ACCT 2302
Fundamentals of Accounting II
Spring 2011
Lecture 14
Professor Jeff Yu
Review: Flexible Budget
Flexible budget is prepared based on the actual activity level and
is used for performance evaluation (control) purpose.
Activity Variance = Flexible budget amount – planning
(static) budget amount
Spending Variance = Actual cost – flexible budget cost
Spending variance is unfavorable if positive, favorable if negative;
Spending variance captures the efficiency of cost control.
Revenue Variance = Actual revenue – flexible budget revenue
Revenue variance is favorable if positive, unfavorable if negative;
Review: Standard Cost
 Standard vs. Budget:
• A budget is set for total costs;
• A standard is set for per unit cost;
 Quantity standards are set for each unit of production
(How much units of input are needed for each unit of output?)
SQ = standard quantity of materials allowed for the actual output
SH = standard hours allowed for the actual output
Price standards are set for each unit of input
(How much should be paid for each unit of input?)
Standard Price (SP) for materials
Standard Rate (SR) for labor and overhead
Review: Variance Analysis
Materials Price Variance
Materials Quantity Variance
AQ(AP - SP)
SP(AQ - SQ)
Labor/VOH Rate Variance Labor/VOH Efficiency Variance
AH(AR – SR)
SR(AH – SH)
AP (AR)= Actual Price (Actual Rate): the amount actually paid for
each unit of the materials (labor or VOH).
SP (SR)= Standard Price (Standard Rate): the amount that should
Have been paid for each unit of the materials (labor or VOH).
AQ (AH)= Actual Quantity (Actual Hour): the amount of materials
(labor or VOH activity) actually used in the production.
SQ (SH)= Standard Quantity (Stan. Hour) allowed for the actual output
= actual production in units * standard quantity (hours) per unit
Review: Materials Variances
When material purchased ≠ material used
To compute the PRICE variance, use the total
quantity of raw materials PURCHASED.
To compute the QUANTITY Variance, use only the
quantity of raw materials USED.
Example: Labor Variances
Bella has the following direct labor standard to
manufacture one Zippy: 1.5 standard hours per Zippy at
$6.00 per direct labor hour.
Last week 1,550 direct labor hours were worked at a total
labor cost of $9,610 to make 1,000 Zippies.
Q: (1)What was Bella’s actual rate for labor for the week?
(2) What was Bella’s labor rate variance for the week?
(3) What is the standard hours of labor that should have been
worked to produce 1,000 Zippies?
(4)What was Bella’s labor efficiency variance for the week?
Responsibility for Labor Variances
Production managers are
usually held accountable
for labor variances
because they can
influence the:
Mix of skill levels
assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.
Production Manager
Quality of training
provided to employees.
Practice Problem: Labor Variances
Osborne Co. has the following DL standards to produce
each unit of horn: 5 direct labor hours at $20 per hour. In
May, the actual hourly rate for direct labor is $22, with the
labor variances reported below:
Labor rate variance $30,400 U
Labor efficiency variance $4,000 U
Q: How many horns did Osborne Co. produce in May?
Practice Problem: Labor Variances
Foster Inc.’s direct labor standard for each unit of
product is 3 hours at $8 per hour. In April, total direct
labor cost of $240,000 was paid to make 10,000 units of
product. Labor rate variance is $16,000 F.
Q: What is Foster Inc.’s labor efficiency variance in
April?
Example: Variable OH Variances
Cola Co’s Variable OH is applied based on machine hours. The
standard allows for 3,200 machine hours for the actual production in
March. In March, actual machine hours worked were 3,300, actual
variable OH incurred was $6,740, and the variable OH efficiency
variance was $200 U.
Q: What is the amount of variable OH rate variance?
Chapter 12 Segment Reporting
Learning Objectives
– Understand performance evaluation tools for cost
center, profit center and investment center
– Prepare a segmented income statement
– Compute ROI and Residual Income
– Understand the pros and cons of performance
evaluation using ROI, Residual Income and the
Balanced Scorecard.
Decentralization and Segments
An Individual Store
Quick Mart
A segment is any part
or activity of an
organization about
which a manager seeks
cost, revenue, or profit
data. A segment can be
...
A Sales Territory
A Service Center
Evaluating Managers’ Performance
Evaluation Tool
Cost Center
(controls costs only)
Profit Center
(controls costs & revenues)
Investment Center
(controls costs & revenues
& Investments)
Flexible Budget Variances;
Standard Cost Variances
Segmented
Income Statement
(Segment Margin)
Return on Investment (ROI);
Residual Income
Segmented Income Statement
There are two keys to building segmented income statements:
A contribution format should be used
because it separates fixed from variable
costs and it enables the calculation of a
contribution margin.
