CAB6-MAC Seminar Week 4

Horngren’s Financial & Managerial
Accounting: The Managerial Chapters

Seventh Edition
Flexible Budgets
Houke
Copyright © 2018, 2016, 2014 Holswilder
Pearson Education, Inc. All Rights Reserved
Cost and Efficiency Variances
• Remainder of chapter 8
• We go one level deeper
– Last week we covered level 1 and 2 of budget variances
– Today we go to level 3: cost and efficiency variances
• Suppose a firm sees that it has spend $10,000 less on direct

materials last month than expected for quantity produced
– Is that because materials were purchased more cheaply?
– Is that because fewer materials were used?
• Cost and efficiency variances allow us to answer these
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-2

Budget Variances
A=Actual
B=Budget
PA * Q A PB * Q A PB * Q B
Actual Results Flexible Budget Static Budget
Based on actual Based on expected
number of units sold number of units sold
Static Budget Variance Level 1 variance
Flexible Budget Variance Sales Volume Variance

Level 2 variance
Change in P Change in Q

Flexible Budget (Level 2)Performance Report
Exhibit 23-5
8 Flexible Budget Performance Report
CHEERFUL COLORS
Flexible Budget Performance Report
For the Year Ended December 31, 2015
1 2 3 4 5
(1) – (3) (3) – (5)
Budget
Amounts PActual
A* Q A PFlexible
B* Q A PStatic
B* Q B
Per Unit Results Budget Budget
Units (Batches of 100) 52,000 52,000 50,000

$ $ $ $ $ $
Sales Revenue 7.50 384,800 5,200 U 390,000 15,000 F 375,000

Variable Costs:
Manufacturing:
Direct Materials 1.75 104,000 13,000 U 91,000 3,500 U 87,500
Direct Labor 3.00 145,600 10,400 F 156,000 6,000 U 150,000
Variable Overhead 0.75 30,160 8,840 F 39,000 1,500 U 37,500
Selling and Administrative:
Supplies 5% of sales 19,200 300 F 19,500 750 U 18,750
Total Variable Costs 298,960 6,540 F 305,500 11,750 U 293,750
Contribution Margin 85,840 1,340 F 84,500 3,250 F 81,250

Fixed Costs: Flexible Budget Variance Sales Volume Variance
$ 680 U $ 3,250 F
Manufacturing 23,920 1,080 F 25,000
Static 0
Budget Variance 25,000
$ 2,570 F
Selling and Administrative 25,600 3,100 U 22,500 0 22,500
Total Fixed Costs Copyright © 2014 Pearson

49,520 Education,
2,020Inc. Publishing
U as Prentice Hall
47,500 0 47,500 23-4
$ $ $ $ $
Standard Cost System Benefits
Standard costing helps managers:
• Prepare the master budget
• Set target levels of performance for flexible
budgets
• Identify performance standards
• Set sales prices of products and services
• Decrease accounting costs

Learning Objective 3
1. Compute the standard
Cost variances
2. Efficiency variances
for DM and DL

Level 3 Variances
All Product Costs can have Level 3
Variances
Actual/budgeted Rods purchase price ( P)
• DM Actual/budgeted Rods used per tent ( Q)
Actual/budgeted Labor hourly rate ( P)
• DL Actual/budgeted Labour hours used per tent ( Q)
• MOH Not for exam calculations
Level 3 including
1. cost variance (caused by P)
2. Efficiency variance (caused by Q)
Flexible Budget (Level 3)Performance Report
Exhibit 23-5 Flexible Budget Performance Report
CHEERFUL COLORS
Flexible Budget Performance Report
For the Year Ended December 31, 2015
1 2 3 4 5
(1) – (3) (3) – (5)
Budget
Amounts Actual Flexible Static
Per Unit Results Budget Budget
Units (Batches of 100) 52,000 52,000 50,000

$ $ $ $ $ $
Sales Revenue 7.50 384,800 5,200 U 390,000 15,000 F 375,000

Variable Costs: Irrelevant
Manufacturing:
for cost and
Direct Materials 1.75 104,000 13,000 U 91,000 3,500 U 87,500
efficiency
Direct Labor 3.00 145,600 10,400 F 156,000 6,000
variances
U 150,000
Variable Overhead 0.75 30,160 8,840 F 39,000 1,500 U 37,500
Selling and Administrative:
Supplies 5% of sales 19,200 300 F 19,500 750 U 18,750
Total Variable Costs 298,960 6,540 F 305,500 11,750 U 293,750
Contribution Margin 85,840 1,340 F 84,500 3,250 F 81,250

Fixed Costs: Flexible Budget Variance Sales Volume Variance
$ 680 U $ 3,250 F
Manufacturing 23,920 1,080 F 25,000
Static 0
Budget Variance 25,000
$ 2,570 F
Selling and Administrative 25,600 3,100 U 22,500 0 22,500
Total Fixed Costs Copyright © 2014 Pearson

