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1

Module 8

Fixed overhead analysis and

reporting for control

Lectures and handouts by:

Shirley Mauger, MBA, HB Comm, CGA

Management Accounting

Fundamentals

2

Module 8 - Table of Contents

8.1 Overhead rates and standard costing

8.2 Fixed overhead budget and volume variances

8.3 Journal entries to record standard costs and variances

8.4 Computer illustration 8.4-1: Fixed costs in a flexible budget

8.5 Full income statement variance analysis

8.6 Decentralization in organizations

8.7 Segment reporting

8.8 Revenue variance and marketing expense analysis

8.9 Return on investment and residual income

8.10 Balanced scorecard

8.11 Other performance measures

1

N/A

2

3

4

Part Content

3

Module 8 - Table of Contents

Review question: Variance analysis and journal entries

Review question: Variance analysis, working backwards from

data

Review question: Segmented statements

Review question: Segmented statements, ROI and residual

income

Review question: Sales and market variances (High low method)

Review question: Multiple choice

5

6

7

8

9

10

Part Content

2

4

Part 1

Overhead rates and standard costing

Fixed overhead budget and volume variances

Journal entries to record standard cost variances

Topics 8.1 - 8.3

MA1 – MODULE 8

Part 1 – Overhead rates and standard costing (Topic 8.1)

Explain the significance of the denominator activity figure in determining the standard cost of a unit of product. (Level 1)

5

Fixed cost: •Total cost remains constant regardless of changes in activity

•Unit cost becomes smaller as the activity increases.

e.g. The rental cost for the sports retailer’s shop is fixed

Skateboards sold

Co

st o

f sto

re r

en

t

Number

of skate-

boards

sold

Cost of

rent per

skate-

board

Total

cost of

rent

1 $2,000 $2,000

2 $1,000 $2,000

100 $20 $2,000

6

Stop the audio, turn to page 1 of

handout 1. (ma1_mod8_handout1.pdf)

Part – Overhead rates and standard costing (Topic 8.1)

Parker Co.

Actual Flexible

budget

variance

Flexible

budget

Sales

volume

variance

Static

budget

Activity level 1,300 0 1,300 200U 1,500

Sales: $300 $410,000 20,000 F $390,000 $ 60,000 U $450,000

Direct mat. (180,000) 16,200 U (163,800) 25,200 F (189,000)

Direct labour (87,800) 9,800 U (78,000) 12,000 F (90,000)

Variable OH (62,200) 5,000 U (57,200) 8,800 F (66,000)

Fixed OH (61,500) 9,000 U (52,500) 0 (52,500)

Income from

operations $ 18,500 $20,000 U $38,500 $14,000 U $52,500

3

7

Handout 1, page 1


Parker Co.

Actual Flexible

budget

variance

Flexible

budget

Sales

volume

variance

Static

budget

Activity level 1,300 0 1,300 200U 1,500

Sales: $300 $410,000 20,000 F $390,000 $ 60,000 U $450,000

Direct mat. (180,000) 16,200 U (163,800) 25,200 F (189,000)

Direct labour (87,800) 9,800 U (78,000) 12,000 F (90,000)

Variable OH (62,200) 5,000 U (57,200) 8,800 F (66,000)

Fixed OH (61,500) 9,000 U (52,500) 0 (52,500)

Income from

operations $ 18,500 $20,000 U $38,500 $14,000 U $52,500

Module 7 review – Calculate all

variances

8


Quantity variance:$181,440-163,800

=$17,640 U

Price variance:$180,000-181,440

=$1,440 F

Direct materials variances

(1)AQ x AR$180,000

(3)SQ x SR

1300 x 10 x $12.60 = $163,800

Total variance 180,000-163,800=16,200 U

(2)AQ x SR

14,400 x $12.6=$181,440

Handout 1, page 1

9


Quantity variance:$181,440-163,800

=$17,640 U

Price variance:$180,000-181,440

=$1,440 F

Direct materials variances

(1)AQ x AR$180,000

(3)SQ x SR

1300 x 10 x $12.60 = $163,800

Total variance 180,000-163,800=16,200 U

(2)AQ x SR

14,400 x $12.6=$181,440

Handout 1, page 1

4

10


Efficiency variance:$78,000 – 78,000

= 0

Rate variance:$87,800 – 78,000

= $9,800 U

Direct labour variances

(1)AQ x AR$87,800

(3)SQ x SR

1300 x 5 x $12 = $78,000

Total variance 87,800 – 78,000 = $9,800 U

(2)AQ x SR

6500 x $12 = $78,000

Handout 1, page 1

11


Efficiency variance:$57,200 – 57,200

= 0

Spending variance:$62,200 - $57,200

= $5,000 U

Variable overhead variances

(1)AQ x AR$62,200

(3)SQ x SR

5 x 1300 x $8.80 = $57,200

Total variance $62,200 – 57,200 = $5,000 U

(2)AQ x SR

6500 x $8.80 = $57,200

Handout 1, page 1

12

Handout 1, page 1


Parker Co.

