Flexible Budgeting Chapter 07, 08. 9-2 Performance evaluation Budget Actual Performance evaluation...

Flexible BudgetingChapter 07, 08

9-2

Performance evaluation

BudgetAct

ualPerformance evaluation by

comparing actual results with

budgeted numbers.

9-3

Deficiencies of the Static BudgetLarry’s Static Budget

9-4

Deficiencies of the Static BudgetLarry’s Actual Results

9-5

Deficiencies of the Static BudgetLarry’s Actual Results Compared with the Static Budget

9-6

Static Budgets and Performance Reports

Static budgets are prepared for a single, planned level of activity.

Performance evaluation is difficult when actual activity

differs from the planned level of

activity.

Hmm! Comparingstatic budgets withactual costs is likecomparing apples

and oranges.

9-7

The relevant question is . . .

“How much of the cost variances are due to higher activity and how much is due to cost control?”

To answer the question,we mustthe budget to theactual level of activity.

The relevant question is . . .

“How much of the cost variances are due to higher activity and how much is due to cost control?”

To answer the question,we mustthe budget to theactual level of activity.

Deficiencies of the Static Budget

9-8

Improve performance evaluation.

May be prepared for any activity level in the relevant range.

Show costs that should have beenincurred at the actual level ofactivity, enabling “apples to apples”cost comparisons.

Help managers control costs.

Let’s look at Larry’s Law Consultancy

Characteristics of Flexible Budgets

9-9

Preparing a Flexible BudgetLarry’s Flexible Budget

9-10

Sales-Volume VariancesLarry’s Flexible Budget Compared with the Static Budget

9-11

Flexible-Budget VariancesLarry’s Flexible Budget Compared with the Actual Results

9-12

Performance report

9-13

Variance Analysis

Standard Cost Variances

Price Variance

The difference betweenthe actual price and the

standard price

Efficiency Variance

The difference betweenthe actual quantity andthe standard quantity

9-14

A General Model for Variance Analysis

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Price Variance Efficiency Variance

Standard price is the amount that should have been paid for the resources acquired.

9-15

Price Variance Efficiency Variance

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

A General Model for Variance Analysis

Standard quantity is the quantity allowed for the actual good output.

Standard input per unit of outputtimes amount of good output.

9-16

A General Model for Variance Analysis

AQ(AP - SP) SP(AQ - SQ)

AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity

Price Variance Efficiency Variance

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

9-17

Hanson Inc. has the following direct material standard to manufacture one

Zippy:

1.5 pounds per Zippy at $4.00 per pound

Last week 1,700 pounds of material were purchased and used to make 1,000 Zippies.

The material cost a total of $6,630.

Material VariancesExample

Zippy

9-18

What is the actual price per poundpaid for the material? a. $4.00 per pound.b. $4.10 per pound.c. $3.90 per pound.d. $6.63 per pound.

What is the actual price per poundpaid for the material? a. $4.00 per pound.b. $4.10 per pound.c. $3.90 per pound.d. $6.63 per pound.

Quick Check Zippy

9-19

Hanson’s material price variance (MPV)for the week was:a. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.d. $800 favorable.

Hanson’s material price variance (MPV)for the week was:a. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.d. $800 favorable.

Quick Check Zippy

9-20

The standard quantity of material thatshould have been used to produce1,000 Zippies is:a. 1,700 pounds.b. 1,500 pounds.c. 2,550 pounds.d. 2,000 pounds.

The standard quantity of material thatshould have been used to produce1,000 Zippies is:a. 1,700 pounds.b. 1,500 pounds.c. 2,550 pounds.d. 2,000 pounds.

Quick Check Zippy

9-21

Quick Check

Hanson’s material efficiency variance (MEV)for the week was:a. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.d. $800 favorable.

Hanson’s material efficiency variance (MEV)for the week was:a. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.d. $800 favorable.

Zippy

9-22

1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb.

= $6,630 = $ 6,800 = $6,000

Price variance$170 favorable

Efficiency variance$800 unfavorable

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Material Variances Summary Zippy

9-23

Hanson Inc. has the following direct labor standard to manufacture one Zippy:

1.5 standard hours per Zippy at $12.00 perdirect labor hour

Last week 1,550 direct labor hours were worked at a total labor cost of $18,910

to make 1,000 Zippies.

Labor Variances ExampleZippy

9-24

What was Hanson’s actual rate (AR)for labor for the week?

a. $12.20 per hour.

b. $12.00 per hour.

c. $11.80 per hour.

d. $11.60 per hour.

What was Hanson’s actual rate (AR)for labor for the week?

a. $12.20 per hour.

b. $12.00 per hour.

c. $11.80 per hour.

d. $11.60 per hour.

Quick Check Zippy

9-25

Hanson’s labor price variance (LPV) for the week was:

a. $310 unfavorable.

b. $310 favorable.

c. $300 unfavorable.

d. $300 favorable.

Hanson’s labor price variance (LPV) for the week was:

a. $310 unfavorable.

b. $310 favorable.

c. $300 unfavorable.

d. $300 favorable.

Quick Check Zippy

9-26

The standard hours (SH) of labor thatshould have been worked to produce1,000 Zippies is:

a. 1,550 hours.

b. 1,500 hours.

c. 1,700 hours.

d. 1,800 hours.

The standard hours (SH) of labor thatshould have been worked to produce1,000 Zippies is:

a. 1,550 hours.

b. 1,500 hours.

c. 1,700 hours.

d. 1,800 hours.

