You are preparing a short presentation for a group who wants learn performance reporting issues. One question that was raised during the discussion is about measuring variances when the actual output (or activity) does not match with the budgeted output (or activity). How will you explain to the group that an approach called flexible budgets can answer many questions on what variances are telling them? Explain to the group why the favorable variance or unfavorable variances are giving ineffective signals.
What assumption is implicitly made about cost behavior when all of the items in a budget are adjusted in proportion to a change in activity? Why is this assumption questionable?© BrainMass Inc. brainmass.com October 25, 2018, 9:54 am ad1c9bdddf
1. There are three major components in business performance reporting:
a. Revenue - consists of all revenue streams such as sales and performing services
b. Working Capital - consists of receivables and payable position which tells short term business sustainability
c. Expenditure - consist of operating expenditure (such as man power cost, recruitment, utilities, rent) and capital expenditure (building, equipment)
Flexible budgets can help to explain factors that are impacting their forecasts. For example
When the oil price is $100/barrel and the budgeted sales is 100 barrels/month, our budgeted revenue will be $10,000/per ...
Performance reporting issues and a discussion of the value of cost accounting.
Cost Accounting, Flexible Budget, Static Budget & Variances
7- 17 Flexible budget. Connor Company's budgeted prices for direct materials, direct manufacturing labor, and direct marketing ( distribution) labor per attaché case are $ 40, $ 8, and $ 12, respectively. The president is pleased with the following performance report:
Actuals Costs Static Budget Variance
Direct materials $364,000 $400,000 $36,000F
Direct manufacturing labor 78,000 80,000 2,000F
Direct marketing (distribution) labor 110,000 120,000 10,000F
Actual output was 8,800 attaché cases. Assume all three direct- cost items above are variable costs.
Is the president's pleasure justified? Prepare a revised performance report that uses a flexible budget and a static budget.
7- 18 Flexible- budget preparation and analysis. Bank Management Printers, Inc., produces luxury check-books with three checks and stubs per page. Each checkbook is designed for an individual customer and is ordered through the customer's bank. The company's operating budget for September 2009 included these data:
Number of checkbooks 15,000
Selling price per book $ 20
Variable cost per book $ 8
Fixed costs for the month $ 145,000
The actual results for September 2009 were:
Number of checkbooks produced and sold 12,000
Average selling price per book $ 21
Variable cost per book $ 7
Fixed costs for the month $ 150,000
The executive vice president of the company observed that the operating income for September was much lower than anticipated, despite a higher- than- budgeted selling price and a lower- than- budgeted variable cost per unit. As the company's management accountant, you have been asked to provide explanations for the disappointing September results.
Bank Management develops its flexible budget on the basis of budgeted per- output- unit revenue and per- output- unit variable costs without detailed analysis of budgeted inputs.
1. Prepare a static- budget- based variance analysis of the September performance.
2. Prepare a flexible- budget- based variance analysis of the September performance.
3. Why might Bank Management find the flexible- budget- based variance analysis more informative than the static- budget- based variance analysis? Explain your answer.
7- 35 Direct manufacturing labor and direct materials variances, missing data. (CMA, heavily adapted). Morro Bay Surfboards manufactures fiberglass surfboards. The standard cost of direct materials and direct manufacturing labor is $ 100 per board. This includes 20 pounds of direct materials, at the budgeted price of $ 2 per pound, and five hours of direct manufacturing labor, at the budgeted rate of $ 12 per hour. Following are additional data for the month of July:
Units completed 6,000 units
Direct material purchases 150,000 pounds
Cost of direct material purchases $ 292,500
Actual direct manufacturing labor-hours 32,000 hours
Actual direct-labor cost $ 368,000
Direct materials efficiency variance $12,500 U
There were no beginning inventories.
1. Compute direct manufacturing labor variances for July.
2. Compute the actual pounds of direct materials used in production in July.
3. Calculate the actual price per pound of direct materials purchased.
4. Calculate the direct materials price variance.