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Direct Input Variances, and Management Control: I

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Direct Input Variances,and Management Control: I

Chapter 7

- Standards
- Variances
- Static vs. Flexible budgets
- Calculate variances for direct inputs (DM & DL)
- EoP Adjustments
- When to investigate variances

- Here budgeted amount = standard amount.
- We will use these terms interchangeably in this course.

- Variance = budgeted – actual results
- If operating income is greater than expected (budget), then you have a favorable variance.
- Not all favorable variances are “good.”

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

Calculate Variances

Actual “Noname”Flexible Static

Results Budget BudgetBudget

Actual input Actual inputFlex-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----|

Direct-material price variance

Actual price – Budgeted price

Actual

Quantity used

×

=

Direct-labor price variance

Actual price – Budgeted price

Actual

Quantity used

×

=

Direct-material efficiency variance

Actual quantity – Standard quantity

Standard

price

×

=

Direct-labor efficiency variance

Actual quantity – Standard quantity

Standard

price

×

=

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.

ActualBudgeted

Toy planes (units)10,0009,000

Input (bd. ft.)5,2004,500

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

Please calculate the five variances for burppa wood:

- Static-budget variance
- Flexible-budget variance
- Sales-volume variance
- Price variance
- Usage (efficiency) variance

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 should variances be investigated?

Subjective judgments

Rules of thumb as “investigate all variances

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

whichever is lower.”

End of Chapter 7