Actual Flexible

budget

variance

Flexible

budget

Sales

volume

variance

Static

budget

Activity level 1,300 0 1,300 200U 1,500

Sales: $300 $410,000 20,000 F $390,000 $ 60,000 U $450,000

Direct mat. (180,000) 16,200 U (163,800) 25,200 F (189,000)

Direct labour (87,800) 9,800 U (78,000) 12,000 F (90,000)

Variable OH (62,200) 5,000 U (57,200) 8,800 F (66,000)

Fixed OH (61,500) 9,000 U (52,500) 0 (52,500)

Income from

operations $ 18,500 $20,000 U $38,500 $14,000 U $52,500

Budget and production

volume variances

5

13

STANDARD COST CARD – 1 DESK

Direct materials: $126

Direct labour (5 hours at $12/hour 60

Variable overhead (5 DLH at $8.80/hour) 44

*Fixed overhead (5 DLH at $7.00/hour) 35

Total standard costs per desk: $265

(*Based on a denominator level of activity of 1,500 desks.)


Handout 1, page 1

Predetermined

overhead rate

Applying overhead costs

Fixed overhead

=

Estimated total fixed

manufacturing

overhead cost

Estimated total

units in the

allocation base

$52,500

Denominator level of activity1,500 desks x 5

hours per desk = 7,500 hours

$7.00 per direct labour

hour

14p 444-449


Handout 1, page 1

Applying overhead costs in a

standard costing system

Fixed overhead

Manufacturing overhead

Actual

costs

incurred

Overhead

applied

Manufacturing overhead

$61,500 1,300 desks at

$7 per DLH x 5

hours =

$45,500

$16,000

underapplied

15


Handout 1, page 1

p 444-449

6

Volume variance:(2)-(3)

Budget variance:(1)-(2)

Fixed overhead variances

(1)Actual cost

$61,500

(3)AU x SQ x SR

Total variance (1)-(3)

(2)BU x SQ x SR

Budgeted units = Denominator level of activity

Part 1 – Fixed overhead budget and volume variances

(Topic 8.2)Compute and properly interpret the fixed overhead budget and volume variances. (Level 1)

16Handout 1, page 1 p 444-449




(1)Actual cost

$61,500

(3)AU x SQ x SR

1,300 desks x 5 hours x $7=

$45,500

Total variance $61,500 - $45,500 = $16,000 U

(2)BU x SQ x SR

Budgeted units = Denominator level of activity

17


(Topic 8.2)

Handout 1, page 1 p 444-449




(1)Actual cost

$61,500

(3)AU x SQ x SR


$45,500

Total variance $61,500 - $45,500 = $16,000 U

(2)BU x SQ x SR


$52,500

18


(Topic 8.2)


7


Budget variance:$61,500 - $52,500 =

$9,000 U


(1)Actual cost

$61,500

(3)AU x SQ x SR


$45,500

Total variance $61,500 - $45,500 = $16,000 U

(2)BU x SQ x SR


$52,500

More was spent

than planned.

19


(Topic 8.2)


Volume variance:$52,500 - $45,500 =

$7,000 U

Budget variance:$61,500 - $52,500 =

$9,000 U


(1)Actual cost

$61,500

(3)AU x SQ x SR


$45,500

Total variance $61,500 - $45,500 = $16,000 U

(2)BU x SQ x SR


$52,500

200 less units were

produced and sold.

20


(Topic 8.2)


Part 1 – Journal entries to record standard costs and

variances (Topic 8.3)Prepare journal entries to record standard costs and variances. (Level 2)

Formal entries to record variances:

1. Raw materials purchases

2. Issuing raw materials to production

3. Incurrence of direct labour

4. Variable and fixed overhead (not demonstrated here)

Chapter 10 appendix 10B

21p 462-464

8


variances (Topic 8.3)Prepare journal entries to record standard costs and variances. (Level 2)

Formal entries to record variances:

1. Raw materials purchases

2. Issuing raw materials to production

3. Incurrence of direct labour

4. Variable and fixed overhead (not demonstrated here)

Chapter 10 appendix 10B

Stop the audio, turn to Problem 10-27 p.477

In the textbook 22p 462-464

Accounts Payable Raw materials

DM price variance

Wages payable

DM quantity variance

Work in progress

DL efficiency varianceDL rate variance

23


variances (Topic 8.3)

p 462-464

DR Direct materials AQ x SR 8,000 x $6.00

48,000

CR Direct materials price

variance AQ x (SR-AR) 8,000 x (6-5.75)

2,000

CR Accounts Payable AQ x AR 46,000

1. A total of 8,000 kilograms of material were

purchased at a cost of $46,000

24



p 462-464

9


46,000

DM price variance

2,000

48,000

Wages payable


Work in progress


25



p 462-464

2. Issued 6,000 kilograms of materials to production

to produce 3,000 units

DR Work in processSQ x SR 3,000 x 1.5 x $6

27,000

DR Direct materials quantity

variance (AQ-SQ)xSR ( 6,000-(3,000x1.5))x$6

9,000

CR Direct materialsAQ x SR 6,000 x $6

36,000

26



p 462-464


46,000

DM price variance

2,000

48,000

Wages payable


9,000

36,000

Work in progress

27,000


27



p 462-464

10

3. Recorded the direct labour wages for June

DR Work in processSQ x SR 3,000 x .6 x $12

21,600

DR Labour rate variance AQx(AR-SR) (10 x 160 x $12.50-$12)

800

CR Labour efficiency variance(AQ-SQ) x SR ((10x160)-(3,000x.6))x$12

2,400

CR Wages payableAQ x AR 10x160x$12.50

20,000

28



p 462-464


46,000

DM price variance

2,000

48,000

Wages payable


9,000

36,000

Work in progress

27,000

21,600

20,000

DL efficiency variance

2,400

DL rate variance

800

29



p 462-464

30

Part 2

Full income statement variance analysis

Decentralization in organizations

Segment reporting

Topics 8.5 - 8.7

MA1 – MODULE 8

11

Part 2 – Full income statement variance analysis (Topic 8.5)

Prepare an income statement incorporating variance analysis. (Level 2)

31

Direct materials

Direct labour

Variable manufacturing OH

Fixed manufacturing OH

Variable selling and admin exp.

