Cost

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DAY ONE:DM & DL

STANDARD COSTS and FLEXIBLE BUDGETING DAY #1 What I hope you always remember (BOOK BUYI NG EXAMPLE): What two reasons can be used to explain literally any variance? #1. #2.

DESIGNATED DOODLE ZONE

It is not the mountain we conquer but ourselves. EDMUND HILLARY (1919—present), Explorer and the first man conquer Mt. Everest

Quantity

Price

Book Buying Example:You went to the university bookstore to purchase booksfor this class, and you spent more than you expectedto … WHY? The reason is some combination of twopossible explanations.

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STANDARD COSTS and FLEXIBLE BUDGETING Static Budget = Flexible Budget = Budget = Standard = We will learn how to calculate four variances:

DESIGNATED DOODLE ZONE

valid for only one level of activity (actual results are compared to original budget)** generally what you have seen so far in class**

geared toward all levels of activity within the relevant range; is dynamic** based on per-unit standards **

total forecasted amount

per unit budget

(Standard × No. Units = Budget)

DM

DL

VOH

FOH

The first three havethe same “picture”

Asset account

Expense accounts

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• DAY 1:– Lands’ End Men’s Suits

• DM variances– Pirates, Inc.

• DL variances

• Extra:– Smith Company

• DM and DL variances

• DAY 2:

• DAY 3:

Cost

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Cost

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DAY TWO:VOH & FOH

STANDARD COSTS and FLEXIBLE BUDGETING DAY #2 Normal Cost System: Extended Normal Cost System: Small opportunities are often the beginning of great enterprises. DEMOSTHENES (384—322), Orator and statesman

MOH

Actual Applied:

Actual Activity×

PDOR

Underapplied Overapplied

MOH

Actual Applied:Std Allowed forActual Output

(“Actual Activity”)×

PDOR

Underapplied Overapplied

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STANDARD COSTS and FLEXIBLE BUDGETING If you wouldn’t write it and sign it, don’t say it. EARL WILSON (1907—1987), Columnist Living well and beautifully and justly are all one thing. SOCRATES (c. 470—399 B.C.), Philosopher REVIEW / SELF-QUIZ Do you know the answers to these questions?? What is the difference between a budget and a standard? What is a static budget? What is a flexible budget? What four variances should you be able to calculate? When utilizing standard costs, what is another name for the PDOR? When utilizing standard costs, how is the “activity” calculated? K now Thy Calculations!

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• DAY 1:

• DAY 2:– True-Blue Corporation

• VOH variances– Strange Fire, P.C.

• VOH variances– The Costume Company

• FOH variances• Extra:

– Tallyho Company• FOH variances

– Frostee Freeze Company• VOH and FOH variances

– (Benton Company)• *Difficult* VOH and FOH variances

• DAY 3:

Cost

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Cost

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DAY Three:Review & Practice

STANDARD COSTS and FLEXIBLE BUDGETING DAY #3 Why do unfavorable variances occur?? Who is to blame? DM : DM : DL : DL : I think we consider too much the good luck of the early bird, and not enough the bad luck of the early worm. FRANKLIN D. ROOSEVELT (1882—1945), U.S. President

Price

Usage

Rate

Efficiency

Occurs because used more material than expected.The Production Manager is usually held responsible. Minimizing scrap, waste and rework reduce unfavorable variances.Can be caused by the purchase of poor quality materials.

Occurs because prices paid for materials was higher than expected.Can be used to evaluate the Purchasing Manager; however, in many

cases price (driven by a market economy) is largely out of the manager’scontrol. The price variance can be influenced by such things as material quality,

quantity discounts, distance from factory (shipping required), etc.

Occurs because paid more for labor than expected.Who to assign blame? Perhaps the Production Manager.Unexpected overtime can cause variance. A new union contract, labor rates can be largely market-driven.Using more skilled workers to perform less skilled tasks (or vice versa)

will influence rate variances.

Occurs because more labor was used than expected.Often the Production Manager is held responsible.Why occurs?? Lazy/poorly motivated workers.

Poor manufacturing process/system.Downtime from frequent equipment breakdowns.Poorly trained/low skill workers. Poor quality materials.

STANDARD COSTS and FLEXIBLE BUDGETING Why do unfavorable variances occur?? Who is to blame? VOH : VOH : FOH : FOH : You cannot be a leader and ask other people to follow you, unless you know how to follow, too. SAM RAYBURN (1882—1961), Legislator

Spending

Efficiency

Spending

Volume

FOH is comprised of costs like Salaries, Depreciation, Taxes, Insurance.These are largely influenced by long-run decisions, and often beyond

the immediate control of management.Usually, budget variances are small.

Typically related to Labor Efficiency.

Occurs because more was spent on variable overhead than expected.Complicated!Consumption of Indirect Materials can be traced to responsible manager. Utilities are a joint cost—not traceable,.

The Volume Variance measures capacity utilization—how much theproduction facility was used.May try to hold Production Manager responsible.However, what if poor quality materials were purchased; rework time

could cause an unfavorable volume variance. In this case, responsibilityrests with purchasing, not production.

As you can see, determining the cause ofvariances is complicated as production activitiesare all inter-related.

• DAY 1:

• DAY 2:

• DAY 3: [students practice]– Beale Street Blues, Inc.– Ballycanally Corporation– Brötchen Bakery

Cost

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