in every aspect of the operation A currently attainable standard sets the performance criterion at a level that a person with proper training and experience can attain most of the time without having to exert extraordinary effort Should we have standards that are difficult to achieve or standards that can be achieved with minimal effort? Standards should be set at levels that are currently attainable with reasonable and efficient effort. Unattainable standards are discouraging while standards that are too easy to achieve provide little motivation.

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 13 Standard Source of Standard Non-financial Measure

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 14 Direct Material Standards Use product design specifications. Use competitive bids for the quality and quantity desired.

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 15 Direct Material Standards The standard material cost for one unit of product is: ×

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 16 Direct Labor Standards Efficiency Standards Rate Standards Use time and motion studies for each labor operation. Use wage surveys and labor contracts.

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 17 Direct Labor Standard The standard labor cost for one unit of product is: standard number standard wage rate of labor hours for one hour for one unit of product ×

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 18 A General Model of Variance Analysis AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price or Rate Variance Usage or Efficiency Variance

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 19 Standard Cost Variances Efficiency VariancePrice Variance The difference between the actual price and the standard price The difference between the actual quantity and the standard quantity

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 20 Material Variance Example Determine the followings: What is the actual price per pound paid for the material? What is Hanson’s material price variance (MPV) for the month? What is the standard quantity of material that should have been used to produce 1,000 X’s? What is Hanson’s material usage variance (MUV) for the month? Hanson Inc. has the following direct material standard to manufacture one unit of X: 1.5 pounds per X at $4.00 per pound Last month 1,700 pounds of material were purchased and used to make 1,000 X’s. The material cost a total of $6,630. X

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 21 Material Variance Example Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb. $6,630 $ 6,800 $6,000 Price variance $170 favorable Usage variance $800 unfavorable X

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 22 Labor Variance Example Hanson Inc. has the following direct labor standard to manufacture one X: 1.5 standard hours per X at $12.00 per direct labor hour Last month 1,550 direct labor hours were worked at a total labor cost of $18,910 to make 1,000 X ’ s. X Determine the followings: What is actual rate for labor for the month? What is Hanson’s labor rate variance (LRV) for the month? What are the standard hours (SH) of labor that should have been worked to produce 1,000 X’s? What is Hanson’s labor efficiency variance (LEV) for the month?

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 23 Labor Variance Example Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate Rate variance $310 unfavorable Efficiency variance $600 unfavorable 1,550 hours 1,550 hours 1,500 hours × × × $12.20 per hour $12.00 per hour $12.00 per hour $18,910 $18,600 $18,000 X