Fixed selling and admin exp.

Variable

Costing

Absorption

Costing

Product

Costs

Period

Costs

Product

Costs

Period

Costs

© McGraw-Hill Ryerson Limited., 2004

Product and period costs

32

Direct mat.

Direct labour

VMOH

FMOH

Variable S&A

Fixed S&A

Absorption

Costing

Product

Costs

Period

Costs



Write off all

variances to cost

of goods sold.


33

Income statement format – Absorption costing


Sales $xxx

Cost of goods sold (standard costs) $xxx

Write off variances

Direct materials price and quantity xxx

Direct labour rate and efficiency xxx

Variable overhead spending and efficiency xxx

Fixed overhead budget and volume xxx

Adjusted cost of goods sold xxx

Gross profit xxx

Variable selling and administration xxx

Fixed selling and administration xxx

Net income $xxx

12


34

Variable

Costing

Product

Costs

Period

Costs



Direct mat.

Direct labour

VMOH

FMOH

Variable S&A

Fixed S&A

Write off all

variances to cost

of goods sold

35

Income statement format – Variable costing


Sales $xxx

Cost of goods sold (standard costs) $xxx

Write off variances

Direct materials price and quantity xxx

Direct labour rate and efficiency xxx

Variable overhead spending and efficiency xxx

Adjusted cost of goods sold xxx

Variable selling and administration xxx xxx

Contribution margin xxx

Fixed manufacturing overhead xxx

Fixed selling and administration xxx

Net income $xxx

Part 2 – Decentralization in organizations (Topic 8.6)

Differentiate between cost centres, profit centres, and investment centres, and explain how performance is measured in each. (Level 2)

Board of directors

CEO

Western

division

Eastern

division

Director of human resources

Consumer

products

Industrial

products

Consumer

products

Industrial

products

DecentralizationDecision making is

spread throughout

the organization.

36p 496-497

13

Responsibility accounting

• Gives managers greater control over their

segments.

• Keeps decisions in the hands of people who

see and understand the problems.

• Serves as a motivating tool.

• Provides a basis for evaluation.


37


Performance is measured

based on control over:

Investment

centre

Cost

centre

Profit

centre

Costs Revenues

Invest-

ments

38p 496-497


Board of directors

CEO

Western

division

Eastern

division

Director of human resources

Consumer

products

Industrial

products

Consumer

products

Industrial

products

Responsibility centres

Cost

centre

Profit centres

Investment

centre

39p 496-497

14

Segment

„Any part or activity of an organization

about which the manager seeks cost,

revenue or profit data.‟Chapter 8, p.334

Part 2 – Segment reporting (Topic 8.7)

40p 334

Prepare a segmented income statement using the contribution format, and explain the difference between traceable fixed costs and common fixed costs. (Level 1)


Segment reporting

• Provides more information on profitability than

company wide reports.

• Can highlight problems and opportunities within

an organization.

• Reduces the effects of cross subsidization

• Costs not traced directly to the segment.

• Costs allocated using an inappropriate base.

41p 334-340


Classifying costs for segment reporting

Traced

directly to

the segment.

Variable Fixed

Variable cost

of goods sold

Stop the audio, turn to page 2 of handout 1.

(ma1_mod8_handout1.pdf)42

p 334-340

15



Traced

directly to

the segment.

Variable Fixed

Traceable Common

Supports more

than one segment

and not traceable

to any segment.

• Salary of the CEO

• Shared equipment

costs

Directly supports

the segment. Can

become common

as segments are

further divided.• Salary of the

segment manager.

43p 334-340



Traced

directly to

the segment.

Variable Fixed

Common

Supports more

than one segment

and not traceable

to any segment.

Can be controlled

by the segment

manager.

CanNOT be

controlled by the

segment manager.

• Advertising for

that segment

• Depreciation of

plant facilities

Traceable

Discretionary Committed

44p 334-340


• Identifies what happens to profits as volume

changes.

• Useful for short run decisions such as temporary

uses of capacity. (chapter 12)

= Contribution margin

Sales

(Variable costs)

Segment reporting format

45p 334-340

16


• Useful for long term decisions.

• Identifies margin available after a segment

covers its own costs.

• A segment that cannot cover its own costs

should be discontinued.


Sales

(Variable costs)

(Traceable fixed costs)

= Segment margin


46p 334-340



Sales

(Variable costs)

(Traceable fixed costs)

= Segment margin

• Corporate wide income


= Net income

(Common costs)

47p 334-340


48

Restructuring a segmented income statement

Stop the audio, and turn to problem

8-24, page 360 and page 3 of

handout 1.

