Direct Input Variances, and Management Control: I

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Direct Input Variances, and Management Control: I. Chapter 7. Overview. Standards Variances Static vs. Flexible budgets Calculate variances for direct inputs (DM &amp; DL) EoP Adjustments When to investigate variances. Standard = Budget. Here budgeted amount = standard amount.

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### Direct Input Variances,and Management Control: I

Chapter 7

Overview
• Standards
• Variances
• Static vs. Flexible budgets
• Calculate variances for direct inputs (DM & DL)
• When to investigate variances
Standard = Budget
• Here budgeted amount = standard amount.
• We will use these terms interchangeably in this course.
Variances
• Variance = budgeted – actual results
• If operating income is greater than expected (budget), then you have a favorable variance.
• Not all favorable variances are “good.”
Static and Flexible Budgets

Planned level of

output at start of

the budget period

Based on

Static Budget

Budgeted revenues

and cost based on

actual level of output

Based on

Flexible Budget

Example

Calculate Variances

Useful Format to Calculate DM and DL Variances

Actual “Noname” Flexible Static

Results Budget BudgetBudget

Actual input Actual input Flex-budget input Static-budget input

X X X X

Actual price Budget price Budget price Budget price

0,1 |--------------- Static Budget Var.----------------|

2 |-----Flexible Budget Var.-----|--Sales Volume Var.--|

3 |---- Price ----|----Usage----|

Price Variance: material

Direct-material price variance

Actual price – Budgeted price

Actual

Quantity used

×

=

Price Variance: labor

Direct-labor price variance

Actual price – Budgeted price

Actual

Quantity used

×

=

Efficiency Variance: DM

Direct-material efficiency variance

Actual quantity – Standard quantity

Standard

price

×

=

Efficiency Variance: labor

Direct-labor efficiency variance

Actual quantity – Standard quantity

Standard

price

×

=

Example: calculate variances

The Boing Company (largest maker of toy airplanes) has provided you with the following data on burppa wood costs for 2004. Burppa wood rots very fast. All wood is used in the period in which it is purchased.

Actual Budgeted

Toy planes (units) 10,000 9,000

Input (bd. ft.) 5,200 4,500

Price (\$/bd. ft.) \$0.49 \$0.50

Calculation of Variances

Please calculate the five variances for burppa wood:

• Static-budget variance
• Flexible-budget variance
• Sales-volume variance
• Price variance
• Usage (efficiency) variance
Performance MeasurementUsing Variances

Effectiveness is the degree to which a

predetermined objective or target is met.

Efficiency is the relative amount of inputs

used to achieve a given level of output.

Variances should not solely be used to

evaluate performance.

• Variance accounts are disposed of using one of the approaches outlined in chapter 4.
• W/O all to CoGS
• Prorate to CoGS, FG, & WIP based on:
• Ending total \$ amount in accounts.
• \$ amount of IDCost in the respective accounts.

(Over- or under-allocated overhead is a variance)

When to Investigate Variances

When should variances be investigated?

Subjective judgments

Rules of thumb as “investigate all variances

exceeding \$10,000 or 25% of expected cost,

whichever is lower.”