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ACIS 2116 Chapter 11 PowerPoints Spring 2009

ACIS 2116 Chapter 11 PowerPoints Spring 2009 - Variance...

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1 Variance Analysis–A Tool for Cost Control and Performance Evaluation ACIS 2116 Chapter 11
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2 Variance Analysis Control Tool – used to make sure the goals of the organization are attained Used to evaluate and motivate employees. Involves comparing actual amounts to budgeted amounts.
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3 Management by Exception Investigate “material” or significant differences Allows managers to focus on areas that need the most improvement
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4 Standard Costing Standard Costing is used in Variance Analysis. Standards are based on a single unit of product or service. Standards represent benchmarks or “norms” for measuring performance. Two types are commonly used.
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5 Quantity Standards Specify how much of an input should be used to make a product or provide a service. Examples: An auto service will set standards for how long (labor time) work tasks should take. A fast-food outlet will set standards for how much meat is used in a hamburger.
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6 Cost (price) Standards Specify how much should be paid for each unit of input. Examples: A construction company will set standards for how much is paid to sub-contractors (framers, roofers, electricians, etc.) Hospitals have standards cost for food, medicine, and medical supplies.
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7 Based on past experience (historical data). Based on engineering studies (studies of production process). How are Standards Determined?
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8 Standards should be designed to encourage efficient future operations. Setting Standard Costs
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9 Ideal Standards Require employees to work at 100 percent peak efficiency. Do not allow for work interruptions. Difficult to attain and can discourage employees.
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10 Practical Standards Can be attained through reasonable and efficient effort. Allow for normal machine downtime and employee rest periods. Most managers prefer practical standards.
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11 A budget is set for total costs. Are Standards the same as Budgets? A standard is a per unit cost. Standards are often used when preparing budgets.
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12 Flexible Budgeting Can be used with standard costs to analyze difference in static and flexible budget. Sales Volume Variance – difference in income based on static budget and income based on flexible budget.
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13 Hokie Consultants Example Hokie Consultants, Inc. has budgeted $5,000 in fixed expenses per month. It has also budgeted variable costs of $35 per consulting job for supplies, $100 per consulting job for labor, and $50 per job for computer time. The firm expects revenue to be $20,000, based on 50 consulting jobs at $400 each. The variable costs per job listed above are standard costs .
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14 Static Budget Example Revenue ($400 x 50) 20,000 $ Variable Expenses: Supplies ($35 x 50) 1,750 Labor ($100 x 50) 5,000 Computer time ($50 x 50) 2,500 Total Variable Expenses 9,250 Contribution Margin 10,750 Fixed Expenses 5,000 Net Income 5,750 $ This is the static budget for Hokie Consultants.
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15 Hokie Consultants Example (continued) Suppose that, during the current month, 54 jobs were actually performed, at an average fee of $390 each. Actual variable costs were $1,620 for supplies,
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