17


49


S. Europe Mid.Europe N.Europe

Sales € 300,000 €800,000 €700,000

Territorial expenses

Cost of goods sold 93,000 240,000 315,000

Salaries 54,000 56,000 112,000

Insurance 9,000 16,000 14,000

Advertising 105,000 240,000 245,000

Depreciation 21,000 32,000 28,000

Shipping 15,000 32,000 42,000

Total territorial expenses 297,000 616,000 756,000

Income/loss before corp.exp. 3,000 184,000 (56,000)

Corporate expenses

Advertising (general) 15,000 40,000 35,000

General administrative 20,000 20,000 20,000

Total corporate expenses 35,000 60,000 55,000

Net operating income(loss) €(32,000) €124,000 €(111,000)

Variable

Costs

problem 8-24, page 360, handout 1, page 3


50



Sales € 300,000 €800,000 €700,000



Salaries 54,000 56,000 112,000

Insurance 9,000 16,000 14,000

Advertising 105,000 240,000 245,000

Depreciation 21,000 32,000 28,000

Shipping 15,000 32,000 42,000



Corporate expenses





Traceable

fixed costs



51



Sales € 300,000 €800,000 €700,000



Salaries 54,000 56,000 112,000

Insurance 9,000 16,000 14,000

Advertising 105,000 240,000 245,000

Depreciation 21,000 32,000 28,000

Shipping 15,000 32,000 42,000



Corporate expenses





Common

fixed costs


18

52

SOLUTION - In €s Total S. Eur. Mid.Eur. N.Eur.

Sales 1,800,000 300,000 800,000 700,000

Less variable expenses:

Cost of goods sold 648,000 93,000 240,000 315,000

Shipping expense 89,000 15,000 32,000 42,000

Total variable expenses 737,000 108,000 272,000 357,000

Contribution margin 1,063,000 192,000 528,000 343,000

Variable

Costs



53


Sales 1,800,000 300,000 800,000 700,000






Less traceable fixed exp.

Salaries 222,000 54,000 56,000 112,000

Insurance 39,000 9,000 16,000 14,000

Advertising 590,000 105,000 240,000 245,000

Depreciation 81,000 21,000 32,000 28,000

Total traceable fixed exp. 932,000 189,000 344,000 399,000

Territorial seg. margin 131,000 3,000 184,000 (56,000)

Traceable

fixed costs



54


Sales 1,800,000 300,000 800,000 700,000







Salaries 222,000 54,000 56,000 112,000

Insurance 39,000 9,000 16,000 14,000

Advertising 590,000 105,000 240,000 245,000

Depreciation 81,000 21,000 32,000 28,000



Less common fixed exp.

Advertising (gen.) 90,000

General admin. 60,000

Total common fixed exp. 150,000

Net operating loss (19,000)

Common

fixed costs


problem 8-24

19

55


Sales 1,800,000 300,000 800,000 700,000







Salaries 222,000 54,000 56,000 112,000

Insurance 39,000 9,000 16,000 14,000

Advertising 590,000 105,000 240,000 245,000

Depreciation 81,000 21,000 32,000 28,000








Which is covering its

traceable costs?


problem 8-24

56


Sales 1,800,000 300,000 800,000 700,000







Salaries 222,000 54,000 56,000 112,000

Insurance 39,000 9,000 16,000 14,000

Advertising 590,000 105,000 240,000 245,000

Depreciation 81,000 21,000 32,000 28,000








S. Europe sales are lower

than mid. Europe, however,

salaries are comparable.


problem 8-24

57


Sales 1,800,000 300,000 800,000 700,000







Salaries 222,000 54,000 56,000 112,000

Insurance 39,000 9,000 16,000 14,000

Advertising 590,000 105,000 240,000 245,000

Depreciation 81,000 21,000 32,000 28,000








S. Europe spends less on

advertising than mid. Europe.

Is this a reason for low sales?


problem 8-24

20

58


Sales 1,800,000 300,000 800,000 700,000







Salaries 222,000 54,000 56,000 112,000

Insurance 39,000 9,000 16,000 14,000

Advertising 590,000 105,000 240,000 245,000

Depreciation 81,000 21,000 32,000 28,000








N. Europe spends twice

as much on sales

salaries as Mid. Europe.


problem 8-24

59


Sales 100 100 100 100


Cost of goods sold 36 31 30 45

Shipping expense 5 5 4 6

Total variable expenses 41 36 34 51

Contribution margin 59 64 66 49


Salaries 12 18 7 16

Insurance 2 3 2 2

Advertising 33 35 30 35

Depreciation 5 7 4 4

Total traceable fixed exp. 52 63 43 57

Territorial seg. margin 7 1 23 (8)


Advertising (gen.) 5

General admin. 3

Total common fixed exp. 8

Net operating loss (1)


problem 8-24

N. Europe‟s

contribution

margin is lower.

