ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 14 Professor Jeff Yu. Review: Flexible Budget. Flexible budget is prepared based on the actual activity level and is used for performance evaluation ( control ) purpose.
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Fundamentals of Accounting II
Professor Jeff Yu
Flexible budgetis prepared based on the actual activity level and is used for performance evaluation (control) purpose.
Activity Variance = Flexible budget amount – planning (static) budget amount
Spending Variance = Actual cost – flexible budget cost
Spending variance is unfavorable if positive, favorable if negative;
Spending variance captures the efficiency of cost control.
Revenue Variance = Actual revenue – flexible budget revenue
Revenue variance is favorable if positive, unfavorable if negative;
(How much units of input are needed for each unit of output?)
SQ = standard quantity of materials allowed for the actual output
SH = standard hours allowed for the actual output
Price standards are set for each unit of input
(How much should be paid for each unit of input?)
Standard Price (SP) for materials
Standard Rate (SR) for labor and overhead
Materials Price Variance
AQ(AP - SP)
Labor/VOH Rate Variance
AH(AR – SR)
Materials Quantity Variance
SP(AQ - SQ)
Labor/VOH Efficiency Variance
SR(AH – SH)
AP (AR)= Actual Price (Actual Rate): the amount actually paid for
each unit of the materials (labor or VOH).
SP (SR)= Standard Price (Standard Rate): the amount that should
Have been paid for each unit of the materials (labor or VOH).
AQ (AH)= Actual Quantity (Actual Hour): the amount of materials
(labor or VOH activity) actually used in the production.
SQ (SH)= Standard Quantity (Stan. Hour) allowed for the actual output
= actualproductionin units * standard quantity (hours) per unit
Review: Materials Variances
When material purchased ≠ material used
Example: Labor Variances
Bella has the following direct labor standard to manufacture one Zippy: 1.5 standard hours per Zippy at $6.00 per direct labor hour.
Last week 1,550 direct labor hours were worked at a total labor cost of $9,610 to make 1,000 Zippies.
Q: (1)What was Bella’s actual rate for labor for the week?
(2) What was Bella’s labor rate variance for the week?
(3) What is the standard hours of labor that should have been worked to produce 1,000 Zippies?
(4)What was Bella’s labor efficiency variance for the week?
Mix of skill levelsassigned to work tasks.
Level of employee motivation.
Quality of production supervision.
Quality of training provided to employees.
Production managers areusually held accountablefor labor variancesbecause they caninfluence the:
Practice Problem: Labor Variances
Osborne Co. has the following DL standards to produce each unit of horn: 5 direct labor hours at $20 per hour. In May, the actual hourly rate for direct labor is $22, with the labor variances reported below:
Labor rate variance $30,400 U
Labor efficiency variance $4,000 U
Q: How many horns did Osborne Co. produce in May?
Foster Inc.’s direct labor standard for each unit of product is 3 hours at $8 per hour. In April, total direct labor cost of $240,000 was paid to make 10,000 units of product. Labor rate variance is $16,000 F.
Q: What is Foster Inc.’s labor efficiency variance in April?
Example: Variable OH Variances
Cola Co’s Variable OH is applied based on machine hours. The standard allows for 3,200 machine hours for the actual production in March. In March, actual machine hours worked were 3,300, actual variable OH incurred was $6,740, and the variable OH efficiency variance was $200 U.
Q: What is the amount of variable OH rate variance?
An Individual Store
A Sales Territory
A Service Center
Asegmentis any part or activity of an organization about which a manager seeks cost, revenue, or profit data. A segment can be . . .
Evaluating Managers’ Performance
Flexible Budget Variances;
Standard Cost Variances
(controls costs & revenues)
(controls costs & revenues
Return on Investment (ROI);
There are two keys to building segmented income statements:
A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin.
Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin.
No computer division means . . .
No computer division
Traceable fixed costsarise because of the existence of a particular segment and would disappearif the segment itself disappeared.
division but . . .
We still have a
Common fixed costsarise because of the overall operation of the company and would not disappear if any particular segment was eliminated.
Segmented Income Statement
- Variable Expenses
- Traceable Fixed costs
Segment reporting uses the contribution format.
is computed by taking sales minus variable costs.
Segment margin is
Common fixed costs should not be allocated to the divisions. These costs would remain even if one of the divisions were eliminated.
In the above reports, staff of the law firm FDS allocated common fixed expenses the two segments proportionally based on their revenues.
Q: (1) Would the firm be better off financially if family law division were dropped? Prepare segmented income statements to support your answer.
(2) Managers propose that an ad campaign costing $20,000 will increase family law revenue by $100,000. If other expenses and revenues remain constant, how would this proposal affect the family law segment margin and the firm’s overall NOI?
Bolvine Co. had a net loss of $10,000 in May. The CEO asked for a segmented monthly income statement to isolate the problem.
Q: (1) Prepare a segmented income statement by divisions.
(2) What is the amount of common fixed costs for the company?
(3)The manager of Division B proposes that an increase of $20,000 in the division’s monthly advertising costs will increase Division B sales by 10%. If this plan is adopted, what would be the new segment margin for Division B?
Homework Problem 1
Xavier Co. applies MOH based on direct labor hours. The standard costs for one unit of product are as follows:
Direct Material: 6 ounces at $0.50 per ounce
Direct Labor: 1.8 hours at $10 per hour
Variable MOH: 1.8 hours at $5 per hour
2,000 units were produced in June with the following cost data:
Material purchased: 18,000 ounces at $0.6 per ounce
Material used in production: 14,000 ounces
Direct labor: 4,000 hours at $9.75 per hour
Variable MOH cost: $20,800
Q: Compute materials, labor and VOH variances.
Q: (1) Store B Sales will increase by $30,000 if its advertising costs increase by $7,000. How would store B’s segment margin change?
(2) Managers propose that an increase of $8,000 in traceable fixed costs will lower variable expense ratio in Store A to 62%. If sales and everything else remain constant, how would this proposal affect overall company’s NOI?