Quick Check Zippy

9-27

Hanson’s labor efficiency variance (LEV)for the week was:

a. $590 unfavorable.

b. $590 favorable.

c. $600 unfavorable.

d. $600 favorable.

Hanson’s labor efficiency variance (LEV)for the week was:

a. $590 unfavorable.

b. $590 favorable.

c. $600 unfavorable.

d. $600 favorable.

Quick Check Zippy

9-28

Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate

Labor Variances Summary

Price variance$310 unfavorable

Efficiency variance$600 unfavorable

1,550 hours 1,550 hours 1,500 hours × × × $12.20 per hour $12.00 per hour $12.00 per hour

= $18,910 = $18,600 = $18,000

Zippy

9-29

Hanson Inc. has the following variable manufacturing overhead standard to

manufacture one Zippy:

1.5 standard hours per Zippy at $3.00 perdirect labor hour

Last week 1,550 hours were worked to make 1,000 Zippies, and $5,115 was spent for

variable manufacturing overhead.

Variable ManufacturingOverhead Variances Example

Zippy

9-30

What was Hanson’s actual rate (AR) for variable manufacturing overhead rate for the week?

a. $3.00 per hour.

b. $3.19 per hour.

c. $3.30 per hour.

d. $4.50 per hour.

What was Hanson’s actual rate (AR) for variable manufacturing overhead rate for the week?

a. $3.00 per hour.

b. $3.19 per hour.

c. $3.30 per hour.

d. $4.50 per hour.

Quick Check Zippy

9-31

Hanson’s spending variance (VOSV) for variable manufacturing overhead forthe week was:

a. $465 unfavorable.

b. $400 favorable.

c. $335 unfavorable.

d. $300 favorable.

Hanson’s spending variance (VOSV) for variable manufacturing overhead forthe week was:

a. $465 unfavorable.

b. $400 favorable.

c. $335 unfavorable.

d. $300 favorable.

Quick Check Zippy

9-32

Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was:

a. $435 unfavorable.

b. $435 favorable.

c. $150 unfavorable.

d. $150 favorable.

Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was:

a. $435 unfavorable.

b. $435 favorable.

c. $150 unfavorable.

d. $150 favorable.

Quick Check Zippy

9-33

Spending variance$465 unfavorable

Efficiency variance$150 unfavorable

1,550 hours 1,550 hours 1,500 hours × × × $3.30 per hour $3.00 per hour $3.00 per hour

= $5,115 = $4,650 = $4,500

Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate

Variable ManufacturingOverhead Variances

Zippy

9-34

Zippy’s actual production required 3,200 standard machine hours. Actual fixed overhead was $8,450.

The budgeted fixed overhead was $9,000. The allocation fixed overhead rate was $3 per machine

hour.

Compute the fixed overhead spending and production-volume variances.

Fixed Overhead Variances – Example

Zippy

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Fixed Overhead Variances

Spending Variance

Production - VolumeVariance

FR = Standard Fixed Overhead RateSH = Standard Hours Allowed

SH × FR

Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Allocated

9-36

3,200 hours × $3.00 per hour

Spending variance$550 favorable

Fixed Overhead Variances – Example

$8,450 $9,000 $9,600

Production - Volume variance$600 favorable

SH × FR

Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied

Zippy

9-37

Fixed Overhead Variances

Volume

Cost

3,000 Hours ExpectedActivity

$9,000 budgeted fixed OH

Fixed overhead

applied to products

Zippy

9-38

Fixed Overhead Variances

$8,450 actual fixed OH

Volume

Cost

3,000 Hours ExpectedActivity

$9,000 budgeted fixed OH

Fixed overhead

applied to products

$8,450 actual fixed OH$550Favorable

Budget Variance

{

Zippy

9-39

{

Fixed Overhead Variances

$8,450 actual fixed OH

3,200 machine hours × $3.00 fixed overhead rate

$600FavorableVolume

Variance

$9,600 applied fixed OH

3,200 StandardHours

Volume

Cost

3,000 Hours ExpectedActivity

$9,000 budgeted fixed OH

Fixed overhead

applied to products

{$550

FavorableBudget

Variance

{ $8,450 actual fixed OH

Zippy

9-40

Sales variances

Selling price

variance

= Actual selling price

Budgeted selling price- x Actual units

sold

Sales volume variance

=Actual

units soldBudgeted units sold- x

Budgeted margin per

unit

9-41

$ $Budgeted ProfitSales variances: Selling price Sales volume

Actual sales minus budgeted costs(F) (U)$ $

Cost variances Material price Material efficiency Direct labor price Direct labor efficiency Vaiable OH spending Variable OH efficiency Fixed OH spending Fixed OH production-volume

Actual Profit

ZippyPerformance report

9-42

Example - Leather LtdOne of the departments of Leather Ltd manufactures leather briefcases. The standard cost schedule applicable for April is set out below.Standard cost schedule per briefcase(assuming monthly production of 640 items)

£Leather 0.7 m2 at £30 per m2 21.00Labor 2 hours at £16 per hour 32.00Variable OH 2 hours at £2 per hour 4.00Fixed OH 2 hours at £6 per hour 12.00Total standard cost 69.00Margin 23.50Selling price 92.50 OH are allocated on the basis of standard labor hours.

9-43

The actual figures for April are set out below. There were no changes in stock levels.

£ £Sales: 700 briefcases 63,000

Less expensesLeather: 525 m2 16,800Labor: 1,350 hrs 22,275Variable OH 2,600

Fixed OH 8,00049,675

Profit for April 13,325

9-44

End of Chapter 07&08