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SIXTH EDITION
COLIN DRURY
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2004 Colin Drury
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
Actual inputs: 53 000 litres of X at 7 28 000 litres of Y at 5.30 19 000 litres of Z at 2.20 100 000
= = =
19.1b
2. Mix variance = (AQ in standard mix AQ) SP AQ in standard mix SP X =100 000 5/10 7 Y =100 000 3/10 5 Z =100 000 2/10 2 350 000 150 000 40 000 540 000 AQ SP 53 000 7 28 000 5 19 000 2 371 000 140 000 38 000 549 000
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.2
Yield variance
1. Yield variance is the difference between the standard output for a given level of inputs and the actual output: = (Actual yield Standard yield from actual input) SC per unit of output = 2. Possible causes (92 700 90 000 ) 54/9 =16 200 F
3. Mix and yield variances are interrelated and should not be interpreted in isolation.
Summary Total variance = SC (92 700 6) AC (561 200) = 5 000 A Price variances + Mix variance + Yield variance 12 200 A 9 000 A 16 200 F 5 000 A
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.3a
Actual sales
X = Y = Z =
6 000 units at 20 contribution 7 000 units at 12 contribution 9 000 units at 9 contribution 22 000
= = =
19.3b
Sales mix and quantity variances (contd.) 2 .Mix variance = (AQ AQ in budgeted proportions) Standard margin AQ AQ in budgeted proportions 6 000 8 800 (40%) 7 000 7 700 (35%) 9 000 5 500 (25%) 22 000 Standard margin 20 = 56 000 A 12 = 8 400 A 9 = 31 500 F 32 900 A
X Y Z
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.4
Sales mix and quantity variances (contd.)
3. Quantity variance
X Y Z
= (AQ in budgeted proportions BQ) SM = (8 800 8 000) 20 = 16 000 F = (7 700 7 000) 12 = 8 400 F = (5 500 5 000) 9 = 4 500 F 28 900 F
4. If planned mix had been achieved the sales volume variance would have been 28 900 F.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
2. Issue of materials (Material A) Dr Work in progress (SQ SP) 180 000 Dr Material usage variance 10 000 Cr Stores ledger control account (AQ SP)
190 000
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.5b
3. Recording of wages due Dr Wages control account (actual cost) Cr Wages accrued account The wages control account is cleared as follows: 273 600 273 600
Dr Work in Progress (SQ SP) Cr Wages control account Dr Wage rate variance Dr Labour efficiency variance Cr Wages control account
243 000
243 000 17 100 13 500 30 600
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.6a
4. Manufacturing overhead cost incurred Dr Factory variable overhead control account Dr Factory fixed overhead control account Cr Expense creditors 5. Absorption of fixed manufacturing overhead Dr Work in progress (SQ SP) Dr Volume variance Cr Factory fixed overhead control account Dr Factory fixed overhead control account Cr Fixed overhead expenditure variance
4 000
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.6b
6.Variable manufacturing overhead Dr Work in progress (SQ SP) Dr Variable overhead efficiency variance Cr Factory variable overhead control account Dr Factory variable overhead control account Cr Variable overhead expenditure variance account 7. Completion of production Dr Finished stock account Cr Work in progress 54 000 3 000 57 000 5 000 5 000
Note that the variances are transferred to the profit and loss account at the end of the period.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.7b
4. Example SP = 5 per unit, market price at time of purchase = 5.20 Actual purchases =10 000 units at 5.18 Conventional variance analysis = 10 000 0.18 = 1 800 A Ex post analysis: Purchase planning variance = (5 5.20) 10 000 Purchase efficiency variance = (5.20 5.18) 10 000
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.7c
5. Sales variances Assume: Budgeted sales =10% market share (10% 1m units) Actual sales = 110 000 units Actual industry sales volume = 1.2m units Budgeted and actual contribution = 100 Ex post standard =120 000 units (10% 1.2m) Conventional sales variance = 1m favourable (10 000 100) Ex post analysis: Planning variance = 2m favourable (20 000 100) Appraisal variance = 1m adverse (10 000 100)
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.8
Investigation of variances
1. Variance investigation models can be classified into the following categories: Simple rule of thumb models. Statistical models that do not incorporate costs and benefits of investigation. Statistical decision models that take into account the cost and benefits of investigation. 2. Reasons for variances Measurement errors. Out-of-date standards. Out-of-control operations. Random or uncontrollable factors. 3. Investigation will indicate that variance is due to: Random uncontrollable factors when the operation is under control. Assignable causes, but the cost of investigation exceeds benefits. Assignable causes, but the benefits of investigation exceed the cost. Note : The aim is to investigate only those variances in the final category.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.9a
Statistical investigation models not incorporating cost and benefits
1. 1. Assume actual observations when under control indicate a mean usage of 10 kg per unit with a SD of 1 kg (normally distributed). Actual usage is 12 000 kg for an output of 1 000 units. Therefore,average usage = 12 kg per unit. Z = Actual usage (12 kg) Expected usage (10 kg) = 2.0 SD (1 kg)
2.
3.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.9b
4.
Normal distribution table indicates that an observation 2 SDs from the mean has a probability of 2.275%. Thus the probability of actual average material usage per unit of output being 12 kg or more when the operation is under control is 2.275%.It is very unlikely that material usage comes from in control distribution . Statistical control charts,which rely on the above principles,can be used to monitor resources usage and the probability that operations are out of control.(See figure on sheet 19.10.)
5.
6.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.10
Statistical quality control charts
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.11
Variance investigation decision models
1. Bierman et al model assumes two mutually exclusive states exist: (i) System in control and variance due to random factors. (ii) System out of control and corrective action can be taken to remedy the situation. 2. If the process is out of control there is a benefit (B) associated with returning it to its in - control state (i.e.cost savings from avoiding variances in future periods). Assume B = 400. 3. Let C = cost of investigation (assume C = 100). Let P = probability that the process is out of control. 4. Expected benefit = PB 5. Investigate if PB > C, or P > C/B 6. P >100 /400 =0.25 7. P (Process is in control) = 0.02275 (see sheet 19.9) 8. P (Process out of control) =1 0.02275 = 0.97725 9. Decision = Investigate the variance 10. Note the difficulty in estimating C and B.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
1. 2. 3. 4.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.13a
The future role of standard costing (cont.) ABC and variance analysis:
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.13b
Example Costs of set-up activity: Budget Activity level (1 600 set-ups) Practical capacity supplied (2 000 set-ups) Total fixed costs (80 000) Total variable costs (40 000) Cost driver rates: Variable (25 per set-up) Fixed (40 per set-up) Variance analysis for fixed set-up expenses: Set-up expenses charged to products (1 500 40) Budgeted unused capacity variance (400 40) Capacity utilization variance (100 40) Expenditure variance Total actual expenses 60 000 16 000 A 4 000 A 10 000 F 70 000 Actual Total FC (70 000) Total VC (39 000)
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury
19.14
The future role of standard costing (contd.)
ABC and variance analysis: Variance analysis for variable set-up expenses: Variable set-up expenses charged to products (1 500 25) Variable overhead variance (Flexed budget Actual cost) Total actual expenses 37 500
1 500 A 39 000
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 2000 Colin Drury 2004 Colin Drury