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Cost Variance Classification and General Framework

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Contabilidade Gerencial: Ferramentas para Facilitar e Orientar nas Tomadas de Decisões

Universidade de Illinois em Urbana-ChampaignUniversidade de Illinois em Urbana-Champaign

4.7 (317 classificações) | 8.6K alunos inscritos

Curso 1 de 7 no Value Chain Management Programa de cursos integrados

In this course, you will explore how to use accounting to allocate resources and incentivize manager and employee behaviors in using these resources. You will also learn how financial and non-financial accounting information facilitates strategic performance measurement and how to integrate this information to continuously improve strategy. Upon successful completion of this course, you will be able to: • Understand the role of managerial accounting information in common business decisions • Differentiate relevant and irrelevant information • Avoid common pitfalls in business decisions • Prepare a master budget and its key components • Describe the iterative and interrelated nature of budgeting • Evaluate capital investments via a variety of measures • Understand how upper management uses variance analysis • Calculate, interpret, and investigate variances • Understand decentralization and its advantages and disadvantages • Compute and interpret financial performance measures • Communicate the role of non-financial measures and strategic performance measurement systems • Identify issues associated with performance measurement and incentives • Understand the nature and role of subjective performance evaluation This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. For more information, please see the Resource page in this course and onlinemba.illinois.edu.

Visualizar o programa do curso

Habilidades que você aprenderá

Accounting, Cost, Investment, Analysis Of Variance (ANOVA)

Avaliações

4.7 (317 classificações)

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SR

Dec 18, 2016

Great course, I does complement the Managerial Accounting course I took before. A lot of tools to apply in the work place. The videos and the examples are wonderful for the learning pourpose.

BB

Mar 01, 2019

Although seems to be easy going it is actually quote complex subject but professor made it simple for understanding - great work U of I !!

Na lição

Standard Costing and Variance Analysis

After establishing goals, setting targets, and the budget, upper management uses variance analysis to compare, assess, and investigate differences between actual and expected performance. In this module, you will learn how upper management uses variance analysis to motivate and monitor managers and employees, how to perform variance analysis on any aspect of the organization, and ultimately understand the power of this important tool for planning and control.

Fundamentals and Concepts7:09

Cost Variance Classification and General Framework10:34

Causes of Variances5:08

Ministrado por

Gary Hecht, Ph.D.
Associate Professor of Accountancy

Transcrição

[ Music ]

>> So let's explore cost variances.

First of all, we'll talk about variable costs.

And as you recall from previous modules there are usually three

categories of variable costs: direct materials, direct labor,

and variable overhead.

We'll think about each of these types

of variable costs on three levels.

That is we'll have three different types of variances:

spending, efficiency, and activity, or sometimes referred

to as volume variances.

We'll have each of these variances for each type of cost.

So for direct materials,

and even each individual material type,

we'll calculate a spending variance,

an efficiency variance, and an activity variance.

We'll calculate these three variances for direct labor,

as well, and all the different types of labor

that we have in our organization.

And, finally, depending on how we parcel

out the overhead category, we'll have spending, efficiency,

and activity variances for each type of overhead that falls

in the variable category.

When we combine the consideration

of all these different types of cost

with all the different types of variances

that each cost uses we have, kind of, a messy picture here.

But that's ultimately a signaling the complexity

of variance analysis.

At the end of the day we can combine spending, efficiency,

and activity variances for materials

or individual materials, labor or individual types of labor,

and all the variable overhead costs into what's referred

to as a generic static budget variance.

This is the overall difference between actual spending

on each type of cost and what was originally expected

or budgeted.

But the static budget variance broken down leads us

to the spending efficiency and activity variance,

which creates a lot of information to analyze

at the end of a period and use for decision-making purposes.

Now one important distinction is that between variable costs

and fixed costs-and I'll get into the details of the logic

and reasoning later-but fixed cost variances are calculated

in a much more simple manner.

Ultimately we'll have just a generic static budget variance

for fixed costs.

There are some exceptions to this and we'll see

that in a future lesson.

So let's introduce a generic framework

for calculating variable costs.

It will help us to simplify this very complex setting.

I'm a sports-oriented person so I wanted to bring

in a sports-oriented example.

And I could bring in any type of equipment.

A soccer ball, a football, tennis ball, baseball,

but the simplest sports product that I can identify comes

from my favorite sport and that is ice hockey.

So let's think about an ice hockey puck.

It's a single material good

and it would surprise you how complex the production process

is for this process.

But in terms of materials, it's just one thing.

So let's use this example to develop our framework.

[ Pause ]

So when we think about the costs associated with the materials

in an ice hockey puck you can think

about how much we would spend in a month

to create all the hockey pucks that we manufacture.

