Standard Costs and Variance Analysis

10 Chapter Standard Costs and Variance Analysis Comparison of Actual vs. Budget for Beal Manufacturing • Fewer units sold • Fewer units produced • DM and DL usage and prices are different than anticipated • How do you compare?

7500 units 7900 units Sales $1,800,000 $1,975,000 CGS 1,252,213 1,264,000 Gross Marg $ 547,787 $ 711,000 Sell & Admin Var 108,000 110,600 Fixed 271,000 280,000 Oper Inc $ 320,400 $ 168,787 Actual Static Budget Comparing actual results to the static budget is not very useful. • Some of the difference is due to sales volume. • Some is due to inefficiency. • A flexible budget is helpful.

$ 547,787 $ 711,000 $ 320,400 $ 168,787 Actual Flexible Budget Static Budget 7500 units 7900 units Sales $1,800,000 $1,975,000 CGS 1,252,213 1,264,000 Gross Marg Sell & Admin Var 108,000 110,600 Fixed 271,000 280,000 Oper Inc Flexible budget based on budgeted rates and actual units sold

$ 711,000 $ 547,787 $ 675,000 $290,000 $ 320,400 $ 168,787 Actual Flexible Budget Variance Flexible Budget Sales Volume Variance Static Budget 7500 units 7500 units 7900 units Sales $1,800,000 $1,875,000 $1,975,000 CGS 1,252,213 1,200,000 1,264,000 Gross Marg Sell & Admin Var 108,000 105,000 110,600 Fixed 271,000 280,000 280,000 Oper Inc Deserves a closer look. Net impact of low sales volume.

$1,256,000 $1,305,580 Actual Flexible Budget List the detail for actual production costs. 7800 units 7800 units DM - input 23,100 lbs - price $5.20 DL - input 40,100 hrs - price $14.60 VOH - rate ? $5.90 DM $120,120 $ 117,000 DL 585,460 585,000 Manuf OH List corresponding detail for a flexible budget. Variable 236,590 234,000 Fixed 363,410 320,000 CG Manuf

7800 units 7800 units DM - input 23,100 lbs 23,400 lbs - price $5.20 $5.00 DL - input 40,100 hrs 39,000 hrs - price $14.60 $15.00 VOH - rate $5.90 $6.00 DM $120,120 $ 117,000 DL 585,460 585,000 $1,256,000 $1,305,580 Manuf OH Variable 236,590 234,000 Fixed 363,410 320,000 CG Manuf Actual Price Variance Act Input x Budg Price Usage Variance Flexible Budget

7800 units 7800 units DM - input 23,100 lbs 23,400 lbs - price $5.20 $5.00 DL - input 40,100 hrs 39,000 hrs - price $14.60 $15.00 VOH - rate $5.90 $6.00 Actual Flexible Budget Quick Calculations for the CPA Exam DM Usage Variance Diff in Usage x Budg Price DM Price Variance Diff in Price x Actual Used or….. Diff in Price x Actual Purch

7800 units 7800 units DM - input 23,100 lbs 23,400 lbs - price $5.20 $5.00 DL - input 40,100 hrs 39,000 hrs - price $14.60 $15.00 VOH - rate $5.90 $6.00 Actual Flexible Budget Quick Calculations for the CPA Exam DL Usage Variance Diff in Usage x Budg Price DL Price Variance Diff in Price x Actual Used

Possible Causes of Variances DM Usage Variance $ 1,500 F DM Price Variance $ 4,620 U DL Usage Variance $16,500 U DL Price Variance $16,040 F

Understanding Variances • Unfavorable variances might indicate potential problems. • excessively high prices from suppliers • high defect rate • poor production scheduling • etc. • Favorable variances might indicate potential problems. • poor quality materials • workers lacking necessary skills • corners cut in production

Understanding Variances • Problems might be beyond the control of the production manager. • poor product design • rush orders causing congestion

Journal Entries to Record Variances Raw Materials (25,000 @ $5) A/P (25,000 @ $5.20) 125,000 5,000 130,000 Two ways of recording DM and DL • record DM and DL at actual cost (Chpt 3) • report variances in statements that compare actual to budget • record DM and DL at standard cost (Chpt 10) • record variances at time of transaction Standard cost Actual cost

WIP (7,800 x 3 lbs x $5 / lb) Raw Mater (23,100 x $5 / lb) WIP (7,800 x 5 hrs x $15 / hr) DL Price Variance Wages Pay. (40,100 x $14.60) DL Usage Variance 117,000 585,000 1,500 115,500 585,460 Standard usage Actual usage Standard usage and cost Actual usage and cost

Standard Costs and Variance Analysis