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Chapter 8
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 1
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 2
Learning Objective 1
A static budget is prepared for only one level of a given type of activity. Differences between actual results and the static budget for level of output achieved are static-budget variances. A flexible budget (variable budget) adjusts for different levels of activities. Differences between actual results and the flexible budget are flexible-budget variances.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 3
Learning Objective 2
Note that the static budget is just the flexible budget for a single assumed level of activity.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 4
Learning Objective 3
An activity-based flexible budget is based on budgeted costs for each activity and related cost driver.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 5
Learning Objective 4
Actual results may differ from the master budget because... 1) sales and other cost-driver activities were not the same as originally forecasted, or 2) revenue or variable costs per unit of activity and fixed costs per period were not as expected.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 6
Static Budget
(5) 9,000 $279,000 196,200 $ 82,800 70,000 $ 12,800
7,000 7,000 $217,000 $217,000 158,200 5,670 U 152,600 $ 58,730 $ 5,670 U $ 64,400 70,300 300 U 70,000 $ (11,570) $5,970 U $(5,600)
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 7
Managers use comparisons among actual results, master budgets, and flexible budgets to evaluate organizational performance.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 8
Effectiveness is the degree to which a goal, objective, or target is met. Efficiency is the degree to which inputs are used in relation to a given level of outputs. Performance may be effective, efficient, both, or neither.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 9
Learning Objective 5
Flexible-Budget Variances
Total flexible-budget variance = Total actual results Total flexible-budget planned results Actual results $(11,570) Flexible budget $(5,600)
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 10
Sales-Activity Variances
Total sales - activity variance
Flexible budget
Master budget
$18,400 Unfavorable
Activity-level variances
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 11
Setting Standards
A standard cost is a carefully developed cost per unit that should be attained. An expected cost is the cost that is most likely to be attained.
Perfection (ideal) standards are expressions of the most efficient performance possible under the best conceivable conditions, using existing specifications and equipment.
No provision is made for waste, spoilage, machine breakdowns, and the like.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 12
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 13
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 14
When should management investigate a variance? Many organizations have developed such rules of thumb as investigate all variances exceeding $5,000 or 25% of expected cost, whichever is lower.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 15
Some organizations compare the most recent budget periods actual results with last years results for the same period.
These comparisons are not as useful as comparisons of actual outcomes with planned results.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 16
$ 2 /pound $16/hour
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 17
Actual results for 7,000 units produced: Direct material Pounds purchased and used: 36,800 Price/pound: $1.90 Total actual cost: $69,920
Direct labor Hours used: 3,750 Actual price (rate): $16.40 Total actual cost: $61,500
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 18
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 19
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 20
Learning Objective 6
(Actual quantity used standard quantity allowed for actual output) Standard price
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 21
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 22
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 23
A price variance is favorable is the actual price is less than the standard.
A quantity variance is favorable if the actual quantity used is less than the standard quantity allowed.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 24
+ $4,000 unfavorable
= $5,500 unfavorable
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 25
Price and usage variances are helpful because they provide feedback to those responsible for managing inputs. Managers should not use these variances alone for decision making, control, or evaluation.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 26
Learning Objective 7
A variable-overhead efficiency variance occurs when actual cost-driver activity differs from the standard amount allowed for the actual output achieved.
A variable-overhead spending variance occurs when the difference between the actual variable overhead and the amount of variable overhead budgeted for the actual level of cost-driver activity.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 27
Variable-Overhead Variances
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 28
Learning Objective 8
The difference between actual fixed overhead and budgeted fixed overhead Is the fixed overhead spending variance.
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 29
The End
End of Chapter 8
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 8 - 30