Download PowerPoint Chapter 15 - McGraw Hill Higher Education

CHAPTER 15
COST ANALYSIS FOR
CONTROL
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Learning Objectives
1. Why are all costs controllable by
someone at some time, but in the
short run some costs may be
classified as noncontrollable?
2. How does performance reporting
facilitate the management-byexception process?
3. How can the operating results of
segments of an organization be
reported most meaningfully?
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Learning Objectives
4. What is a flexible budget, and how is it
used?
5. How and why are the two components
of a standard cost variance
calculated?
6. What are the specific names assigned
to variances for different product
inputs?
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Learning Objectives
7. How do the control and analysis of
fixed overhead variances and variable
cost variances differ?
8. What are the alternative methods of
accounting for variances?
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Learning Objective 1
• Why are all costs controllable by
someone at some time, but in the
short run some costs may be
classified as noncontrollable?
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Performance Reporting
• Involves the comparison of actual
results with planned results
• The objective is highlighting those
activities where planned and actual
results differ
• Appropriate actions may be taken to
address the causes of the favorable
or unfavorable variances
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Strategic,
Operational, and
Financial Planning
Implement Plans
Planning and Control Cycle
Performance
Analysis:
Plans vs.
Actual Results
(Controlling)
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Data Collection and
Performance Feedback
Executing
Operational
Activities
(Managing)
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Relationship of Total Costs to
Volume
of
Activity
+/• Any differences between achieved and
planned performances should be evaluated
• As the level of activity changes from the
planned activity, total variable costs should
change
• The total amount of fixed costs should not
change with changes in levels of activity
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Cost Classification According
to a Time-Frame Perspective
• A noncontrollable cost is one which the
manager can do nothing to influence the
amount of the cost
• Noncontrollable costs occur in the short
run
• In the long run every cost is controllable
by someone in the organization
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Learning Objective 2
• How does performance reporting
facilitate the management-byexception process?
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Characteristics of the
Performance Report
• A performance report compares actual
results to budgeted amounts
• It is an integral part of the control process
• The general format is as follows:
Activity
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Budget Actual
Amount Amount Variance Explanation
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+/-
Variances
• Variances are usually described as either
favorable or unfavorable
• A favorable variance occurs when results
exceed planned activities in a positive
manner – revenues are larger than expected
• An unfavorable variance occurs when results
exceed planned activities in a negative
manner – expenses are larger than expected
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Responsibility Reporting
• The explanation column in the performance
report is to communicate to upper-level
management the causes of variances
• In responsibility reporting, higher levels of
management receive less details regarding
lower levels in the chain of command
• Managers want to eliminate unfavorable
variances and retain favorable variances
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Management by Exception
• Managers concentrate their efforts only on
those activities that are not performing
according to the plan
• To aid in this effort, variances are often
expressed in percentages
• Only those variances that exceed a
predetermined percentage are investigated
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Frequency of
Performance Reports
• Performance reports should be issued soon after
the period in which the activity takes place
• If later, actions are forgotten or confused
• A question regarding performance reports is
whether noncontrollable expenses should be
reported
• May want managers to be aware of all costs, or
may want managers to deal only with controllable
costs
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Learning Objective 3
• How can the operating results
of segments of an organization
be reported most meaningfully?
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Reporting for Segments of
an Organization
• A segment is a division, product line, or
other organizational unit
• Using the contribution margin format,
sales, variable expenses, contribution
margin, fixed expenses, and operating
income are calculated for each segment
• Fixed expenses should be divided into
direct fixed expenses and common fixed
expenses
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Segment Fixed Expenses
• Direct fixed expenses would be eliminated
if the segment were eliminated
• Common fixed expenses are an allocated
portion of the organization’s fixed
expenses
• Common fixed expenses would not be
eliminated if the segment were eliminated
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Types of Segments
• A responsibility center is an element of
the organization over which a manager
has responsibility and authority
– Cost center – does not generate revenue
for the organization
– Profit center – generates revenue for the
organization
– Investment center – generates revenue
and controls assets of the organization
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Evaluating Segments
• Cost centers are evaluated by comparing
actual costs incurred to budgeted costs
• Profit centers are evaluated by comparing
actual segment margin to budgeted
segment margin
• Investment centers are evaluated by
comparing actual and budgeted return on
investment based on segment margin and
assets controlled by the segment
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Learning Objective 4
• What is a flexible budget, and
how is it used?
