1. 1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor Emeritus of Accounting Bryant University MANAGERIAL ACCOUNTING 10 TH EDITION BY MAHER, STICKNEY & WEIL PROFIT & COST CENTER PERFORMANCE EVALUATION STUDENT CHAPTER 10 © Copyright 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South- Western are trademarks used herein under license.

2. Managerial Planning, Control, & Performance Evaluation 2 1.Explain reasons for conducting variance analyses. 2.Describe how to use budget for performance evaluation. 3.Identify different types of variances between actual results & flexible budget. 4.Assign responsibility for variances. LEARNING OBJECTIVES Continued

3. Managerial Planning, Control, & Performance Evaluation 3 5.Describe the role of variance analysis in service organizations. 6.Explain the difference between price & efficiency variances. 7.Identify the relation between actual, budgeted, & applied fixed manufacturing costs. LEARNING OBJECTIVES Continued

4. Managerial Planning, Control, & Performance Evaluation 4 8.Explain why an effective performance measurement system requires employee involvement. 9.Explain how to compute the mix variance (Appendix 10.1). LEARNING OBJECTIVES

5. Managerial Planning, Control, & Performance Evaluation 5 CHAPTER GOAL This chapter describes & discusses variance analysis, including providing detailed comparisons of the profits achieved with those budgeted. ☼☼

6. Managerial Planning, Control, & Performance Evaluation 6 EXAMPLE: Victoria’s Gourmet Coffee Victoria’s Gourmet Coffee (VGC) information continues from chapter 9 as we look at variances from previously budgeted performance. Actual results are as follows: LO 1 Continued Units made & sold800 per month Maximum production & sales capacity 1,200 units per month Selling price$ 30 VGCVGC

7. Managerial Planning, Control, & Performance Evaluation 7 VICTORIA’S GOURMET COFFEE: Actual Results LO 1 Sales price per unit$ 6.10 Sales volume for period80,000 units Variable manufacturing costs per unit$ 3.82 Variable marketing costs per unit$ 0.16 Fixed manufacturing costs for period$34,000 Fixed marketing costs for period$64,400 Fixed administrative costs for period$44,600 VGCVGC

8. Managerial Planning, Control, & Performance Evaluation 8 VARIANCE ANALYSES VGC sold 10,000 more units than budgeted (70,000). Variance analysis will allow VGC to determine whether actual variations from budgeted are favorable or not. LO 2 VGCVGC

9. Managerial Planning, Control, & Performance Evaluation 9 TYPES OF VARIANCES Variances are calculated for materials, labor, fixed & variable manufacturing overhead. Variances are divided between  Price variance  Efficiency variance (Production volume variance for fixed manufacturing overhead) LO 3

10. Managerial Planning, Control, & Performance Evaluation 10 REASONS FOR VARIANCE  A variance is the difference between a predetermined norm or standard & actual results  Standards may be biased  Systematic reasons  Change in prices  More/less efficient use of inputs LO 3

11. Managerial Planning, Control, & Performance Evaluation 11 What do the terms “favorable” & “unfavorable” variance mean? Favorable means the variance will increase profits; unfavorable means the variance will decrease profits. LO 3

12. Managerial Planning, Control, & Performance Evaluation 12 ADMINISTRATIVE VARIANCES Administrative variances are more difficult to manage because there is no well- defined causal relationship between administrative costs & production or sales output. LO 4 MANAGERS WANT TO KNOW!

13. Managerial Planning, Control, & Performance Evaluation 13 PRODUCTION COST VARIANCE ANALYSIS Variances are calculated for major responsibility centers, holding all other things constant. After variances are computed, managers investigate the causes of these variances & take corrective action if necessary. LO 5

14. Managerial Planning, Control, & Performance Evaluation 14 VARIANCE ANALYSIS IN SERVICE ORGANIZATIONS Service organizations, such as financial institutions & fast food restaurants use labor & overhead variances. Variable overhead is often significant for service industry firms, governmental agencies, & non-profit groups. Variance analysis helps assess efficiency & control costs. LO 5

15. Managerial Planning, Control, & Performance Evaluation 15 PRICE VARIANCE: Definition Measures the difference between the price set as norm (standard) & the actual price. LO 6

