24
Budgets and Variances continued: Production variances

Budgets and Variances continued: Production variances

Embed Size (px)

Citation preview

Page 1: Budgets and Variances continued: Production variances

Budgets and Variances continued:

Production variances

Page 2: Budgets and Variances continued: Production variances

Agenda

• Return Reichard: recap main points

• Midterm exam discussion

• Briefly review production variances

• Vanguard problem

• Group work: Example Company

Page 3: Budgets and Variances continued: Production variances

Reichard

• IC of 100 plastic rings = $32, CM = $293, or $73 per 100 steel rings on an equivalent basis of 4 steel rings =1 plastic ring.

• This assumes a price of $325/100.• Current margins are about 20% on sales (1-

264/325) or 25% of Full Cost.• If price drops to $82/100 for plastic, profit per

100 rings = $15/100 * 9000 rings = $1350 p.a. on current (equiv) sales volume

Page 4: Budgets and Variances continued: Production variances

Reichard

• In fact, the entire market for plastic rings will produce $13,500 p.a. in profits: less than what Reichard earned on 10% of the steel ring market!!!

• Is this any market for Reichard to be in?

• Should we bother to compete in plastic?

• Where do we go from here?

• How many proprietary parts do we have?

Page 5: Budgets and Variances continued: Production variances

Midterm Exam

• The exam has five questions.• Question 1: Cost estimation - regression (a make or buy

decision)• Question 2: Production cost variances (compute 11

variances)• Question 3: Manufacturing Costs and Accounts• Question 4: Cost-volume-profit - minimum SP• Question 5: Identifying relevant costs and revenues

Page 6: Budgets and Variances continued: Production variances

Midterm self-evaluation of participation:

• Get a copy of the form from the homepage: Go to “Schedule of Work,” scroll to “Midterm Exam”, click on “self-evaluation”

• The form contains some grading criteria; also use the criteria attached to the syllabus.

• I have my grades already recorded. I record grades after each class.

• I’ll write my midterm grade on your form and hand it back to you with your exam.

Page 7: Budgets and Variances continued: Production variances

Review of Tuesday’s discussion

• Variances are departures from budget expectations - they are performance evaluation measures.

• Each one measures a favorable or unfavorable change in (budgeted) net income due to some departure from planned sales and production.

• They do not, themselves, provide answers - they trigger questions.

Page 8: Budgets and Variances continued: Production variances

Review: What information do variances convey?

• What do activity variances convey?

• What do price variances convey?– Material and labor (price)– Variable overhead (spending)– Fixed overhead (budget)

• What do efficiency variances convey?

• What do production volume variances convey?

Page 9: Budgets and Variances continued: Production variances

Variance computations:

• Price variances: Find the difference between the budgeted and the actual prices and multiply the difference by the actual number of units of the input consumed/purchased.

• Quantity/efficiency variances: Find the difference between the actual number of units of the input consumed and the number of units the standards would allow for good production and then multiply the difference by the standard price of the input.

Page 10: Budgets and Variances continued: Production variances

Variance computations

• Spending variance: Find the difference between the actual amount spent on variable overhead and the amount that would have been spent if the predetermined overhead rate had accurately predicted the price of variable overhead per unit of the cost driver. (Actual - Std. Input)

• Budget variance: The difference between actual fixed overhead spending and budgeted fixed overhead. (Actual - Master Budget)

Page 11: Budgets and Variances continued: Production variances

Variance computations

• The production volume variance measures the difference between budgeted fixed overhead and the amount of fixed overhead that has been included in production costs. (Master Budget - Applied Overhead)

• An unfavorable PVV indicates less production than planned: Idle capacity.

• A favorable PVV indicates that production (sales) levels are more than adequate to cover the amount of fixed overhead expected to be covered.

Page 12: Budgets and Variances continued: Production variances

Example: The Vanguard Company

The Vanguard Company manufactures one product. Itsstandard cost system incorporates flexible budgets andassigns indirect costs on the basis of standard DL hrs.

At denominator activity, the standard cost per unit is:Direct materials, 3 lbs. @ $5.00 $15.00Direct labor, .4 hr. @ $20.00 8.00

Variable indirect costs, .4 hr. @ $6.00 2.40

Fixed indirect costs, .4 hr. @ $4.00 1.60

Total $27.00

Page 13: Budgets and Variances continued: Production variances

Example: The Vanguard Company

ActualPrice

StandardCosts

TotalVar.

