Top Banner
© 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Using Budgets for Planning and Planning and Coordination Coordination Chapter 10
23

© 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

Jan 17, 2016

Download

Documents

Basil Bradford
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

Using Budgets for Planning Using Budgets for Planning and Coordinationand Coordination

Chapter 10

Page 2: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

What-If AnalysisWhat-If Analysis Structure and information required to prepare the

master budget can be used to easily provide the basis for what-if analysis– Evaluating Decision-Making Alternatives– Sensitivity Analysis

The process of selectively varying a plan’s or budget’s key estimates for the purpose of identifying over what range a decision option is preferred

Page 3: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

Variance AnalysisVariance Analysis Variance analysis – comparison of planned (or

budgeted) results with actual results Variance—difference between planned and actual

results– Should be investigated to determine:

What caused the variance What should be done to correct that variance

Page 4: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

Variance AnalysisVariance Analysis Budgeted or planned costs can come from three

sources:

– Standards established by industrial engineers

– Previous period’s performance

– A benchmark—the best in class results achieved by a competitor

Page 5: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

Variance AnalysisVariance Analysis The financial numbers are the product of a price

and a quantity component: – Budgeted amount = standard price per unit *

budgeted quantity– Actual amount = actual price per unit * actual

quantity

Variance analysis explains the difference between planned and actual costs by evaluating:– Differences between planned and actual prices– Differences between planned and actual quantities

Page 6: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

Variance AnalysisVariance Analysis Managers focus separately on prices and quantities

because in most organizations:– One department or division is responsible for the

acquisition of a resource and determining the actual price

– A different department uses the resource and determines the quantity

A variance is a signal that is part of a control system for monitoring results

Page 7: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

Basic Variance Analysis Basic Variance Analysis If managers learn that specific actions they took

helped lower the actual costs, then they can obtain further cost savings by repeating those actions on similar jobs in the future

If the factors causing actual costs to be higher than expected can be identified, then actions may be taken to prevent those factors from recurring in the future

If cost changes are likely to be permanent, cost information can be updated for future jobs

Page 8: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

First-Level VariancesFirst-Level Variances The first-level variance for a cost item is the

difference between the actual costs and the master budget costs for that cost item

Variances are favorable (F) if the actual costs are less than estimated master budget costs

Unfavorable (U) variances arise when actual costs exceed estimated master budget costs

Page 9: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

Decomposing the VariancesDecomposing the Variances A flexible budget adjusts the forecast in the master

budget for the difference between planned volume and actual volume

Cost differences between the master and the flexible budget are called planning variances– Reflect the difference between planned output and

actual output– Arise entirely because the planned volume of

activity was not realized

Page 10: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

Planning and FlexiblePlanning and FlexibleBudget VariancesBudget Variances

Flexible budget variances are the differences between the flexible budget and the actual results

Flexible budget variances reflect:– Quantity variances—the difference between the

planned and the actual use rates per unit of output – Cost variances—the difference between the

planned and the actual price or cost per unit of the various cost items

Page 11: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

Static and Flexible BudgetsStatic and Flexible BudgetsStatic Budget Master budget Carefully forecasted sales

and operating targets

Actual Budget VariancesUnits 7,000 9,000Sales $217,000$279,000 Variable costs:Manufacturing $151,270 $189,000Shipping . 5,000 5,400Administrative 2,000 1,800Total variable $158,270 $196,200

Contr’n margin $58,730 $82,800

Fixed costs:Manufacturing $37,300 $37,000Sell & Admin 33,000 33,000Total fixed costs $70,300 $70,000

Op income (loss) $(11,570) $12,800

2,000 U

62,000 U

37,730 F 400 F 200 U $37,930 F

$24,070 F

300 U UNCH 300 U

$24,370 U

Page 12: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

Evaluation of Financial PerformanceEvaluation of Financial Performance Subdivision of total difference between master or static budget and

actual results to evaluate performance

Flexible SalesActual Budget Flexible Activity MasterResults Variances Budget Variances Budget

