Cost Accounting Systems

Dr. Shorouk Esam El-Din Yassien

Lecturer in Accounting Department
Faculty of Commerce-Benha University
CHAPTER 7

Flexible Budgets,
Direct-Cost Variances,
and
Management Control
 Basic Concepts
 Variance – difference between an actual and
an expected (budgeted) amount
 Management by Exception – the practice of
focusing attention on areas not operating as
expected (budgeted)
 Static (Master) Budget – is based on the
output planned at the start of the budget
period

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 7-3
 Basic Concepts
 Static-Budget Variance (Level 0) – the difference
between the actual result and the corresponding
static budget amount
 Favorable Variance (F) – has the effect of increasing
operating income relative to the budget amount
 Unfavorable Variance (U) – has the effect of
decreasing operating income relative to the budget
amount

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 7-4
 Variances
 Level 0 analysis:
 Variances may start out “at the top” with a
Level 0 analysis
 This is the highest level of analysis, a super-
macro view of operating results
 The Level 0 analysis is nothing more than the
difference between actual and static-budget
operating income

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 7-5
 Variances
 Further analysis decomposes (breaks down)
the Level 0 analysis into progressively
smaller and smaller components
 Answers: “How much were we off?”
 Levels 1, 2, and 3 examine the Level 0
variance into progressively more-detailed
levels of analysis
 Answers: “Where and why were we off?”

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 7-6
 Level 1 analysis:
 Gives the user a little more information :it
shows which line items led to the total level 0
variance
 Like variance in units, revenue , VC ,CM , FC

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 Flexible budget:
 Shifts the budgeted revenues and costs up and
down based on actual operating results(activities)
 It is a budget based on actual level of output
prepared at the end of the period.
 Level 2 analysis:1- flexible budget variance=actual
results-flexible budget results(all items)
 2- sales volume variance=flexible budget amount-
static budget amount(all items)
 Level3 analysis : it divided flexible budget variance
into
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 7-8
  Price variance=(actual price-budget
price)*actual quantity of input
 Eff. variance =(actual quantity of input-
budget quantity of input for actual
units)*budget price
 For DM &DL only.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 7-9
  Ex1:Given the following information for Happy
manufacturing company for the year ended
dec31,2023:
Actual Flexible Static budget
results budget
Units sold 10,000 10,000 12,000
Revenues 1,250,000$ 1,200,000$ 1440,000$
Variable costs:
Direct materials 621,600 600,000 720,000
Direct mfg labor 198,000 160,000 192,000
Variable mfg ov H 130,500 120,000 144,000
Fixed mfg costs 285,000 276,000 276,000
Required:
1-prepare a level 0 analysis of 2023 performance
2-prepare a level 1 analysis of 2023 performance
3-prepare a level 2 analysis of 2023 performance

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 7-10
 Actual Static Variance Static

Units Sold 10,000 2000 U 12,000

Rev 1,250,000 190,000 U 1,440,000

VC

DM (621,600) 98400F (720,000)

DL (198,000) 6,000 U (192,000)

OH (130,500) 13,500 F (144,000)

CM 299,900 84,100 U 384,000

FOH (285,000) 9,000 U (276,000)

O.I 14900 93,100 U 108,000

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 7-11
 Actual Flexible V Flexible B Sales Static
Vol. V
Units Sold 10,000 0 10,000 2000 U 12,000
Rev 1250,000 50,000F 1,200,000 240,000U 1,440,000
VC
DM (621,600) 21,600 U (600,000) 120,000F (720,000)
DL (198,000) 38,000U (160,000) 32,000F (192,000)
OH (130,500) 10,500 U (120,000) 24,000F (144,000)
CM 299,900 20100U 320,000 64,000U 384,000
FOH (285,000) 9,000U (276,000) 0 (276,000)
O.I 14,900 29,100 U 44,000 64,000U 108,000

To ensure results
Flexible budget Var + sales vol variance =static budget variance
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 7-12
 Ex2:The ABC company prepared its static budget for 2023 using the
following data:
Expected sales units 10,000 units
Expected selling price per unit 50L.E
Quantity of direct materials required 6 K.G
to produce one unit of out put

Expected cost per KG L.E3

Direct labor hours required to 8 hours
produce one unit of output
Expected Direct labor cost per hour l.E2

Expected fixed cost 60,000L.E

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 Actual data for 2023:

Sales units 12,000 units

Selling price per unit 48L.E
Actual quantity of direct materials 75,000K.G
Actual cost of direct materials L.E262500
Actual direct labor hours 90,000
Actual direct labor costs L.E162000
Actual Fixed costs L.E60,000

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 7-14
 Actual Flexible V Flexible B Sales Vol. V Static

Units Sold 12,000 0 12000 2000F 10,000

Rev 576,000 24000U 600,000 100000F 500,000

VC

DM (262500) 46500U (216,000) 36000U (180,000)

DL (162000) 30000F (192000) 32000U (160,000)

CM 151,500 40500U 192,000 32000F 160,000

F.C (60000) 0 (60,000) 0 (60000)

O.I 91500 40500U 132,000 32000F 100,000

Static budget v=91500-100000=8500 U (level 0)

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 Level 3 analysis:
 DM variance=1-price variance=(Actual price-
Budgeted price)*Actual Q of inputs
 Actual=(262500/75000)=3.5
 Budgeted =3
 (3.5-3)*75000=37500 U
 Eff. variance =(actual quantity of input-
budget quantity of input for actual
units)*budget price 6*12000

 =(75000-72000)*3=9000U

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  Dl variance=1-price variance=(Actual price-
Budgeted price)*Actual Q of inputs
 162000\90000h=1.8
 (1.8-2)*90000=18000 F
 Eff. variance =(actual quantity of input- budget
quantity of input for actual units)*budget price
 (90000-96000)*2=12000 F
 8*12000

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 7-17
 Ex3:The following information is given for solar company for the month of
march:

 Budgeted Actual
 Production units 2500 2000
 Total direct material quantity(kilo) 10000 9000
 Total direct material cost (l.E) 50000 40500
 Total direct labor hours 5000 6000
 Total direct labor cost (l.E) 40000 42000
 Variable overhead cost(L.E) 36000 35000
 Fixed overhead costs 72000 75000
 Total machine hours 4000 3500
 Budgeted machine hours are the denominator volume and overhead costs are
allocated using machine hours.
 Required:
 Using the flexible budget ,compute the following variances:
 1- price and efficiency variances of direct material
 2- price and efficiency variances of direct labor

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 7-18
  DM variance=
 1-price variance=(Actual price-Budgeted
price)*Actual Q of inputs
(40500\9000) (50000\10000)

 =(4.5-5)*9000=4500 F
 Eff. variance =(actual quantity of input-
budget quantity of input for actual
units)*budget price
 10000\2500
 4*20000

 =(9000-8000)*5=5000U

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 7-19
  Dl variance=1-price variance=(Actual price-
Budgeted price)*Actual Q of inputs
 =(7-8)*6000=6000 F
 Eff. variance =(actual quantity of input- budget
quantity of input for actual units)*budget price
 =(6000-4000)*8=16000U
5000\2500)=2*2000

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-20