PriceVar.

Eff.Var. PVV

$134,400 $135,000 $600 $5,600 F $5,000 U ---

77,900 72,000 5,900 1,900 U 4,000 U ---

VOH 21,500 21,600 100 1,300 1,200 U ---

15,800 14,400 1,400 200 -- $1,600 U

$249,600 $243,000 $6,600 $5,200 $10,200 U $1,600 U

DM

DL

VOH

FOH

Page 14: Budgets and Variances continued: Production variances

Example: The Vanguard Company

ActualCosts

AppliedStd.

CostsTotalVar.

PriceVar.

EfficiencyVar. PVV

DM $134,400 $135,000 $ 600 F $5,600 F $5,000 U --

DL 77,900 72,000 5,900 U 1,900 U 4,000 U --

VOH 21,500 21,600 100 F 1,300 F 1,200 U --

FOH 15,800 14,400 1,400 U 200 F -- $1,600 U

Total $249,600 $243,000 $6,600 U $5,200 F $10,200 U $1,600 U

Page 15: Budgets and Variances continued: Production variances

Example: The Vanguard Company

Direct materials were quoted at $5.50 per pound through-out September and October to all suppliers. There was nopurchase-price variance for materials in October; theprice variance shown relates solely to the materials usedduring October.

Wage standards were set in accordance with an annualunion contract, but a shortage of workers in the localareas has resulted in rates higher than standard.

There were no beginning or ending inventories of workin process.

Page 16: Budgets and Variances continued: Production variances

Example: The Vanguard Company

1. How many units were produced?

Use the standard cost column.

All the units manufactured cost $243,000 at standard

One unit at standard costs $27.00

Units produced = $243,000 / $27.00 = 9,000 units

Page 17: Budgets and Variances continued: Production variances

Example: The Vanguard Company

2. What were the actual number of direct labor hoursused?

Efficiency variance = (actual hrs./unit - std. hrs./unit) x actual output x std. price

= [actual DL hrs. - (.4 x 9,000)] x $20

$4,000 = actual DL hrs. x $20 - $72,000

$76,000 = actual DL hrs. x $20

3,800 = actual DL hrs.

Page 18: Budgets and Variances continued: Production variances

Example: The Vanguard Company

3. What was the actual wage rate?

Labor price variance = (actual rate - std. rate) x actual labor hours

$1,900 = (actual wage rate - $20.00) x 3,800 hrs.

$1,900 = actual wage rate x 3,800 hrs - $76,000

$77,900 = actual wage rate x 3,800 hrs

$20.50 = actual wage rate

Page 19: Budgets and Variances continued: Production variances

Example: The Vanguard Company

4. What was the budget for fixed indirect costs.

FOH budget variance = Budgeted FOH - Actual FOH

$200 = Budgeted FOH - $15,800

Actual FOH < Budgeted FOH

$16,000 = Budgeted FOH

Page 20: Budgets and Variances continued: Production variances

Example: The Vanguard Company

5. Denominator activity expressed in direct labor hours.

$14,400 output actualxhrs.std.xVolumer Denominato

FOH Budgeted

$14,400 9xhrs..xVolumer Denominato

FOH Budgeted000,4

$14,400 9xhrs..xVolumer Denominato

$16,000000,4

Denominator Volume = 4,000 DL hrs.

Look at FOH applied:

Page 21: Budgets and Variances continued: Production variances

Example: The Vanguard Company

6. How many pounds of direct materials were used?

DM quantity variance = (actual quantity used -std. quantity for output) xstandard price

$5,000 = (actual quantity used - (3 lbs. x 9,000)) x $5.00

$5,000 = actual quantity used x $5.00 - $135,000

$140,000 = actual quantity used x $5.00

28,000 lbs. = actual quantity used

Page 22: Budgets and Variances continued: Production variances

Example: The Vanguard Company

7. How many pounds of direct material were purchased?

We cannot compute that number from the information given.

Page 23: Budgets and Variances continued: Production variances

Tuesday & Thursday

• Midterm exam - 8:00 a.m., 152 Comm. West• Thursday: Waltham Motors

– Hand in a memo and computations

Page 24: Budgets and Variances continued: Production variances

Group exercise

• Use Example Company: Look at the numbers and determine what they all mean.

• Compute– Direct material price, quantity and activity

variances

– Direct labor rate, quantity and activity variances

– Overhead variances: spending/budget, efficiency (if applicable), and PVV