16. Managerial Planning, Control, & Performance Evaluation 16 EFFICIENCY VARIANCE: Definition Measures the difference between the actual quantity of inputs used & those allowed at standard to make a unit of output. LO 6

17. Managerial Planning, Control, & Performance Evaluation 17 REASONS FOR MATERIALS VARIANCES  Materials price variances occur because of  Failure to take purchase discounts  Using a better (worse) grade of raw materials than expected  Changes in market supply/demand for raw material affecting prices  Materials efficiency variances occur when  Allowance is not made for defects, inexperienced workers LO 6

18. Managerial Planning, Control, & Performance Evaluation 18 REASONS FOR DIRECT LABOR VARIANCES  Direct labor price (wage) variances occur because of  Changes in labor wage rates not incorporated into budget  Direct labor efficiency variances occur when  Workers are poorly motivated & trained  Poor materials  Faulty equipment  Poor supervision  Scheduling LO 6

19. Managerial Planning, Control, & Performance Evaluation 19 OVERHEAD PRICE & EFFICIENCY VARIANCES Variable overhead price variance results when the cost per machine hour is more/less than the standard allowed. Variable overhead efficiency variance results if machine hours required to make the actual production output exceed the standard machine hours allowed to make that output. LO 6

20. Managerial Planning, Control, & Performance Evaluation 20 FIXED MANUFACTURING COST VARIANCES Fixed manufacturing cost variances are applied at predetermined rates. Full absorption costing requires incorporating fixed costs into unit cost of items being manufactured. LO 7

21. Managerial Planning, Control, & Performance Evaluation 21 EXAMPLE: Victoria’s Gourmet Coffee Victoria’s Gourmet Coffee (VGC) information continues as we look at fixed manufacturing costs. LO 7 Continued Budgeted fixed manufacturing costs$32,200 Estimated production volume70,000 units Actual production volume80,000 units Actual fixed manufacturing costs$34,000 VGCVGC

22. Managerial Planning, Control, & Performance Evaluation 22 PRICE VARIANCE LO 7 VGCVGC Price variance = Actual fixed manufacturing costs – Budgeted fixed manufacturing costs = $34,000 - $32,200 = $1,800 U

23. Managerial Planning, Control, & Performance Evaluation 23 APPLIED FIXED MANUFACTURING COST Cost per unit: LO 7 VGCVGC Applied fixed manufacturing cost per unit Budgeted fixed manufacturing cost per period Estimated production volume per period = $32,200 / 70,000 units = $0.46 per unit = Applied = $0.46 per unit * 80,000 units = $36,800

24. Managerial Planning, Control, & Performance Evaluation 24 PRODUCTION VOLUME VARIANCE LO 7 VGCVGC Production volume variance = Budgeted fixed manufacturing costs - Applied fixed manufacturing costs = $32,200 - $36,800 = $4,600 F

25. Managerial Planning, Control, & Performance Evaluation 25 HIGH-TECHNOLOGY COMPANIES Variance analysis is applied differently in high technology companies because computerized equipment is substituted for direct labor. Therefore, these companies should treat labor as a fixed cost. LO 7

26. Managerial Planning, Control, & Performance Evaluation 26 Management should create a decision rule for conducting a variance investigation. Investigations should be conducted on a cost-benefit basis. Quality should be allowed to vary within preset tolerance limits. LO 7 DECISION RULE

27. Managerial Planning, Control, & Performance Evaluation 27 WORKER INVOLVEMENT: Benefits  Commitment improves & goals increase when workers have decision-making authority  When workers can make decisions, the company is closer to customers  Giving decision-making responsibility to workers uses their skills & knowledge & provides motivation to develop further LO 8

28. Managerial Planning, Control, & Performance Evaluation 28 WORKER INVOLVEMENT: Challenges  Management must create a system that conveys organization goals & critical success to all members  Determining measures to determine success may not be as easy & must ensure  Promoting desired behavior  Comprehensive measures  Supporting organization goals  Reflecting unit’s role in organization  Performance measures most be applied consistently & accurately LO 8

29. Managerial Planning, Control, & Performance Evaluation 29 CHAPTER 10 THE END