60


Sales 100 100 100 100


Cost of goods sold 36 31 30 45

Shipping expense 5 5 4 6

Total variable expenses 41 36 34 51

Contribution margin 59 64 66 49


Salaries 12 18 7 16

Insurance 2 3 2 2

Advertising 33 35 30 35

Depreciation 5 7 4 4

Total traceable fixed exp. 52 63 43 57

Territorial seg. margin 7 1 23 (8)


Advertising (gen.) 5

General admin. 3

Total common fixed exp. 8

Net operating loss (1)

N. Europe is not

covering its

traceable costs.


problem 8-24

21

61

Part 3

Revenue variance and marketing expense

analysis

Topic 8.8

MA1 – MODULE 8

Part 3 – Revenue variance and marketing expense analysis

(Topic 8.8)Analyze variances from revenue targets. (Level 1)

62

Static-budget

variances

Flexible budget

variance

Sales volume

variance

Price

variance

Efficiency

variance

Mix

variance

Yield

variance

Stop the audio, and turn

in handout 1 to pages 4-7

p 532-538

Analyze variances from revenue targets. (Level 1)

63

Static-budget

variances

Flexible budget

variance

Sales-volume

variance

Sales price

variance

Market volume

variance

Market share

variance

Sales mix

variance

Sales quantity

variance


(Topic 8.8)

p 532-538

22

64

Parker Co. Per unit Totals

Budget Selling

price

Variable

cost

Cont.

margin

Sales

volume

Sales

mix

Contribution

margin

Desks 200 84 116 4,200 19.81% 487,200

Wall units 300 129 171 17,000 80.19% 2,907,000

TOTAL 21,200 100% 3,394,200

Parker Company sells desks and wall units. The following is

the budget and the actual results for the year.

Parker Co. Per unit Totals

Actual Selling

price

Variable

cost

Cont.

margin

Sales

volume

Sales

mix

Contribution

margin

Desks 180 84 116 6,000 25% 696,000

Wall units 300 129 171 18,000 75% 3,078,000

TOTAL 24,000 100% 3,774,000

Work with unrounded numbers….


(Topic 8.8)

65

Static-budget

variances

Flexible budget

variance

Sales-volume

variance

Sales price

variance

Market volume

variance

Market share

variance

Sales mix

variance

Sales quantity

variance


(Topic 8.8)

p 532-538

66

How much of the variance is due to less sales and how much of it is due to a change in

selling price?

1. Prepare a partial static budget for sales data.

Parker Co. - Static budget

Actual

results

Static budget Static budget

variance

Desks 1,080,000 840,000 240,000 F

Wall units 5,400,000 5,100,000 300,000 F

TOTAL 6,480,000 5,940,000 540,000 F


(Topic 8.8)

p 532-538

23

Static-budget

variances

Flexible budget

variance

Sales-volume

variance

Sales price

variance

Market volume

variance

Market share

variance

Sales mix

variance

Sales quantity

variance

67


(Topic 8.8)

p 532-538

2. Prepare a partial flexible budget for sales data.

Parker Co.

Sales price and sales volume variances

Actual

results

Sales

price

variance

Flexible

budget

Static

budget

Desks 1,080,000 1,200,000 840,000

Wall units 5,400,000 5,400,000 5,100,000

TOTAL 6,480,000 6,600,000 5,940,000

Bud.sell.price Act.unitsDesks $200 x 6,000 = $1,200,000Wall units $300 x 18,000 = $5,400,000

68


(Topic 8.8)

p 532-538


Sales price variance

Parker Co.


Actual

results

Sales

price

variance

Flexible

budget

Static

budget

Desks 1,080,000 120,000 U 1,200,000 840,000

Wall units 5,400,000 -- 5,400,000 5,100,000

TOTAL 6,480,000 120,000 U 6,600,000 5,940,000

69


(Topic 8.8)

p 532-538

24


When based on the contribution margin, this is called the Sales volume variance‟.This next analysis will be based on contribution margin‟

Parker Co.


Actual

results

Sales

price

variance

Flexible

budget

Static

budget

Desks 1,080,000 120,000 U 1,200,000 360,000 F 840,000

Wall units 5,400,000 -- 5,400,000 300,000 F 5,100,000

TOTAL 6,480,000 120,000 U 6,600,000 660,000 F 5,940,000

70


(Topic 8.8)

p 532-538

3. Prepare the sales mix and sales quantity variances

Based on contribution margin:Act.sls. CM

Desks: 6,000 x $116 = $ 696,000Wall units: 18,000 x $171 = $3,078,000TOTAL $3,774,000

$3,394,200

Parker Co.


Actual

results

Sales

price

variance

Flexible

budget

Static

budget

Desks 1,080,000 120,000 U 1,200,000 360,000 F 840,000

Wall units 5,400,000 -- 5,400,000 300,000 F 5,100,000

TOTAL 6,480,000 120,000 U 6,600,000 660,000 F 5,940,000

71


(Topic 8.8)

p 532-538


Parker Co.


Flexible

budget

Sales

volume

variance

Static

budget

Desks 696,000 208,800 F 487,200

Wall units 3,078,000 171,000 F 2,907,000

TOTAL 3,774,000 379,800 F 3,394,200

72


(Topic 8.8)

p 532-538

25

Market volume

variance

Market share

variance

Static-budget

variances

Flexible budget

variance

Sales-volume

variance

Sales mix

variance

Sales quantity

variance

Sales price

variance

73


(Topic 8.8)

p 532-538

•Market volume variance• Change in contribution margin due to change in total

market sales.

•Market share variance• Change in contribution margin due to change in the

share of market sales.

•Sales mix variance• Change in contribution margin due to change in the

proportion of sales that each product contributes.

•Sales quantity variance• Change in contribution margin due to either more or less

sales than budgeted.

74


(Topic 8.8)

p 532-538


Desks: 24,000 x (42/212) x $116= $ 551,547Wall units 24,000 x (170/212) x $171 = $3,290,943

Parker Co.

