STUDENT
CHAPTER 10
MANAGERIAL
ACCOUNTING
PowerPoint Presentation by
10TH EDITION
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
© Copyright 2008 Thomson South-Western, a part of The
Thomson Corporation. Thomson, the Star Logo, and SouthWestern are trademarks used herein under license.
BY
MAHER, STICKNEY & WEIL
PROFIT & COST CENTER
PERFORMANCE EVALUATION
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Managerial Planning, Control, & Performance Evaluation
LEARNING OBJECTIVES
1. Explain reasons for conducting variance
analyses.
2. Describe how to use budget for
performance evaluation.
3. Identify different types of variances
between actual results & flexible budget.
4. Assign responsibility for variances.
Continued
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Managerial Planning, Control, & Performance Evaluation
LEARNING OBJECTIVES
5. Describe the role of variance analysis in
service organizations.
6. Explain the difference between price &
efficiency variances.
7. Identify the relation between actual,
budgeted, & applied fixed manufacturing
costs.
Continued
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Managerial Planning, Control, & Performance Evaluation
LEARNING OBJECTIVES
8. Explain why an effective performance
measurement system requires employee
involvement.
9. Explain how to compute the mix variance
(Appendix 10.1).
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Managerial Planning, Control, & Performance Evaluation
☼
CHAPTER GOAL
☼
This chapter describes & discusses
variance analysis, including providing
detailed comparisons of the profits
achieved with those budgeted.
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LO 1
EXAMPLE: Victoria’s Gourmet Coffee
Managerial Planning, Control, & Performance Evaluation
Victoria’s Gourmet Coffee (VGC) information continues
from chapter 9 as we look at variances from previously
budgeted performance. Actual results are as follows:
Units made & sold
Maximum production & sales
capacity
Selling price
800 per month
1,200 units per
month
$ 30
Continued
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Managerial Planning, Control, & Performance Evaluation
V
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VICTORIA’S GOURMET
COFFEE: Actual Results
Sales price per unit
Sales volume for period
Variable manufacturing costs per unit
Variable marketing costs per unit
Fixed manufacturing costs for period
Fixed marketing costs for period
Fixed administrative costs for period
LO 1
$ 6.10
80,000 units
$ 3.82
$ 0.16
$34,000
$64,400
$44,600
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Managerial Planning, Control, & Performance Evaluation
V
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LO 2
VARIANCE ANALYSES
VGC sold 10,000 more units than
budgeted (70,000). Variance analysis
will allow VGC to determine whether
actual variations from budgeted are
favorable or not.
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LO 3
Managerial Planning, Control, & Performance Evaluation
TYPES OF VARIANCES
Variances are calculated for materials, labor,
fixed & variable manufacturing overhead.
Variances are divided between
Price variance
Efficiency variance (Production volume variance for
fixed manufacturing overhead)
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LO 3
Managerial Planning, Control, & Performance Evaluation
REASONS FOR VARIANCE
A variance is the difference between a
predetermined norm or standard & actual
results
Standards may be biased
Systematic reasons
Change in prices
More/less efficient use of inputs
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LO 3
Managerial Planning, Control, & Performance Evaluation
What do the terms
“favorable” &
“unfavorable”
variance mean?
Favorable means the
variance will increase
profits; unfavorable
means the variance will
decrease profits.
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MANAGERS WANT TO KNOW!
LO 4
Managerial Planning, Control, & Performance Evaluation
ADMINISTRATIVE VARIANCES
Administrative variances are more difficult
to manage because there is no welldefined causal relationship between
administrative costs & production or
sales output.
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LO 5
Managerial Planning, Control, & Performance Evaluation
PRODUCTION COST VARIANCE
ANALYSIS
Variances are calculated for major
responsibility centers, holding all other
things constant. After variances are
computed, managers investigate the
causes of these variances & take
corrective action if necessary.
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LO 5
Managerial Planning, Control, & Performance Evaluation
VARIANCE ANALYSIS IN
SERVICE ORGANIZATIONS
Service organizations, such as financial
institutions & fast food restaurants use
labor & overhead variances. Variable
overhead is often significant for service
industry firms, governmental agencies,
& non-profit groups. Variance analysis
helps assess efficiency & control costs.
