Chapter 7 â Static Budget, Flexible Budget and Variance Analysis ...
LECTURE 12
COMM 2AB3
Chapter 7 – Static Budget, Flexible Budget and Variance Analysis March 26, 28 2014
− − − −
Static Budgets set using standards Bench marks/Yard sticks = standards Standard costing – predictive costing; based on past experience (competitors, industry, history, environment (eg/ inflation, labor shortage)) Standards based on practical, not ideal o Practical Standard – achievable
o o − −
Ideal Standard – not achievable Eg/ Capacity of class room is to hold 24 hours of classes (ideal); practical is 8:30 am – 10:00 pm (practical)
Standard Price (SP) – the standard price per unit of input; for every unit of input (materials, labor, OH), what is the price of the input?; does not account for output; SPI Standard Quantity (SQ) – the standard quantity of input allowed for output (actual production); not the same as SQI (input allowed for one unit of output) o Plan 200 bottles 400 kg glass $1/kg o Actual 150 bottles Spent $500 on glass Used 280 kg glass o SP = $1
o o
SQ = 400 kg / 200 bottles x 150 bottles = 300 kg Two types
−
SQ – input required for entire output; eg/ how much glass needed for all bottles produced SQI – standard quantity of input for one unit of output; eg/ how many glass needed for one bottle
Example 1: Static Budget
Actual Results
BQO = 10,000 BSP = $100 10,000 units at $100 $1,000,000
AQO = 8000 ASP = $110 8,000 units at $110 $880,000
Units: One Unit Sales Revenue: $100 Variable CGS: DM 3.0 x 4.0 = 12 12 x 10,000 DL 2.0 x 14 = 28 28 x 10,000 VFOH 1.0 x 8.0 = 8 8 x 10,000 Total VC 48 48 x 10,000 CM 52 x 10,000 10048 = 52 FFOH 160,000 (given) Operating Income 360,000 o BQO = Budget and Quantity of Output
o o o
o o
112,000 216,000 82,000 (410,000) 470,000 (170,000) 300,000
Static Budget Var.
Flexible Budget
Flexible Budget Var
BSP = $100 AQO = 8000 8,000 units at $100 100 x 8,000
80,000 (F)
Do not compare static budget with 12 x 8000 actual budget 28 x 8000 8 x 8000 48 x 8000 52 x 8000 160,000 256,000
BSP = Budgeted Selling Price Flexible Budget = Budget of AQO (actual quantity, budgeted price) Flexible Budget Variance = difference between actual and flexible
Flexible = “supposed to”
BSP – BV Costs = 100 – 48 = 52
Same as flexible budget variance – revenues
Actual = what actually happened Supposed to make $800,000 Revenue, actually made $880,000 CM = 80,000 (F) Revenue – 26,000 (U) Cost = 54,000 (F) FFOH = 170,000 – 160,000 = 10,000 (U) higher cost than budgeted
OI = 54,000 (F) – 10,000 (U) = 44,000 (F) OR 300,000 Actual OI – 256,000 Budgeted OI = 44,000 (F) SVV = (8000 – 10,000) x 52 = 104,000 (U) unfavorable because sold less, thus will harm NI Static OI – Flexible OI = 360,000 – 256,000 = 104,000 (U) SPV = (110 – 100) x 8000 = 80,000 (F) favorable because sold at higher price
o Variance Analysis 1
16,000 (U) 8,000 (F) 18,000 (U) 26,000 (U) 54,000 (F) 10,000 (U) 44,000 (F)
LECTURE 12
COMM 2AB3
− −
Quantity Variance – also called Efficiency or Usage Variance
−
Changes in costs – hold quantity constant o Actual quantity held constant
− −
Changes in quantity – hold costs constant o Comparing quantity of what should have spent vs. did spend – hold standard price constant
Remember budgeted and actual 4 variances o Market Size Variance
o o o −
If actual market increases, favorable; if actual market size decreased, unfavorable Market Share Variancee Sales Volume Variance (SVV) = (AQO – BQO) x (BSPBV costs) = (actual sales volume – budgeted sales volume) x budgeted CM/unit