Analysis of the sales volume variance

Bud.

mix

%

Flexible

budget

Sales

mix

variance

∑Act.qty.

x bud.sls.

mix x CM

Sales

quantity

variance

Static

budget

Desks *19.8 696,000 551,547 487,200

Wall

units

*80.2 3,078,000 3,290,943 2,907,000

TOTAL 3,774,000 3,842,490 3,394,200

* rounded

75Work with unrounded numbers….


(Topic 8.8)

p 532-538

26


Parker Co.


Act.

mix

Bud.

mix

Flexible

budget

Sales

mix

variance

∑Act.qty.

x bud.sls.

mix x CM

Sales

quantity

variance

Static

budget

Desks 25 *19.8 696,000 144,453F 551,547 64,347F 487,200

Wall

units

75 *80.2 3,078,000 212,943U 3,290,943 383,943F 2,907,000

TOTAL 3,774,000 68,490U 3,842,490 448,290F 3,394,200

For desks the actual sales mix is 5.1887% more than the budgeted sales mix. 24,000 total units x 5.1887% x CM of $116 per unit is $144,453.

* rounded

76


(Topic 8.8)

p 532-538


Parker Co.


Act.

mix

Bud.

mix

Flexible

budget

Sales

mix

variance

∑Act.qty.

x bud.sls.

mix x CM

Sales

quantity

variance

Static

budget

Desks 25 *19.8 696,000 144,453F 551,547 64,347F 487,200

Wall

units

75 *80.2 3,078,000 212,943U 3,290,943 383,943F 2,907,000

TOTAL 3,774,000 68,490U 3,842,490 448,290F 3,394,200

* rounded

• In total 2,800 more units were sold (24,000-21,200). Of that amount 19.8113% were desks.

• At a contribution margin level of $116 that represents a 2,800 x .198113 x $116 = $64,347 favorable variance for desks.

77


(Topic 8.8)

p 532-538


See page 535 in the textbook for an alternative method.

Parker Co.


Act.

mix

Bud.

mix

Flexible

budget

Sales

mix

variance

∑Act.qty.

x bud.sls.

mix x CM

Sales

quantity

variance

Static

budget

Desks 25 *19.8 696,000 144,453F 551,547 64,347F 487,200

Wall

units

75 *80.2 3,078,000 212,943U 3,290,943 383,943F 2,907,000

TOTAL 3,774,000 68,490U 3,842,490 448,290F 3,394,200

* rounded

78


(Topic 8.8)

p 532-538

27

Static-budget

variances

Flexible budget

variance

Sales-volume

variance

Sales price

variance

Market volume

variance

Market share

variance

Sales mix

variance

Sales quantity

variance

79


(Topic 8.8)

p 532-538

Assume that Parker Co. derives its total unit sales budget for the

year based on industry forecasts.

Parker Co. - Analysis of the sales volume variance

Industry

forecast

in units

Actual

industry

results in

units

Variance

(units)

Desks 48,000 60,000 12,000F

Wall

units

85,000 100,000 15,000F

Total 133,000 160,000 27,000F

4. Prepare the market volume and market share variances

80


(Topic 8.8)

p 532-538




Industry

forecast

in units

Actual

industry

results in

units

Variance

(units)

Market

volume

variance

Desks 48,000 60,000 12,000F 121,800F

Wall

units

85,000 100,000 15,000F 513,000F

Total 133,000 160,000 27,000F 634,800F


(Act.mkt.vol.-bud.mkt.vol.) x Ant.mkt sh.% x Bud. CMDesks: ( 60,000 - 48,000 ) x ( 4200/48,000) x 116Wall units: ( 100,000 - 85,000 ) x (17000/85000) x 171

81


(Topic 8.8)

p 532-538

28

p 532-538




Industry

forecast

in units

Actual

industry

results in

units

Variance

(units)

Market

volume

variance

Desks 48,000 60,000 12,000F 121,800F

Wall

units

85,000 100,000 15,000F 513,000F

Total 133,000 160,000 27,000F 634,800F


82

• The total market size for desks has increased by 60,000-48,000=12,000 units

• Parker’s share of this is 8.75% (4200/48,000). That’s 1050 units• 1050 units x CM of $116 is $121,800 which means that Parker’s

share of the increase in the market size is $121,800.


(Topic 8.8)




Industry

forecast

in units

Actual

industry

results in

units

Variance

(units)

Market

volume

variance

Market

share

variance

TOTAL

Desks 48,000 60,000 12,000F 121,800F 87,000F 208,800F

Wall

units

85,000 100,000 15,000F 513,000F 342,000U 171,000F

Total 133,000 160,000 27,000F 634,800F 255,000U 379,800F


(Act.sls qty.- [Act.mkt.vol. x Ant.mkt sh.%]) x Bud. CMDesks: ( 6,000 - [ 60,000 x 4200 / 48000]) x 116Wall units: ( 18,000 - [ 100,000 x 17000/ 85000]) x 171

83


(Topic 8.8)

p 532-538

p 532-53884




Industry

forecast

in units

Actual

industry

results in

units

Variance

(units)

Market

volume

variance

Market

share

variance

TOTAL

Desks 48,000 60,000 12,000F 121,800F 87,000F 208,800F

Wall

units

85,000 100,000 15,000F 513,000F 342,000U 171,000F

Total 133,000 160,000 27,000F 634,800F 255,000U 379,800F


84

•Parker’s original forecast of 4200 units was 8.75% of the market. •At a market level of 60,000 units they should have sold (60,000x8.75%) 5,250 units to maintain their market share. •Instead they sold 6000 units. The increase of 750 units x $116 CM is $87,000 which is their increase in the share of the market for desks.


