Direct Input Variances,
and Management Control: I
Chapter 7
2009 Foster School of Business
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Overview
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•
•
•
•
•
Standards
Variances
Static vs. Flexible budgets
Calculate variances for direct inputs (DM & DL)
EoP Adjustments
When to investigate variances
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Standard = Budget
• Here budgeted amount = standard amount.
• We will use these terms interchangeably in
this course.
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Variances
• Variance = budgeted – actual results
• If operating income is greater than expected
(budget), then you have a favorable
variance.
• Not all favorable variances are “good.”
2009 Foster School of Business
Cost Accounting
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4
Static and Flexible Budgets
Based on
Static Budget
Flexible Budget
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Based on
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Planned level of
output at start of
the budget period
Budgeted revenues
and cost based on
actual level of output
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Example
Calculate Variances
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Cost Accounting
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Useful Format to Calculate DM
and DL Variances
Actual
Results
“Noname”
Flexible
Budget
Actual input
X
Actual price
Actual input
X
Budget price
Budget
Flex-budget input
X
Budget price
Static
Budget
Static-budget input
X
Budget price
0,1 |--------------- Static Budget Var.----------------|
2 |----- Flexible Budget Var.-----|-- Sales Volume Var. --|
3 |---- Price ----|---- Usage ----|
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Price Variance: material
Direct-material price variance
=
Actual price –
Budgeted price
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×
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Actual
Quantity used
8
Price Variance: labor
Direct-labor price variance
=
Actual price –
Budgeted price
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×
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Actual
Quantity used
9
Efficiency Variance: DM
Direct-material efficiency variance
=
Actual quantity –
Standard quantity
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×
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Standard
price
10
Efficiency Variance: labor
Direct-labor efficiency variance
=
Actual quantity –
Standard quantity
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×
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Standard
price
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Example: calculate variances
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.
Actual
Budgeted
Toy planes (units)
10,000
9,000
Input (bd. ft.)
5,200
4,500
Price ($/bd. ft.)
$0.49
$0.50
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Calculation of Variances
Please calculate the five variances for burppa
wood:
–
–
–
–
–
Static-budget variance
Flexible-budget variance
Sales-volume variance
Price variance
Usage (efficiency) variance
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Performance Measurement
Using Variances
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.
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End-of-period Adjustments
• 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)
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When to Investigate Variances
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.”
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End of Chapter 7
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