Selling less is unfavorable
Selling at higher price is favorable; selling at higher price, regardless of formula, is favorable
Difference between OI of static and flexible budget Sales Price Variance (SPV) = (ASP – BSP) x Actual Quantity Sold
Market Size Variance = (Actual Market Size in Units – Budgeted Market Size in Units) x (Budgeted CM/unit) x (Budgeted Market Share %) o Actual Market Size = 140 000
o
Budgeted Market Size = 100,000
o
If 10% = 10,000 units; then 100% = 100,000 units Budgeted CM = 52
−
o o o
BSPBVC = 100 – 48 = 52
• BVC = DM + DL + VMOH = 12 + 28 + 8 Budgeted Market Share % = 10% Absolute value of the different between Actual Market Size in Units and Budgeted Market Size in Units This example will be favorable, because market size grew
Market Share Variance = (Actual Market Share % Budgeted Market Share %) x Budgeted CM/unit x Actual Market Share in Units o Actual Market Share % = 8000/140,000 = 5.7%
o o o o −
SPV is also the Flexible Budget Variance for Revenue
Budgeted Market Share % = 10% Budgeted Cm/Unit = 52 Actual Market Size in Units = 140,000 Unfavorable, because share of total market dropped in reality
Variance is always in dollars – bottom line is effect on income
Cost Variances
− −
Variance due to price vs. variance due to quantity DM variance isolated at Purchase Point and Usage (or production) Point o Usage Point – DM Price Variance
DM purchased = DM used
(Actual Price – Standard Price) x Actual Quantity Eg/
• • • • • • •
2
OR when isolated at usage point = (APSP) x AQ
Actual Costs o Actual Quantity of Input Used (AQIU) = 4 lbs x 8000 units = 32,000 lbs
o
Actual Price Input (API) = 3.50
Standard Price Input (SPI) = 4 Favorable – actual price
COMM 2AB3
Chapter 7 – Static Budget, Flexible Budget and Variance Analysis March 26, 28 2014
− − − −
Static Budgets set using standards Bench marks/Yard sticks = standards Standard costing – predictive costing; based on past experience (competitors, industry, history, environment (eg/ inflation, labor shortage)) Standards based on practical, not ideal o Practical Standard – achievable
o o − −
Ideal Standard – not achievable Eg/ Capacity of class room is to hold 24 hours of classes (ideal); practical is 8:30 am – 10:00 pm (practical)
Standard Price (SP) – the standard price per unit of input; for every unit of input (materials, labor, OH), what is the price of the input?; does not account for output; SPI Standard Quantity (SQ) – the standard quantity of input allowed for output (actual production); not the same as SQI (input allowed for one unit of output) o Plan 200 bottles 400 kg glass $1/kg o Actual 150 bottles Spent $500 on glass Used 280 kg glass o SP = $1
o o
SQ = 400 kg / 200 bottles x 150 bottles = 300 kg Two types
−
SQ – input required for entire output; eg/ how much glass needed for all bottles produced SQI – standard quantity of input for one unit of output; eg/ how many glass needed for one bottle
Example 1: Static Budget
Actual Results
BQO = 10,000 BSP = $100 10,000 units at $100 $1,000,000
AQO = 8000 ASP = $110 8,000 units at $110 $880,000
Units: One Unit Sales Revenue: $100 Variable CGS: DM 3.0 x 4.0 = 12 12 x 10,000 DL 2.0 x 14 = 28 28 x 10,000 VFOH 1.0 x 8.0 = 8 8 x 10,000 Total VC 48 48 x 10,000 CM 52 x 10,000 10048 = 52 FFOH 160,000 (given) Operating Income 360,000 o BQO = Budget and Quantity of Output
o o o
o o
112,000 216,000 82,000 (410,000) 470,000 (170,000) 300,000
Static Budget Var.