(Topic 8.8)

29




Industry

forecast

in units

Actual

industry

results in

units

Variance

(units)

Market

volume

variance

Market

share

variance

TOTAL

Desks 48,000 60,000 12,000F 121,800F 87,000F 208,800F

Wall

units

85,000 100,000 15,000F 513,000F 342,000U 171,000F

Total 133,000 160,000 27,000F 634,800F 255,000U 379,800F


$379,800 is the original sales volume variance.

85


(Topic 8.8)

p 532-538

86

Part 4

Rate of return and residual income

Balanced scorecard

Other performance measures

Topics 8.9-8.11

MA1 – MODULE 8

Part 4 – Rate of return and residual income (Topic 8.9)

Compute and interpret the return on investment and residual income and list the strengths and weaknesses of each method. (Level 1)

Return on investment

(ROI)

Measuring performance of

investment centres

Net operating income Sales

Sales Average operating

assets

x

Margin Turnover

87p 505-514

30



(ROI)


investment centres



assets

x

Margin

Management’s ability to

control expenses in

relation to sales.

Turnover

88


p 505-514



(ROI)


investment centres



assets

x

Margin Turnover

Amount of sales

generated by the

investment in assets.

89


p 505-514



(ROI)


investment centres

• Percentages are easy to understand and

compare with other divisions/companies.

• Forces control of investments in assets and costs.

• Includes major ingredients of profitability.

Advantages

Disadvantages

• May encourage short run increases in ROI or

changes that are inconsistent with strategies.

• A manager may not be able to control committed

costs.

• Ignores product quality.

• May reject profitable investment opportunities to

maximize ROI.90


p 505-514

31


Residual income


investment centres

Net operating income – (minimum required

return on investments)

% return x average

investments

•Deducting the minimum required return leaves

the residual income available for investments.

91


p 505-514



investment centres

• Includes major ingredients of profitability.

• Encourages managers to make investments that

are profitable to the entire organization.

Advantages

Disadvantages

• May encourage short run increases in RI.

• Cannot compare with different size segments.

• Not normally used by external analysts.

Residual income

92


p 505-514

ROI APPROACH Present New line Total

Sales 21,000,000

Net operating income 1,680,000

Operating assets 5,250,000

ROI (margin x turnover) 32%


investment centres

Stop the audio, turn to page 548, problem 11-20

in the textbook and page 8 of handout1.

(1,680,000/21,000,000) x (21,000,000/5,250,000)

(net operating income/sales) x (sales/average operating assets)

1. Compute the division’s ROI for last year, also, compute the

ROI as it will appear if the new product line is added.

93


p 505-514

32


Sales 21,000,000 9,000,000

Net operating income 1,680,000 630,000*

Operating assets 5,250,000 3,000,000

ROI (margin x turnover) 32% 21%


investment centres

(630,000/9,000,000) x (9,000,000/3,000,000)

*(9,000,000-(65% of 9,000,000)-2,520,000)

Problem 11-20, page 548-549




94


p 505-514


Sales 21,000,000 9,000,000 30,000,000

Net operating income 1,680,000 630,000 2,310,000

Operating assets 5,250,000 3,000,000 8,250,000

ROI (margin x turnover) 32% 21% 28%


investment centres

(2,310,000/30,000,000) x (30,000,000/8,250,000)




95


Problem 11-20, page 548-549 p 505-514


investment centres

2. Fred has no incentive to accept the

investment if it will reduce his ROI from

32% to 28%.

3. It will increase the company’s overall ROI

of 18%.


Sales 21,000,000 9,000,000 30,000,000

Net operating income 1,680,000 630,000 2,310,000

Operating assets 5,250,000 3,000,000 8,250,000

ROI (margin x turnover) 32% 21% 28%

96


Problem 11-20, page 548-549 p 505-514

33


investment centres

RESIDUAL INCOME APPROACH Present New line Total

Net operating income $1,680,000Minimum net operating income 787,500

Residual income $ 892,500

Operating assets x minimum rate of return (5,250,000 x 15%)

4. a. Compute the East Division’s residual income for last year,

also compute the residual income as it will appear if the

new product line is added.

97


Problem 11-20, page 548-549 p 505-514


investment centres


Net operating income $1,680,000 $ 630,000Minimum net operating income 787,500 450,000

Residual income $ 892,500 $ 180,000





98


Problem 11-20, page 548-549 p 505-514


investment centres


Net operating income $1,680,000 $ 630,000 $2,310,000Minimum net operating income 787,500 450,000 1,237,500

Residual income $ 892,500 $ 180,000 $1,072,500





99


Problem 11-20, page 548-549 p 505-514

34


investment centres


Net operating income $1,680,000 $ 630,000 $2,310,000Minimum net operating income 787,500 450,000 1,237,500

Residual income $ 892,500 $ 180,000 $1,072,500

Problem 12-18, page 594

4.b. Using this approach, Fred is inclined to accept

the project because it will increase the East

Division’s residual income.