Traceable fixed costs should be separated
from common fixed costs to enable the
calculation of a segment margin.
Identifying Traceable Fixed Costs
Traceable fixed costs arise because of the existence
of a particular segment and would disappear if the
segment itself disappeared.
No computer division
means . . .
No computer division
manager.
Identifying Common Fixed Costs
Common fixed costs arise because of the overall
operation of the company and would not disappear
if any particular segment was eliminated.
No computer
division but . . .
We still have a
company president.
Segmented Income Statement
Sales
- Variable Expenses
Contribution Margin
- Traceable Fixed costs
Segment Margin
 Do NOT subtract Common fixed costs!!
 Segment margin is a valuable tool for performance
evaluation and is also useful in decisions such as
dropping or retaining a segment.
Example: Segmented Income Statements
Segment reporting uses the contribution format.
Income Statement
Television Division
Sales
$ 300,000
Variable COGS
120,000
Other variable costs
30,000
Total variable costs
150,000
Contribution margin
150,000
Traceable fixed costs
90,000
Segment margin
$ 60,000
Contribution margin
is computed by
taking sales minus
variable costs.
Segment margin is
Television Division’s
contribution
to profits.
Example: Segmented Income Statements
Income Statement
Company
Television
Sales
$ 500,000
$ 300,000
Variable costs
230,000
150,000
CM
270,000
150,000
Traceable FC
170,000
90,000
Segment margin
100,000
$ 60,000
Common FC
25,000
Net operating
income
$ 75,000
Computer
$ 200,000
80,000
120,000
80,000
$ 40,000
Common fixed costs should not be allocated to the
divisions. These costs would remain even if one of the
divisions were eliminated.
Practice Problem
Revenue from Clients
Variable expenses
Contribution margin
Traceable fixed expenses
Segment margin
Common fixed expenses
Net operating income
Company
$1000,000
220,000
780,000
670,000
$ 110,000
60,000
$ 50,000
Family Law Commercial
Division
Law Division
$400,000
$600,000
100,000
120,000
300,000
480,000
280,000
390,000
$ 20,000
$ 90,000
24,000
36,000
$ (4,000)
$ 54,000
In the above reports, staff of the law firm FDS allocated common fixed
expenses the two segments proportionally based on their revenues.
Q: (1) Would the firm be better off financially if family law division were
dropped? Prepare segmented income statements to support your answer.
(2) Managers propose that an ad campaign costing $20,000 will increase
family law revenue by $100,000. If other expenses and revenues remain
constant, how would this proposal affect the family law segment margin and
the firm’s overall NOI?
Practice Problem
Bolvine Co. had a net loss of $10,000 in May. The CEO asked for a
segmented monthly income statement to isolate the problem.
Division A
Division B
Sales
$400,000
$600,000
Variable expense ratio
50%
30%
Traceable fixed expenses
$240,000
$330,000
Q: (1) Prepare a segmented income statement by divisions.
(2) What is the amount of common fixed costs for the company?
(3)The manager of Division B proposes that an increase of
$20,000 in the division’s monthly advertising costs will increase
Division B sales by 10%. If this plan is adopted, what would be the
new segment margin for Division B?
For Next Class
 Continue on Chapter 12
 Cover ROI, RI and the Balanced Scorecard
Homework Problem 1
Xavier Co. applies MOH based on direct labor hours. The standard
costs for one unit of product are as follows:
Direct Material: 6 ounces at $0.50 per ounce
Direct Labor: 1.8 hours at $10 per hour
Variable MOH: 1.8 hours at $5 per hour
2,000 units were produced in June with the following cost data:
Material purchased: 18,000 ounces at $0.6 per ounce
Material used in production: 14,000 ounces
Direct labor: 4,000 hours at $9.75 per hour
Variable MOH cost: $20,800
Q: Compute materials, labor and VOH variances.
Homework Problem 2
Company
Sales
Store A
Store B
$300,000
$100,000
$200,000
Variable expenses
192,000
72,000
120,000
Contribution margin
Traceable fixed expenses
108,000
76,000
28,000
21,000
80,000
55,000
Segment margin
32,000
$ 7,000
$ 25,000
Common fixed expenses
27,000
Net operating income
$ 5,000
Q: (1) Store B Sales will increase by $30,000 if its advertising costs increase by
$7,000. How would store B’s segment margin change?
(2) Managers propose that an increase of $8,000 in traceable fixed costs will
lower variable expense ratio in Store A to 62%. If sales and everything else
remain constant, how would this proposal affect overall company’s NOI?