Chapter 13

1. Chapter 13 Adnan Alibegovic Jenny Hon Vivian Ngo Tom Spaulding

2. Case 13-1: Hoof & Fin Restaurants • Opened over 40 years ago in Austin, Texas • Grown to a 20-location chain throughout Texas • David Green - restaurant manager for one of 20 restaurants • Principal attractions: • Selections include steak and seafood • Low pricing compare to competitors • Menu & décor appeals to target market: budget-conscious diners

3. Case 13-1 • Budget set for each location by CFO of company • Bonus: profits exceeding budgets • Trend: customer preference towards seafood has increased (significantly) as preference towards steak has decreased (slightly)

4. Case 13-1 • What managers of each restaurant had control of: • Hiring • Firing • Employee wage rate • Hours worked • Operating expenses

5. Case 13-1 • Advertising expenses • 5% of sales & allocated among 20 restaurants • Home office expenses • Equally among all • Straight line depreciation depending on each building/equipment • Corporate costs • Net book value of each restaurant • Management costs = mgr & assistant mgr salary + home office mgmt costs (legal, accounting, etc.)

6. Case 13-1

7. Case 13-1

8. Case 13-1

9. Case13-1 • Sales Vol. Variance = $26460.00 F • Market for Seafood is larger and represents opportunity for expansion • However, CM is smaller because we are selling lower CM items. We now sell higher proportion of Seafood, along with a higher discount.

10. Case13-1 • Large unfavorable Operating Inc. Flex Budget Variance • Unfavorable Sales Variance (Increasing sales alone doesn’t mean more) • Favorable Variable Expense Variance • Unfavorable Fixed expense Variance (Can’t blame the Corp, since it is too small)

11. Case13-1 • Reality is that such large unfavorable variance is David’s fault (don’t tell Marv though) • Primary source is large discount • While seafood may sell more quantity wise, it makes no sense to pursue unless the inputs cost can be reduced

12. Case13-1 • Food Costs saving 8¢ • Steak: $3.50  $3.42 • Seafood: $$3.00  $2.92 • DM Usage Variance • Favorable • Means improvements in usage of direct materials, likely caused by substitution of items mentioned

13. Case13-1 • Labor Variances • Insignificant because what one improved the other cancelled out • Less hours worked at higher rate, or more hours worked at lower rate

14. Q&A

15. Reading 13-11 – 13-18:Redesigning Cost Systems: Is Standard Costing Obsolete? Adnan Alibegovic Jenny Hon Vivian Ngo Tom Spaulding

16. Standard Cost System • Standard cost - The cost a firm should incur for an operation based on operating standards (e.g. optimum materials and labor requirements) • Goal: Assess effectiveness and efficiency • Effectiveness – attain goal set for the operation • Efficiency – waste no resources in operation

17. Flexible Budget • A budget that adjusts revenues and costs to the output achieved • Used to identify variances from the master budget which is built with the standard cost system

18. Traditional SCS Variances • Selling price—Diff between actual selling price and budgeted price • Variable Cost • Direct materials • Direct labor • Variable overhead • Variable selling and admin • Fixed Cost (Ch. 14)

19. Q1: Criticisms of Traditional SCS Variances • Obsolete variances • Overemphasis on price • Doesn’t account for quality • Measures utilization of capacity but ignores inventory • No provision for continuous improvement • Use of variances for responsibility accounting can cause internal conflict

20. Actual pounds ordered X Actual Price Actual pounds purchased X Actual Price Actual pounds purchased X Standard Price Raw Materials Ordering Variance Price Variance Adjusted Variances • Raw materials ordering—assesses the effectiveness of suppliers • Price—still a concern but diluted

21. Adjusted Variances • RM Inventory—Management of purchasing • Efficiency—DM used vs. allowed by standards incl. scrap/waste Std. pounds allowed for total production X Std Price Actual pounds Purchased X Standard Price Actual pounds Used X Standard Price Raw Materials Inventory Variance Efficiency Variance

22. Total production X Std. Cost per unit Goods units produced X Std. Cost per unit Scheduled production X Std. Cost per unit Quality Variance ProductionVariance Adjusted Variances • Quality—Scrap/waste (Efficiency + Quality = Traditional DM Variance) • Production—Actual vs. scheduled (any variance is unfavorable)

23. Adjusted Variances • Finished goods—Produced vs. shipped • Sales order—Opportunity cost for orders placed vs. shipped Good units produced X budgeted contribution margin Sales orders filled X budgeted contribution margin Sales order placed X budgeted contribution margin Finished goods Variance Sales order Variance

24. Adjusted Variances • Price deemphasized by addition of several new variances • Split Traditional DM variance to account for quality • Several adjusted variances account for inventory

25. Q2: Push-through vs. Pull-Through • “Push-through” results in departmentalization/ separation of processes with large inventories • “Pull-through” uses multi-functional work cells which produce according to demand

26. SCS for Responsibility Accounting • Lines of responsibility less rigid due to work cells/pull through—reduced departmental competition • Improved variance reporting • Trade-offs between Price/Efficiency/Quality • Inventory • RM + WIP + Finished Goods = Cost of Capital & Lost CM • Both types of reports illustrate trade-offs

27. Q3: SCS for Continuous Improvement/ Making SCS More Dynamic • Standards can be adjusted • Prior periods’ results • Benchmarking • Moving cost reductions • Target costs

28. Q4: What Parts of Updated SCS Make Most Sense? • Dynamic Standards • Focus of Management Reporting on Trade-offs rather than Competition

29. Q&A