49,520 Education,
2,020Inc. Publishing
U as Prentice Hall
47,500 0 47,500 23-8
$ $ $ $ $
Level 3 Variances
• Flexible budget variance can be divided into two
components:
– Cost variance: caused by to a difference between actual and
budgeted costs, vs.
• Example: firm paid $10/kg for raw materials instead of $12/kg
– Efficiency variance: caused by a difference between actual and
budgeted quantities, vs.
• Example: firm used 1 kg of raw materials per unit instead of 0.9 kg
• These level 3 variances further help a manager pinpoint

where and how a process went over/under budget

Two methods
• Using the table format of the actual results
and flexible budget
• Using the formulas

Exhibit
CC 8
23-11 Direct Materials Variances
DM cost standard $1.75 per pound of paraffin
DM efficiency standard 1.00 pound of paraffin per batch of crayons 52,000 units were produced
Actual amount of paraffin purchased and used 65,000 pounds
Actual cost of paraffin purchased and used $104,000
PB* QA
PA* QA P B* Q B
$1.60 per pound $1.75 per pound $1.75 per pound
× × ×
65,000 pounds 65,000 pounds 52,000 pounds
$104,000 $113,750 $91,000
Cost Efficiency
Variance Variance
Formula = $22,750 U Formula =
$9,750 F
(PA - PB )* QA (QA - QB )* PB
Total Direct Materials Variance

$13,000 U
8
Exhibit 23-12 Direct Labor Variances
52,000 units were produced
Actual cost*Actual Quantity Standard cost*Actual Quantity Standard cost*Standard Quantity

PA*×Q P * QA
AC AQA SCB× AQ SC
PB*×QSQ
B
$14.00 per DLHr $12.00 per DLHr $12.00 per DLHr

× × ×
10,400 DLHr 10,400 DLHr 13,000 DLHr
$145,600 $124,800 $156,000
Cost Efficiency
Variance Variance
Formula = Formula =
$20,800 U $31,200 F
(PA - PB )* QA (QA - QB )* PB
Total Direct Labor Variance

$10,400 F
Recap: Formulas
• Cost variance:
– How much more/less did we pay for the materials?
– Valued at the actual quantity
• Efficiency variance:
– How much more/less materials did we use?
– Valued at the budgeted cost

S8-6 Calculating materials variances
Martin Inc. is a manufacturer of lead crystal glasses. The standard direct materials
quantity is 1.0 pound per glass at a cost of $0.50 per pound. The actual result for one
month’s production of 6,500 glasses was 1.2 pounds per glass, at a cost of $0.30 per
pound. Calculate the direct materials cost variance and the direct materials efficiency
variance.
• Direct materials cost variance

• Direct materials efficiency variance

Martin Inc. is a manufacturer of lead crystal glasses. The standard direct materials
quantity is 1.0 pound per glass at a cost of $0.50 per pound. The actual result for one
month’s production of 6,500 glasses was 1.2 pounds per glass, at a cost of $0.30 per
pound. Calculate the direct materials cost variance and the direct materials efficiency
variance.

Follow-up question:
What does this analysis mean for the firm?

S-6 Calculating materials variances
Follow-up question:
• Direct material cost variance: $1,560 F

• Direct material efficiency variance: $ 650 U
• The firm spent less on direct materials compared to the flexible

budget
• The analysis shows that:
– This advantage is purely due to purchasing at a lower price
– Materials are actually being used less efficiently, i.e. more materials are used
than normal
• Management should:
1. Investigate why the purchasing price was so much lower
2. Investigate why more materials were being used

S8-7 Calculating labor variances
Martin Inc. is a manufacturer of lead crystal glasses. The standard direct labor time is
0.5 hours per glass, at a cost of $18 per hour. The actual results for one month’s
production of 6,500 glasses were 0.2 hours per glass, at a cost of $11 per hour. Calculate
the direct labor cost variance and the direct labor efficiency variance.
• Direct labor cost variance

• Direct labor efficiency variance
• labor hours standard or budgeted

• labor hours actual

Martin Inc. is a manufacturer of lead crystal glasses. The standard direct labor time is
0.5 hours per glass, at a cost of $18 per hour. The actual results for one month’s
production of 6,500 glasses were 0.2 hours per glass, at a cost of $11 per hour. Calculate
the direct labor cost variance and the direct labor efficiency variance.