So at the end of the month we have spent some total dollar

amount on materials for creating all of our ice hockey pucks.

And that's something that we know at the end of the period.

So we would call that actual.

Now that's the total spending.

But let's think about the individual drivers

of this total spending.

Again, just for the materials that the hockey puck is made

of you can think about the input, the raw materials rubber,

and how much we pay for that on a per unit basis.

Now you can measure the raw material in a variety

of ways-let's say it's ounces or grams-and we think

about buying the raw material rubber from a supplier.

And that's going to be in terms

of some dollar amount, per some weight unit.

Ounces or, again, grams.

So that's one driver of the overall cost.

But then we can also think about how much

of the input the raw material we use for each hockey puck.

And so that is in terms of some weight unit, ounces,

per unit produced per puck.

And then the final driver leads to the total amount

of materials dollars we spend in a given timeframe is the number

of pucks that we produce.

And when we multiply each of those individual components

by each other we're left

with the total dollar spent for materials.

So dollars per ounce multiplied

by ounces per puck will yield a dollar per puck figure

in terms of materials costs.

When we multiply that by the number

of pucks we produce we have the total dollar amount

that we have spent.

So these are all actual pieces of information

that we have identified at the end of an accounting period.

Our accounting records tell us how much we paid per ounce,

how many ounces we use per puck, and how many pucks we produced.

But, of course, we have a plan or an expectation,

a static budget, if you will,

where each of those individual components can be presented

on a budgeted or expected basis.

These are our standards.

We can have a standard price, we can have a standard input,

and we can have a standard output.

Same principle applies here.

The standard price is what we expect to pay

for an ounce of rubber.

The raw material.

The standard input is how much of the rubber that we use,

again in ounces, per puck that we produce.

And the standard output is the number of pucks

that we expected to produce.

So in essence we have an analogues line-column-over here.

In the sense that we have a standard price, standard input,

and standard output compared to the actual information

in the left hand column.

When multiplying each of those three components

in the same way we come up with how much our direct material

spending should have been.

What we have budgeted.

Now, if we were to compare these two things

in their aggregation we would see that, oh,

we have spent more direct materials dollars

than we had planned to.

Or, perhaps, we have spent less in any one given month.

But that wouldn't provide you a lot of information.

The reason is there are many different sources

of that overall difference.

You might have paid a different amount for your input,

you might have used a different amount

of input per output then you had expected,

or you might have produced more or less than you though

in terms of number of pucks.

So variance analysis allows us to delve into those details.

So let's move from this static budget column

where everything is expected, everything is budgeted,

and go eventually create the actual column.

So the next column in we'll refer to that

as the flexible budget.

And recall from previous slide

that that is how much we should have spent given what we

actually produced.

So comparing the flexible budget

to the static budget is all expected numbers.

Standard numbers.

Standard price, standard input, but actual output.

It takes into account what we actually produced,

but at the standard price and standard input amounts.

So it tells us what we should have spent given what our actual

production was.

When we multiply the standard price, standard input,

and actual output numbers we get the flexible budget for,

in this case, materials.

The next column in doesn't necessarily have an official

name, I just call it the standard price column.

And in that one we're going to change the next component.

We've already changed standard output to actual output

as we move from right to left.

So we can leave that the same.

Actual output.

But what we haven't done is considered how these standard

input per output differs from the actual input per output.

So let's change that component as we move from column three

to what is in column two and leave everything else the same

so that we can isolate this individual component.

When we multiplied the standard price,

multiplied by the actual input per output,

multiplied by the actual output,

we get a total dollar number there again.

And now our variances fallout from the bottom of the columns.

The difference between the actual

and selling price column totals can be calculated.

The same for the difference between the selling price,

standard price column, and the flexible budget column.

And, finally, the same for the flexible budget

and static budget column.

As you can see what this framework allows is

to see the isolation in the variance analysis

for each individual component.

The difference between the flexible budget column

and the static budget column comes down to the difference

between actual output and standard output.

The different between the two middle columns is focused

on the difference between the actual

and standard input per output.

And the difference between the first two columns is the

difference between the actual price paid for each

of our inputs and the standard price

that we had expected to pay.

So these individual differences that fallout

from this framework are referred to as the spending variance,

the efficiency variance, and the activity variance.

Firms call these things different things,

different labels, depending on their preferences,

but these are generic labels

that I think are useful in most cases.

But, ultimately, what this framework allows us to see is

that there are different reasons or different sources

of an overall difference between the actual amount spent

on materials and what we had planned to spend.

And some of that has to do with each component.

Variances provide us a quantification of each reason

or each source of that variance.

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