After reading this chapter, you should be able to answer the following questions: Why are all costs controllable by someone at some time, but in the short run some costs may be classified as noncontrollable? How does performance reporting facilitate the management-by-exception process? How can the operating results of segments of an organization be reported most meaningfully?...
CHAPTER 15 COST ANALYSIS FOR CONTROL McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 Learning Objectives Why are all costs controllable by someone at some time, but in the short run some costs may be classified as noncontrollable? How does performance reporting facilitate the management-byexception process? How can the operating results of segments of an organization be reported most meaningfully? McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 Learning Objectives What is a flexible budget, and how is it used? How and why are the two components of a standard cost variance calculated? What are the specific names assigned to variances for different product inputs? McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 Learning Objectives How the control and analysis of fixed overhead variances and variable cost variances differ? What are the alternative methods of accounting for variances? McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 Learning Objective • Why are all costs controllable by someone at some time, but in the short run some costs may be classified as noncontrollable? McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 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 McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 Revisit Plans Strategic, Operational, and Financial Planning Planning and Control Cycle Performance Analysis: Plans vs Actual Results (Controlling) McGrawHill/Irwin Implement Plans Data Collection and Performance Feedback Executing Operational Activities (Managing) ©The McGrawHill Companies, Inc., 2002 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 McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 Cost Classification According to a Time-Frame Perspective • A noncontrollable cost is one which the manager can 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 McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 Learning Objective • How does performance reporting facilitate the management-byexception process? McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 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 McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 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 McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 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 McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 Learning Objective • What are the specific names assigned to variances for different product inputs? McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 Variance Names Cost per unit Input Quantity Raw materials Usage Direct labor Efficiency Variable overhead Efficiency McGrawHill/Irwin of Input Price Rate Spending âTheMcGrawưHillCompanies,Inc.,2002 General Variance Model ã 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 McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 Graphical Representation Actual quantity used Actual quantity used X X Actual cost per unit McGrawHill/Irwin Standard quantity allowed X Standard cost per unit Standard cost per unit Cost per unit of Quantity Input variance variance ©The McGrawHill Companies, Inc., 2002 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 McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Raw Materials Purchase Variance ã 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 McGrawHill/Irwin - Actual Actual cost per X quantity unit purchased ©The McGrawHill Companies, Inc., 2002 Learning Objective • How the control and analysis of fixed overhead variances and variable cost variances differ? McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 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 McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Fixed Overhead Volume Variance ã 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 not behave on a per unit basis McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Fixed Overhead Budget Variance ã 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 McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Learning Objective ã What are the alternative methods of accounting for variances? McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 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 McGrawHill/Irwin ©The McGrawHill Companies, Inc., 2002 ... Perspective • A noncontrollable cost is one which the manager can nothing to influence the amount of the cost • Noncontrollable costs occur in the short run • In the long run every cost is controllable... 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. .. Why are all costs controllable by someone at some time, but in the short run some costs may be classified as noncontrollable? How does performance reporting facilitate the management-byexception