Flexible Budget
Flexible Budget Var
BSP = $100 AQO = 8000 8,000 units at $100 100 x 8,000
80,000 (F)
Do not compare static budget with 12 x 8000 actual budget 28 x 8000 8 x 8000 48 x 8000 52 x 8000 160,000 256,000
BSP = Budgeted Selling Price Flexible Budget = Budget of AQO (actual quantity, budgeted price) Flexible Budget Variance = difference between actual and flexible
Flexible = “supposed to”
BSP – BV Costs = 100 – 48 = 52
Same as flexible budget variance – revenues
Actual = what actually happened Supposed to make $800,000 Revenue, actually made $880,000 CM = 80,000 (F) Revenue – 26,000 (U) Cost = 54,000 (F) FFOH = 170,000 – 160,000 = 10,000 (U) higher cost than budgeted
OI = 54,000 (F) – 10,000 (U) = 44,000 (F) OR 300,000 Actual OI – 256,000 Budgeted OI = 44,000 (F) SVV = (8000 – 10,000) x 52 = 104,000 (U) unfavorable because sold less, thus will harm NI Static OI – Flexible OI = 360,000 – 256,000 = 104,000 (U) SPV = (110 – 100) x 8000 = 80,000 (F) favorable because sold at higher price
o Variance Analysis 1
16,000 (U) 8,000 (F) 18,000 (U) 26,000 (U) 54,000 (F) 10,000 (U) 44,000 (F)
LECTURE 12
COMM 2AB3
− −
Quantity Variance – also called Efficiency or Usage Variance
−
Changes in costs – hold quantity constant o Actual quantity held constant
− −
Changes in quantity – hold costs constant o Comparing quantity of what should have spent vs. did spend – hold standard price constant
Remember budgeted and actual 4 variances o Market Size Variance
o o o −
If actual market increases, favorable; if actual market size decreased, unfavorable Market Share Variancee Sales Volume Variance (SVV) = (AQO – BQO) x (BSPBV costs) = (actual sales volume – budgeted sales volume) x budgeted CM/unit
Selling less is unfavorable
Selling at higher price is favorable; selling at higher price, regardless of formula, is favorable
Difference between OI of static and flexible budget Sales Price Variance (SPV) = (ASP – BSP) x Actual Quantity Sold
Market Size Variance = (Actual Market Size in Units – Budgeted Market Size in Units) x (Budgeted CM/unit) x (Budgeted Market Share %) o Actual Market Size = 140 000
o
Budgeted Market Size = 100,000
o
If 10% = 10,000 units; then 100% = 100,000 units Budgeted CM = 52
−
o o o
BSPBVC = 100 – 48 = 52
• BVC = DM + DL + VMOH = 12 + 28 + 8 Budgeted Market Share % = 10% Absolute value of the different between Actual Market Size in Units and Budgeted Market Size in Units This example will be favorable, because market size grew
Market Share Variance = (Actual Market Share % Budgeted Market Share %) x Budgeted CM/unit x Actual Market Share in Units o Actual Market Share % = 8000/140,000 = 5.7%
o o o o −
SPV is also the Flexible Budget Variance for Revenue
Budgeted Market Share % = 10% Budgeted Cm/Unit = 52 Actual Market Size in Units = 140,000 Unfavorable, because share of total market dropped in reality
Variance is always in dollars – bottom line is effect on income
Cost Variances
− −
Variance due to price vs. variance due to quantity DM variance isolated at Purchase Point and Usage (or production) Point o Usage Point – DM Price Variance
DM purchased = DM used
(Actual Price – Standard Price) x Actual Quantity Eg/
• • • • • • •
2
OR when isolated at usage point = (APSP) x AQ
Actual Costs o Actual Quantity of Input Used (AQIU) = 4 lbs x 8000 units = 32,000 lbs
o
Actual Price Input (API) = 3.50
Standard Price Input (SPI) = 4 Favorable – actual price