Follow-up question:

Follow-up question:
• Direct labor cost variance $ 9,100 F

• Direct labor efficiency variance $ 35,100 F
• Direct labor costs are in total lower compared to the flexible budget
• The analysis shows that:
– The cost of one hour of labor was significantly lower, resulting in a benefit of
$9,100 for the firm
– Far fewer labor hours were used, resulting in a benefit of $35,100 for the firm
• Management should:
– Investigate how it was possible to pay only $11/hour instead of $18
– Investigate how the same output was produced with 1,950 fewer labor hours

P23-32B (equals 8-32B, only different numbers) Computing standard cost variances
and reporting to management
PC Accessories manufactures laptop cases. During October 2018, the company produced
95,400 cases and recorded the following cost data:
Requirements:
1. Compute the cost
and efficiency
variances for direct
materials and direct
labor.
2. PC Accessories’
management used
better-quality
materials during
October. Discuss the
trade-off between
the two direct
material variances.

P8-32B: Requirement 1
Direct materials Formula Calculation
Cost variance
Efficiency variance

Cost variance U
Efficiency variance
Note: to calculate , use the actual number of units sold  we want to know
how many parts would normally be used to produce the actual amount
parts

Cost variance U
Efficiency variance F
how many parts would normally be used to produce the actual amount
parts

Direct labor Formula Calculation
Cost variance
Efficiency variance

Cost variance U
Efficiency variance
how much labor would normally be used to produce the actual amount
direct labor hours

Cost variance U
how much labor would normally be used to produce the actual amount
direct labor hours

Direct materials Calculation
Cost variance U
Direct labor Calculation

Cost variance U

P23-32B Computing standard cost variances and reporting to management
PC Accessories manufactures laptop cases. During October 2018, the company produced
95,400 cases and recorded the following cost data:
Requirements:
1. Compute the cost
and efficiency
variances for direct
materials and direct
labor.
2. PC Accessories’
management used
better-quality
materials during
October. Discuss the
trade-off between
the two direct
material variances.

Direct materials Calculation
Cost variance U
• The firm used better quality materials

• As a result, it seems the firm used fewer parts, resulting in a
favorable efficiency variance
– 150,480 parts used instead of 152,640
• However, the better quality materials were also a lot more

expensive, resulting in a large unfavorable cost variance
• Looking at the costs this was thus clearly a bad idea
• However, if this results in a higher quality product, the firm may still
benefit
Questions?
• If any pop up later, feel free to send me an
email (h.b.j.j.holswilder@pl.hanze.nl)
• In week 7 there is a one hour overview /

Q&A session

CAB6-MAC Seminar Week 4

Uploaded by

Copyright:

Available Formats

CAB6-MAC Seminar Week 4

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CAB6-MAC Seminar Week 4

Uploaded by

Copyright:

Available Formats

Horngren’s Financial & Managerial

Accounting: The Managerial Chapters

• Suppose a firm sees that it has spend $10,000 less on direct

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-2

Static Budget Variance Level 1 variance

Flexible Budget Variance Sales Volume Variance

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-3

Units (Batches of 100) 52,000 52,000 50,000

Sales Revenue 7.50 384,800 5,200 U 390,000 15,000 F 375,000

Direct Materials 1.75 104,000 13,000 U 91,000 3,500 U 87,500

Direct Labor 3.00 145,600 10,400 F 156,000 6,000 U 150,000

Variable Overhead 0.75 30,160 8,840 F 39,000 1,500 U 37,500

Selling and Administrative:

Supplies 5% of sales 19,200 300 F 19,500 750 U 18,750

Total Variable Costs 298,960 6,540 F 305,500 11,750 U 293,750

Contribution Margin 85,840 1,340 F 84,500 3,250 F 81,250

Total Fixed Costs Copyright © 2014 Pearson

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-5

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-6

Units (Batches of 100) 52,000 52,000 50,000

Sales Revenue 7.50 384,800 5,200 U 390,000 15,000 F 375,000

Variable Overhead 0.75 30,160 8,840 F 39,000 1,500 U 37,500

Selling and Administrative:

Supplies 5% of sales 19,200 300 F 19,500 750 U 18,750

Total Variable Costs 298,960 6,540 F 305,500 11,750 U 293,750

Contribution Margin 85,840 1,340 F 84,500 3,250 F 81,250

Total Fixed Costs Copyright © 2014 Pearson

• These level 3 variances further help a manager pinpoint

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-9

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-10

Actual cost of paraffin purchased and used $104,000

$104,000 $113,750 $91,000

Total Direct Materials Variance

52,000 units were produced

Actual cost*Actual Quantity Standard cost*Actual Quantity Standard cost*Standard Quantity

$14.00 per DLHr $12.00 per DLHr $12.00 per DLHr

Total Direct Labor Variance

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-13

• Direct materials cost variance

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-14

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-15

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-16

• Direct material cost variance: $1,560 F

• The firm spent less on direct materials compared to the flexible

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-17

• Direct labor cost variance

• labor hours standard or budgeted

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-18

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-19

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-20

• Direct labor cost variance $ 9,100 F

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-21

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-22

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-23

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-24

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-25

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-26

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-27

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-28

Direct labor Calculation

Actual costActual Quantity Standard costActual Quantity Standard cost*Standard Quantity