100


p 505-514

Part 4 – Balanced scorecard (Topic 8.10)List some operating performance measures and explain how they are used. (Level 1)

“An integrated set of performance measures…that supports the

organization‟s strategy”

Performance

measures

Financial Customers

Learning

and growth

Internal

business

processes

© McGraw-Hill Ryerson Limited., 2004 101p 514-519

List some operating performance measures and explain how they are used. (Level 1)



Performance

measures

Financial Customers

Learning

and growth

Internal

business

processes

How do we look to the owners?

•Return on investment•Net income

© McGraw-Hill Ryerson Limited., 2004 102

Part 4 – Balanced scorecard (Topic 8.10)

p 514-519

35




Performance

measures

Financial Customers

Learning

and growth

Internal

business

processes

How do we look to our customers?

•Market share•New customers•Customer complaints



p 514-519




Performance

measures

Financial Customers

Learning

and growth

Internal

business

processes

How can we continually learn,

improve, and grow?

• Hours of in-house training• Suggestions per employee• Employee turnover



p 514-519




Performance

measures

Financial Customers

Learning

and growth

Internal

business

processes

In which internal business processes

must we excel?

• Time to introduce new products

• Delivery cycle time• Standard cost variances



p 514-519

36

Part 4 – Other performance measures (Topic 8.11)Calculate delivery cycle time, the throughput time, and manufacturing cycle efficiency. (Level 1)

Measures of internal process performance

• Delivery cycle time

•Time from receipt of order from customer to delivery of

product. (wait time + throughput time)

• Throughput time (manufacturing cycle time)

•Process time + inspection time + move time + queue time

•Only process time adds value

• Manufacturing cycle efficiency

•Value added time/throughput time.

•<1 means non-value added time is present.

106p 519-521







•Only process time adds value




107


p 519-521







•Only process time adds value.




108


p 519-521

37

109

Part 5

Review question:

Variance analysis and journal entries

(download the additional questions handout:

ma1_mod7_handout1.pdf)

MA1 – MODULE 8

110

Past CGA exam questionHandout pages 9 thru 10

a. What amounts would be debited to work in process for materials and labour?

b. What would be the entry to record the materials quantity variance?

c. Calculate total direct labour cost variance. Identify and calculate the two components of this total labour variance.

Part 5 – Review question: Variance analysis and journal

entries

Stop the audio, read and attempt the

question in the handout then come back to

listen to the solution.

111






entries

38

112






entries

113






entries

114

Part 6

Review question:

Variance analysis – working backward from variance data



MA1 – MODULE 8

39

115

Case 10-44 pages 490-491Handout page 11

1. How many units were produced last period?

2. How many kilograms of direct materials were purchased and used in production?

3. What was the actual cost per kilogram of direct material?

Part 6 – Review question: Variance analysis – working

backward from variance data


question in the textbook then come back to


116

Case 10-44 pages 490-491Handout page 11

4. How many actual direct labour hours were worked during the period?

5. What was the actual rate per direct labour hour?

6. How much actual variable manufacturing overhead cost was incurred during the period?

7. What is the total fixed manufacturing overhead cost in the company‟s flexible budget?

8. What were the denominator direct labour hours for last period?

Part 6 – Review question: Variance analysis – working

backward from variance data

117

Part 7

Review question:

Segmented statements; Product-line analysis



MA1 – MODULE 8

40

118

Problem 8-27 pages 362-363Handout pages 12 and 13

1. Prepare a contribution format segmented income statement for the leather division.

2. Prepare a contribution format segmented income statement for the handbag division.

3. Which product line should be the focus of the advertising campaign?

Part 7 – Review question: Segmented statements


question in the textbook then come back to


119






120






41

121

Part 8

Review question:

Segmented statement analysis: ROI and residual income



MA1 – MODULE 8

122


Q1 By employing as many different measures as you can, demonstrate which of Divisions A, B, or C has performed the best in 1991.

Interpret the results.

Part 8 – Review question: Segmented statement analysis:

ROI and residual income




123






42

124






125

Part 9

Review question:

Sales and market variances

(High/low method)



MA1 – MODULE 8

126


a. Calculate the budgeted contribution margin per unit for a canoe and a kayak

b. Calculate for each product:

i. Sales mix

ii. Sales quantity

iii. Market share

c. State 2 reasons why you will or will not be satisfied with the performance of marketing and sales personnel.

Part 9 – Review question: Sales and market variances




43

127




i. Sales mix

ii. Sales quantity

iii. Market share



128




i. Sales mix

ii. Sales quantity

iii. Market share



129




i. Sales mix

ii. Sales quantity

iii. Market share



44

130

Part 10

Review questions:

Multiple Choice Questions



MA1 – MODULE 8

131

Multiple choice questionsHandout pages 19 thru 22

Now working on page 19

Q1 Which variances does DEF Manufacturing have?

Q2 Which of the statements about fixed overhead is true?

Q3 What was the amount of overhead cost applied to work in process for May?

Part 10 – Review questions: Multiple choice




132



Q4 a. What was the variable overhead efficiency variance?

b. What was the fixed overhead production volume variance?

Q5 What would be the total flexible budget if total lines printed increased to 2,600,000?


45

133



Q6 What is the flexible budget for 40,000 and 20,000 units, respectively?

Q7 How does the application of JIT principles improve return on investment?

Q8 What is the amount of invested capital?

Q9 What was Rai‟s invested capital in 2002?


134



Q10 a) What is the delivery cycle time for System I?

b) What is the approximate manufacturing cycle efficiency for System II?


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