1. © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Accounting: What The Numbers Mean
Tenth Edition
Marshall, McManus, and Viele

2. Chapter 15 Cost Control PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

3. Performance Report Characteristics
LO 2
Budget Amount
Actual Amount = —
Activity
Variance
Explanation
Favorable
Actual revenues > Budgeted revenues
Actual costs < Budgeted costs
Unfavorable
Actual revenues < Budgeted revenues
Actual costs > Budgeted costs
Learning Objective 2: Discuss how performance reporting facilitates the management by exception process.
A variance for an activity equals the budgeted amount less the actual amount.
Favorable variances occur when the actual revenues are greater than budgeted revenues, and actual costs are less than budgeted costs.
Unfavorable variances occur when actual revenues are less than budgeted revenues and actual costs are greater than budgeted costs.
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4. Performance Report Characteristics
LO 2
Responsibility Reporting Amount of detail varies according to level in the organization.
Management by exception:
Upper-level management does not receive operating detail unless activities are not performing according to plan.
With management by exception, upper-level management does not receive operating detail unless activities are not performing according to plan, and the vice president of operations receives summarized information from each store.
The vice president of operations receives summarized information from each store.
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5. The Flexible Budget
LO 3
Show revenues and expenses that should have occurred at the actual activity.
May be prepared for any activity level within the relevant range.
Reveal variances due to effective
cost control or lack of cost control.
Learning Objective 3: Construct a flexible budget and describe how it is used.
Flexible budgets show revenues and expenses that should have occurred at the actual activity. They may be prepared for any activity level within the relevant range. Flexible budgets reveal variances due to effective cost control or lack of cost control. They can also improve performance evaluation.
Improve performance evaluation.
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6. The Flexible Budget
LO 3
To a budget for different activity levels, we must know how costs behave with changes in activity levels.
Total variable costs change in direct proportion to changes in activity.
Total fixed costs remain unchanged within the relevant range.
Variable
To flex a budget for different activity levels, we must know how costs behave with changes in activity levels. Total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range.
Fixed
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7. Standard Cost Variance Analysis
LO 4
Based on carefully predetermined amounts.
Used for planning material, labor, and overhead requirements.
Standard Costs are
The expected level of performance.
Benchmarks for measuring performance.
Learning Objective 4: Calculate and explain the two components of a standard cost variance.
Standard costs are based on carefully predetermined amounts. They are used for planning material, labor, and overhead requirements. They are the expected level of performance and the benchmarks for measuring performance.
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8. Standard Cost Variance Analysis
LO 4
Standard Cost Variances
Cost per Unit of Input Variance
Quantity Variance
A cost per unit of input variance is the difference between the actual price and the standard price. A quantity variance is the difference between the actual quantity and the standard quantity used. The cost per unit of input variance may be referred to as a price, rate, or spending variance, and the quantity variance may be referred to as a usage or efficiency variance.
The difference between the actual price and the standard price
The difference between the actual quantity and the standard quantity
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9. Standard Cost Variance Analysis
LO 4
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Cost per Unit of Input Variance
Quantity Variance
Standard price is the amount that should have been paid for the resources acquired. For the cost per unit of input variance, the actual quantity times the actual price is compared to the actual quantity times the standard price. For the quantity variance, the actual quantity times the standard price is compared to the standard quantity times the standard price.
Standard price is the amount that should have been paid for the resources acquired.
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10. Standard Cost Variance Analysis
LO 4
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Cost per Unit of Input Variance
Quantity Variance
The standard quantity is the quantity that should have been used for the output achieved.
Standard quantity is the quantity that should have been used for the output achieved.
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11. Standard Cost Variance Analysis
LO 4
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Cost per Unit of Input Variance
Quantity Variance
The price variance equation can be stated as AQ(AP minus SP), where: AQ = Actual Quantity, SP = Standard Price, AP = Actual Price, and SQ = Standard Quantity.
The usage variance equation can be stated as SP(AQ minus SQ), where: AQ = Actual Quantity, SP = Standard Price, AP = Actual Price, and SQ = Standard Quantity.
AQ(AP - SP) SP(AQ - SQ)
AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity
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12. Analysis of Fixed Overhead Variances
LO 6
Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied
SH × POHAR
Budget Variance
Volume Variance
To compute the budget variance, actual fixed overhead incurred is compared to the fixed overhead budget. The fixed overhead budget is compared to the fixed overhead applied (SH times POHAR) to compute the volume variance. Note that POHAR equals the fixed overhead application rate, while SH equals the standard hours allowed.
POHAR = Fixed Overhead Application Rate SH = Standard Hours Allowed
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13. Accounting for Variances
LO 7
Insignificant
Net
Variance
Significant
Net
Variance
Significant Net
Unfavorable
Variance and current standards
Production inefficiency costs recognized as a
Product cost included in
Product cost allocated between
Learning Objective 7: Illustrate the alternative methods of accounting for variances.
Usually, if the net total of all of the favorable and unfavorable variances is not significant relative to the total of all production costs incurred during the period, the net variance will be included with cost of goods sold in the income statement.
If the net variance is significant relative to total production costs, it may be allocated between inventories and cost of goods sold in proportion to the standard costs included in these inventories and cost of goods.
On the other hand, if the standards represent currently attainable targets, then a net unfavorable variance can be interpreted as the cost of production inefficiencies that should be recognized as a cost of the current period.
Cost of
Goods
Sold
Current
Period
Expense
Inventory
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14. Methods of Evaluating Segments
LO 8
Segment
Evaluation Measures
Cost
Center
Actual costs are compared to budgeted costs
Actual segment margin is compared to budgeted segment margin
Profit
Center
Evaluation measures for segments are: for a cost center, the actual costs are compared to budgeted costs; for a profit center, the actual segment margin is compared to the budgeted segment margin; and for an investment center, the actual return on investment is compared to the budgeted return on investment.
Actual return on investment is compared to budgeted return on investment
Investment
Center
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15. Analysis of Investment Centers
LO 9
Return on investment (ROI) is the ratio of segment margin to the investment used to generate the segment margin.
Segment margin
Divisional operating assets
Learning Objective 9: Explain and compare how return on investment and residual income are used to evaluate investment center performance.
Return on investment (ROI) is the ratio of segment margin to the investment used to generate the segment margin. ROI equals segment margin divided by divisional operating assets.
ROI =
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16. Analysis of Investment Centers
LO 9
Segment Margin
Operating assets
ROI =
Segment margin
Sales
Sales
Operating assets
ROI = ×
ROI equals segment margin divided by operating assets. ROI equals margin (segment margin divided by sales) times turnover (sales divided by operating assets).
Margin
Turnover
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17. Residual Income – Another Measure
LO 9
Segment margin
less required return on operating assets
Residual income is another performance measure.
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18. The Balanced Scorecard
LO 10
Financial Perspective
How do we look to the firm’s owners?
Integrated measures
Learning and Growth Perspective How can we continually improve and create value?
Internal Business Process Perspective
In which activities must we excel?
The balanced scorecard financial perspective examines how we look to the firm's owners. The learning and growth perspective examines how we can continually improve and create value. The internal business process perspective identifies the activities in which we must excel. And the customer perspective examines how our customers see us.
Customer Perspective
How do our customers see us?
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19. End of Chapter 15
End of Chapter 15.
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