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Flexible Budget
• A flexible budget is one that reflects
budgeted amounts for actual activity
• Flexible budgeting does not affect the
predetermined overhead application
rate
• Therefore, fixed overhead will be
overapplied or underapplied
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Learning Objective 5
• How and why are the two
components of a standard cost
variance calculated?
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Analysis of Variable
Cost Variances
• The total variance for a cost component is
called the budget variance
• The budget variance is caused by two
factors:
– The difference between the standard and actual
quantity
– The difference between the standard and actual
unit cost
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Variance Terminology
• Different variances are the responsibility
of different managers
• Must separate total variances so that each
manager can take appropriate action
• Quantity variances often called usage or
efficiency variances
• Cost per unit of input variances often
called price, rate, or spending variances
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Direct Labor Variances
• Direct labor efficiency variance is the quantity
variance for direct labor
• The direct labor efficiency variance is the difference
between standard hours allowed and actual hours
worked
• Direct labor rate variance is the cost per unit of
input variance
• The direct labor rate variance is the difference
between actual and standard hourly pay rates
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Learning Objective 6
• What are the specific names
assigned to variances for
different product inputs?
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Variance Names
Cost per
unit
Input
Quantity
Raw materials
Usage
Direct labor
Efficiency
Variable overhead Efficiency
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of Input
Price
Rate
Spending
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General Variance Model
• Quantity variance =
Standard
Actual
Standard
quantity quantity X cost per
allowed
used
unit
• Cost per unit of input variance =
Standard
Actual
Standard
quantity quantity X cost per
allowed
used
unit
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Graphical Representation
Actual quantity used
Actual quantity used
X
X
Actual cost per unit
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Standard quantity allowed
X
Standard cost per unit
Standard cost per unit
Cost per unit of
Quantity
Input variance
variance
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Variance Analysis Objectives
• Objective is to highlight deviations from planned
results
• Want to eliminate unfavorable variances and
capture favorable variances
• Need to analyze variances for each standard
• Usually raw materials usage variances and direct
labor efficiency variances are reported frequently
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Raw Materials
Purchase Variance
• Many firms calculate and report raw
materials price variances at the time the
materials are purchased rather than when
they are used
• Modified purchase price variance:
Standard
cost per
unit
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-
Actual
Actual
cost per X quantity
unit
purchased
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Learning Objective 7
• How do the control and analysis
of fixed overhead variances and
variable cost variances differ?
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Analysis of Fixed Overhead
• Analyzed differently from variable cost
variances
• The focus is on the difference budgeted
fixed overhead and actual fixed
overhead expenditures
• This difference is divided into a budget
variance and a volume variance
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Fixed Overhead
Volume Variance
• Volume variance is the difference
between the amount of fixed overhead
applied to production and that planned to
be applied
• It is not appropriate to make per unit fixed
overhead variance calculations because
fixed costs do not behave on a per unit
basis
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Fixed Overhead
Budget Variance
• The budget variance is the difference
between budgeted fixed overhead for the
period and the actual fixed overhead for
the period
• Fixed overhead is difficult to control on a
short-term basis
• But is a significant cost, so it receives
management’s attention
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Learning Objective 8
• What are the alternative methods
of accounting for variances?
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Accounting for Variances
• If the total of all of the variance is not
significant, it is included with cost of goods
sold in the income statement
• Standard costs also are released to cost of
goods sold
• Therefore, cost of goods sold reports the
actual cost of the items
• If variances are large, the variances are
allocated between inventory and cost of
goods sold
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