10 Standard Costs andVariance Analysis

Chapter

Fewer units sold

Fewer units produced

DM and DL usage and prices are different than anticipated

How do you compare?

Comparison of Actual vs. Budgetfor Beal Manufacturing

ActualStatic

Budget

Sales

CGS

Sell & Admin

Var

Fixed

Gross Marg

Oper Inc

$1,800,000

1,252,213

108,000

271,000

$ 547,787

7500 units

$ 168,787

$1,975,000

1,264,000

110,600

280,000

7900 units

$ 320,400

$ 711,000

Comparing actual results to the static budget is not very useful. Some of the

difference is due to sales volume.

Some is due to inefficiency.

A flexible budget is helpful.

ActualFlexibleBudget

StaticBudget

Sales

CGS

Sell & Admin

Var

Fixed

Gross Marg

Oper Inc

$1,800,000

1,252,213

108,000

271,000

$ 547,787

7500 units

$ 168,787

$1,975,000

1,264,000

110,600

280,000

7900 units

$ 320,400

$ 711,000

Flexible budget based on budgeted rates and actual units

sold

ActualFlexibleBudget

Variance

FlexibleBudget

SalesVolume

Variance

StaticBudget

Sales

CGS

Sell & Admin

Var

Fixed

Gross Marg

Oper Inc

$1,800,000

1,252,213

108,000

271,000

$ 547,787

7500 units

$ 168,787

$1,975,000

1,264,000

110,600

280,000

7900 units

$ 320,400

$ 711,000

$1,875,000

1,200,000

105,000

280,000

$ 675,000

7500 units

$290,000

Net impact of low sales volume.

Deserves a closer look.

Actual

DM

DL

Manuf OH

Variable

Fixed

CG Manuf

$120,120

585,460

236,590

363,410

7800 units

$1,305,580

23,100 lbs

$5.20

40,100 hrs

$14.60

?

DM - input- price

DL - input- price

VOH - rate $5.90

FlexibleBudget

$ 117,000

585,000

234,000

320,000

$1,256,000

7800 units

List the detail for actual production

costs.

List corresponding detail for a flexible

budget.

ActualPrice

Variance

Act Inputx

Budg Price

UsageVariance

FlexibleBudget

DM

DL

Manuf OH

Variable

Fixed

CG Manuf

$120,120

585,460

236,590

363,410

7800 units

$1,305,580

23,100 lbs

$5.20

40,100 hrs

$14.60

$5.90

DM - input- price

DL - input- price

VOH - rate

$ 117,000

585,000

234,000

320,000

$1,256,000

7800 units

23,400 lbs

$5.00

39,000 hrs

$15.00

$6.00

ActualFlexibleBudget

DM Usage Variance

DM - input- price

DL - input- price

VOH - rate

7800 units

23,400 lbs

$5.00

39,000 hrs

$15.00

$6.00

23,100 lbs

$5.20

40,100 hrs

$14.60

$5.90

7800 units

Diff in Usage x Budg Price

Diff in Price x Actual Used DM Price Variance

Diff in Price x Actual Purch or…..

Quick Calculationsfor theCPA Exam

DL Usage Variance Diff in Usage x Budg Price

Diff in Price x Actual Used DL Price Variance

ActualFlexibleBudget

DM - input- price

DL - input- price

VOH - rate

7800 units

23,400 lbs

$5.00

39,000 hrs

$15.00

$6.00

23,100 lbs

$5.20

40,100 hrs

$14.60

$5.90

7800 units

Quick Calculationsfor theCPA Exam

DM Usage Variance

$ 4,620 U

$ 1,500 F

DM Price Variance

DL Usage Variance

$16,040 F

$16,500 U

DL Price Variance

Possible Causes of Variances

Unfavorable variances might indicate potential problems.

excessively high prices from suppliers high defect rate poor production scheduling etc.

Favorable variances might indicate potential problems.

poor quality materials workers lacking necessary skills corners cut in production

Understanding Variances

Problems might be beyond the control of the production manager.

poor product design rush orders causing congestion

Understanding Variances

Journal Entries to Record Variances

Two ways of recording DM and DL record DM and DL at actual cost (Chpt 3)

report variances in statements that compare actual to budget

record DM and DL at standard cost (Chpt 10)

record variances at time of transaction

Raw Materials (25,000 @ $5) 125,000

5,000

A/P (25,000 @ $5.20) 130,000

Standard cost

Actual cost

WIP (7,800 x 3 lbs x $5 / lb) 117,000

1,500

Raw Mater (23,100 x $5 / lb) 115,500

Standard usage

WIP (7,800 x 5 hrs x $15 / hr) 585,000

DL Price Variance

Wages Pay. (40,100 x $14.60) 585,460

DL Usage Variance

Actual usage

Standard usage and cost

Actual usage and cost