Units 7,000 7,000 2,000 U 9,000

Sales $217,000 $217,000 $62,000 U $279,000

Variable costs 158,270 5,670 U 152,600 43,600 F 196,200

ContributionMargin 58,730 5,670 U 64,400 18,400 U 82,800

Fixed costs 70,300 300 U70,000 70,000

Operating income$(11,570) $5,970 U $(5,600) $18,400 U $12,800

Page 13: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

Second and Third-Level Second and Third-Level VariancesVariances

The second-level variances are the planning variance and the flexible budget variance

The direct material flexible budget variances and direct labor flexible budget variances can be decomposed further into third-level variances:– Efficiency variances – Price variances

Page 14: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

Copyright 2010 Pearson Education Canada

Price and Efficiency VariancesPrice and Efficiency Variances

Static-Budget Variance

Flexible-Budget Variance Sales-Volume (Planning) Variance

Price Variance Efficiency Variance

Page 15: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

A General Model for Variance A General Model for Variance Analysis Analysis

AQ x (AP – SP) (AQ – SQ) x SP

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

Price Variance Quantity Variance

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

Page 16: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

Direct Material Variances Direct Material Variances Quantity variance = (AQ - SQ) x SP

Where:AQ = actual quantity of materials usedSQ = standard quantity of materials allowedSP = standard price of materials

Page 17: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

Direct Material Variances Direct Material Variances Price variance = (AP - SP) x AQ

Where:

•AP = actual price of materialsSP = standard price of materials AQ = actual quantity of materials used

– The price variance may be calculated using the quantity purchased rather than the quantity used

Page 18: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

Direct Labor VariancesDirect Labor Variances Efficiency variance = (AH - SH) x SR Rate variance = (AR - SR) x AH

Where:AH = actual number of direct labor hoursAR = actual wage rate SR = standard rateSH = standard number of direct labor hours allowed

The sum of the rate variance and the efficiency variance equals the total flexible budget direct labor variance

Page 19: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

Support ActivitySupport ActivityCost VariancesCost Variances

Support costs can reflect either flexible or fixed costs

The quantity of fixed costs may not change from period to period, but the spending on them may fluctuate

Monitoring spending variances on fixed costs is possible and desirable

Page 20: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

© 2012 Pearson Prentice Hall. All rights reserved.

Support Activity Support Activity Cost VariancesCost Variances

Flexible support costs reflect behind-the-scenes operations that are proportional to the volume of activity but are not directly a part of the product or service provided to the customer

Flexible support costs consist of a quantity (or usage) component and a price component

Flexible support cost variances may be analyzed in a manner similar to direct material or direct labor variances

Page 21: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

Sales VariancesSales Variances Sales volume effects

– Sales mix variance

– Sales quantity variance

© 2012 Pearson Prentice Hall. All rights reserved.

Actual total Actual PlannedPlanned

= units of all x sales – sales xrevenue

products sold mix % mix %per unit

Actual total Planned total PlannedPlanned

= units of all – units of all x sales xrevenue products sold products mix % per unit

Page 22: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

Copyright 2010 Pearson Education Canada

Profitability VariancesProfitability Variances

Static-Budget Variance

Flexible-Budget Variance Sales-Volume (Planning) Variance

Sales-Volume Variance= (Actual unit sales –

Budgeted unit sales) x Budgeted contribution margin per unit

Sales-MixVariance

Sales-QuantityVariance

Level 1

Level 2

Level 3

Page 23: © 2012 Pearson Prentice Hall. All rights reserved. Using Budgets for Planning and Coordination Chapter 10.

Sales VariancesSales Variances Sales price effects

– Sales price variance Actual number of units sold x (Actual price per unit

– Planned price per unit)

© 2012 Pearson Prentice Hall. All rights reserved.

Actual number Actual Plannedof units x price per –

price soldunit per unit