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LO 6
Managerial Planning, Control, & Performance Evaluation
PRICE VARIANCE: Definition
Measures the difference
between the price set as norm
(standard) & the actual price.
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LO 6
EFFICIENCY VARIANCE:
Managerial Planning, Control, & Performance Evaluation
Definition
Measures the difference
between the actual quantity of
inputs used & those allowed at
standard to make a unit of
output.
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LO 6
REASONS FOR MATERIALS
VARIANCES
Managerial Planning, Control, & Performance Evaluation
Materials price variances occur because of
Failure to take purchase discounts
Using a better (worse) grade of raw materials than expected
Changes in market supply/demand for raw material
affecting prices
Materials efficiency variances occur when
Allowance is not made for defects, inexperienced workers
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LO 6
REASONS FOR DIRECT LABOR
VARIANCES
Direct labor price (wage) variances occur because of
Changes in labor wage rates not incorporated into budget
Managerial Planning, Control, & Performance Evaluation
Direct labor efficiency variances occur when
Workers are poorly motivated & trained
Poor materials
Faulty equipment
Poor supervision
Scheduling
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LO 6
Managerial Planning, Control, & Performance Evaluation
OVERHEAD PRICE &
EFFICIENCY VARIANCES
Variable overhead price variance results when
the cost per machine hour is more/less than
the standard allowed.
Variable overhead efficiency variance results if
machine hours required to make the actual
production output exceed the standard
machine hours allowed to make that output.
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LO 7
Managerial Planning, Control, & Performance Evaluation
FIXED MANUFACTURING COST
VARIANCES
Fixed manufacturing cost variances are
applied at predetermined rates. Full
absorption costing requires
incorporating fixed costs into unit cost
of items being manufactured.
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LO 7
EXAMPLE: Victoria’s Gourmet Coffee
Managerial Planning, Control, & Performance Evaluation
Victoria’s Gourmet Coffee (VGC) information
continues as we look at fixed manufacturing costs.
Budgeted fixed manufacturing costs
Estimated production volume
$32,200
70,000 units
Actual production volume
Actual fixed manufacturing costs
80,000 units
$34,000
Continued
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Managerial Planning, Control, & Performance Evaluation
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LO 7
PRICE VARIANCE
Price variance =
Actual fixed manufacturing costs
– Budgeted fixed manufacturing costs
= $34,000 - $32,200
= $1,800 U
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LO 7
APPLIED FIXED
MANUFACTURING COST
Managerial Planning, Control, & Performance Evaluation
Cost per unit:
Applied fixed manufacturing cost per unit
Budgeted fixed manufacturing cost per period
=
Estimated production volume per period
= $32,200 / 70,000 units
= $0.46 per unit
Applied = $0.46 per unit * 80,000 units
= $36,800
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Managerial Planning, Control, & Performance Evaluation
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LO 7
PRODUCTION VOLUME
VARIANCE
Production volume variance =
Budgeted fixed manufacturing costs
- Applied fixed manufacturing costs
= $32,200 - $36,800
= $4,600 F
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LO 7
Managerial Planning, Control, & Performance Evaluation
HIGH-TECHNOLOGY
COMPANIES
Variance analysis is applied differently in
high technology companies because
computerized equipment is substituted
for direct labor. Therefore, these
companies should treat labor as a fixed
cost.
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LO 7
Managerial Planning, Control, & Performance Evaluation
DECISION RULE
Management should create a decision rule
for conducting a variance investigation.
Investigations should be conducted on
a cost-benefit basis. Quality should be
allowed to vary within preset
tolerance limits.
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LO 8
Managerial Planning, Control, & Performance Evaluation
WORKER INVOLVEMENT: Benefits
Commitment improves & goals increase when
workers have decision-making authority
When workers can make decisions, the
company is closer to customers
Giving decision-making responsibility to
workers uses their skills & knowledge &
provides motivation to develop further
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LO 8
WORKER INVOLVEMENT:
Managerial Planning, Control, & Performance Evaluation
Challenges
Management must create a system that conveys
organization goals & critical success to all members
Determining measures to determine success may not
be as easy & must ensure
Promoting desired behavior
Comprehensive measures
Supporting organization goals
Reflecting unit’s role in organization
Performance measures most be applied consistently
& accurately
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Managerial Planning, Control, & Performance Evaluation
CHAPTER 10
THE END
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