Ch 6&amp 7 - Copyright© Rowland Atiase October 1 1 2009 Chapter 6& 7 Day 1 H0 ‘ 1 Introduction K T 11,13,116”(i Responsibility

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Unformatted text preview: Copyright© Rowland Atiase, October 1 1, 2009 Chapter 6 & 7 Day 1 H0 ‘ - 1_ Introduction K _ T; 11,13,116” (i) Responsibility Accounting Jifff'i Static (Master) Budgets _ .j:'_f5:_l_'i_:(ili) _ Kai‘zen Budgeting (Continuous . " " -.;:,,Imprvvcment),_ ; .. ‘ 111. Ch 7 (i) Introduction 1 (ii) Standard Costs & Flexible Budgets . (iii) Levels of Analysis , ‘ (iv) Types of Standards . (v) DM & DL Stds, Variances & Control _\ (vi) Kaizen Budgeting/ Continuous Improvement -‘& Variances - (vii) Benchmarking & Variances (viii) General Ledger Entries hwy—.mw—«WMMWMMWWWMNH, “w ( ,V..VL.-_,._\..._;~-l- Copyright© Rowland Atiase, October ii, 2009 _ 2 _ Chapter 6 _ RESPONSIBILITY ACCOUNTING & MASTER (STATIC) I BUDGET ' I. Responsibility Accounting (RA! may be defined as an accounting system that recognizes various decision centers throughout an organization and traces costs ( Mamas! mg: 4— Aabrlxn'ggwhere relevant) to the individual managers who are primarily responsible for making decisions about the costs (etc) in question It holds clear that in an ideal setting, revenues and costs should be recorded and automatically traced to the one individual in the organization Who bears primary responsibility for the item. The rational is that these pEWWmam—e I the situation or cost incurrence. The scope of responsibility accounting system ' employed is a function of the organization structure or area of responsibility of interest. Copyright© Rowland Atiase, October ii, 2009 Scope of RA. is a function of Organization Structure. Examples: (i) Cost Center 4‘" M '4 are? arm-Hg ofl £055; £14 .. Earlier on, we defined a cost center as the smallest segment of activity or area of reSponsibility for which costs are accumulated e. g, departments,” although a department may Icontainmseveral cost centers. (ii) Profit Center — formal reporting or (or responsibility for) revenues and costs. - u (iii) Investment Center - Formal reporting of or responsibility for profits (revenues & costs) relative to Investment Capital. In Short RA. suggests that there should be no eSPOHSibility Withoutw. Copyright© Rowland Atiase, October 11, 2009 4 Controllable Costs: are costs that are primarily subject to the influence of -‘ -- ‘ " a (i) _ a gym Wager (of a given responsibility center) (ii) Fora ‘HwaWWSHM _ _ I A maj or of this definition is—thatnfew costs are , clearly under of one person. Fer example, although Direct Material (DM) prices may be heavily influenced by the purchasing manager, While DM quantity used may be heavily influenced by the production manager, therernay be shades of influence. Another problem relates to the time period. With a long enough time, virtually all costs will be controllable by somebody in the organization. However, as the time period shortens, fewer and fewer costs can be considered controllable e.g., the cost of one year insurance policy may be controllable by the insurance manager. But it might not be deemed controllable if the time period were a week or even a month. Copyright© Rowland Atiase, October 11, 2009 5 11. Master gStatic! Budget A Master Budget summarizes the objectives of all subunits of an organization. . ., . A Static (Master) Budget is a budget tailored to one level of activity. I ErmP-iéer- a How eke-7 - Example - Problem. Rolling/Continuous Budget: A rolling or continuous budget is an annual budget whereby a 12 month forecast is always available by adding a month in the future as the month just ended is dropped. a Management by Objectives (MBO) Intelligent budgeting can overcome many of the problems of hum behavior inherent in commonly used performance measures such as income” on investment. For example, many organizations have successfully used some form of MBO. Under this procedure, a subordinate and his/her superior jointly formulate the subordinate sets of goals and plans for attaining those goals (objectives) for the subsequent period. Copyright© Rowland Atiasa, October 11, 2009 6 III. Kaizen Budgeting (Continuous Improvement) The Japanese use the term Kaizen for continuous improvement. Kaizen Budgeting is a budgetary approach that explicitly incorporates continuous improvement during the budget period into the resultant budget numbers. Copyright© Rowland Atiase, October l 1, 2009 Chapter '7 FLEXIBLE BUDGETS & STANDARD COSTS PART I — DIRECT-MATERIALS & DIRECT LABOR- I. of Static Budgeting and the use .of Responsibility Introduction: Chapter 6 dealt with the general ideas Accounting to help plan performance. A key element of the control system is feedback w the comparison of actual performance with planned performance (budget). The comparison is made between the budgeted and actual amount to arrive at the variance. This places emphasis on the variances and illustrate Management By Exception (MBE) - which means executives attention is concentrated on the important deviations from budgeted items. In this way, managers do not waste time on the parts of the reports that reflect the smoothly running phases of operations. Copyright© Rowland Atiase, October 11, 2009 8 11. Standard Costs & Flexible Budgets Note Assumptions made in Ch. 9 Part I that Actual Costs equal Budgeted Costs we Lager (Myth 75km ggw an ' . Ch. 7 focuses on how managers use Flexible degets and Standard costs as. helpfiil tools for planning and control. Standard Costs & Feedback System Standard Costs — are the basis for a budgeting and feedback system. Standard (Std) costs are applicable to any product costing. svstem - Whether Job Order, Process Costing or some hybrid (e.g., Operation Costing) product costing system. " * Std Costs are carefully predetermined costs. They are target costs, costs that should be attained. StdCostshelp: (1) Email morgue»; (2) (24,4495, persevch .. (3) ngmjn proaietc-F cases . (4) Save On book-{twins} east: (beams; 4W .4 w. . n-ccce 41hr mkifi 605+ «claw a55WMPfibv‘ enj- L1Fp( F,f,o) A set of standards outlines how tasks should be accomplished and [MW W um My: studio-Q @531; . As work is done, actual costs incurred are compared with std costs to reveal variances. This feedback helps discover better ways of (l) adhering to standards, (2) changing standards, and (3) accomplishing objectives. Copyright© Rowland Atiase, October 11, 2009 9 Std Costs & Budgets: , "” ng‘F‘Q' C954“ is We - Ewe/go!» as 4 am mcfl_ ._ 71:45, std”. ws+ f5 tin effecsf A fiugjqa. gr OM . _. K1151 practice however, std costs and budgets are often used interchangeably. Flexible Budgets - a budget that may be tailored to any level of activity, so that the evaluation of efficiency (the relation of inputs to outputs) is not contaminated by comparing a budget at one level of activity With the results for another level of activity. Although they are often associated With the control of OH, Flexible. Budgets apply equally to Direct Materials (DM) and Direct Labor (DL). - Copyright© Rowland Atiase, October 11, 2009 The essential ingredient is tberll‘lexible Budgeting Equation of the form: l yma+bx where: y = (Total) Budgeted cost ‘ a = Budgeted fixed costs ’(F-Cs) _ b = Std Variable cost (VC) i it = Activity Level Thus a typical flexible budget is really composed of two separate budgets: _ (1) A static budget for FCS, and (2) A really flexible budget for VCS (& Revenues) Evolution of Flexible Budgets: The Flexible Budgeting idea Evolved , (a) to facilitate the explanation of deviations of volume from the original plans inthe static (master) budget ~— Sales Volume Variance. (b) to pinpoint the Budget Variance and break it down into Price Variance and Efficiency Variance. 30 Copyright© Rowland Atiase, October 11, 2009 11 III. Levels efAnai sis % (1) '(3) (5) Actual Flexible H Static (Master) Results Budget Budget PI/ EV ‘_ iFlexibie Bud et Variance Sales Volume Variance fl: Static Budget Variance fl’j Level 0 Analysis: (i)—(5) W Operating Income Variance W Static Budget Variance Level 1 Analysis: (1)—(5) for individual Revenue and Cost items. Level 2 Analysis: Breaks down (Operating Income) Static Budget Variance into: (a) Sales Volume Variance [(3)~(5)], & (b) flexible Budget Variance [(l)—(3 )] Comment The Sales Volume Variance (SVV) makes a sense for Profit centers but not cost centers. I I Level 3 Analysis: (a) Level 2 analysis by territory (& Products) & (b) Breakdown of the flexible Budget Variance into Price & Efficiency Variances. % RV Frat/79.66»? four/MRS ’ a; M5,} AM? he 7Q? 45(61‘, #3 Copyright© Rowland Attase, October 1 l, 2009 12 IV. Tynes of Standards ' ' " ' How demanding should standards be? Should they express perfection or should they allow for the various factors that prevent perfect performance.” ' ' " 1. Basic Cost Standards: are unchanging "standards spotlight trend, _ seldom used. 2. Perfection or Ideal Maximum Efficiency or Theoretical) Standard Costs: Reflect Industrial Engineering dreams of Factory Heaven. 3. Currently Attainabie (CA) Standard Costs: The costs that should be incurred under forthcoming efficient operating conditions. Currently Attainable Standards are difficult but possible to achieve. They are looser than Ideal Standards because Currently Attainable Standards allow for normal spoilage, ordinary machine breakdown and lost time. Currently Attainable Standards are the most widely used because they . have the most desirable ni'otiyational impact and because they may be used for a variety of accounting purposes, including financial planning, as well as for monitoring departmental performance. Unless otherwise stated, we would assume Standards are Currently Attainable. Copyrigiit© Rcwland Atiase, October ll, 2009 13 1V. DM & DL Stds Variances & Control ————§ room; cm “Mammy? may,“ 51M?” Theoretically, Variances should be isoiated (1) As early as possible (Why? For any PM )& (2) At Source (Why? For Resgmibiltt; ACLOMWHI)3 Thus DM Price variance should be isolated at the point of PURCHASE and NOT at the point of USAGE. 7 Similarly, DM Efficiency Variance should be isolated at the point of usage. 0 Material Price Variance (MPV) m MgV = {Actual Price (AP) ~ Standard Price (SP)} x Actual Quantity (AQ) Purchased = (AP u SP) x AQ Purchased. " It addresses the question, holding actual quantity purchased constant, did we pwmwme» 0 Material Efficiency Variance (MEV) w = SP (AQ. Used ~ Standard Q Allowed) It addresses the question, holding standard price constant, did we use more or less materials than we should have. Efficiency Variance is also called Usage or Quantity Variance. Efficiency Variance — Efficiency is a relative measure — often expressed as a ratio of inputs to outputs. Copyright© Rowiand Atiase, October 11, 2009 ' 14 Responsibility for MPV & MEV' I Control is aided by measuring variances in terms of responsibilities. Typically MRMisjheresponsibility ofthersrrzzs' purchasing department head Where as MEV is the responsibility of the production department head (e.g. foreman). The responsibility of the purchasing manager is deemed to include buying for all needs regardless of Whether the materials are used efficiently. However, there may be exceptions: Question: Under What conditions will an unfavorable MPV be the-responsibilityof. the production manager? = ' ' Answer: F” exa’MPIE, WL‘V‘ “M'th (an W‘J; res-«11‘; i“ 5‘. .._./?WVGZ\JL$¢ arafw Map Prr'ggs Question: Under What conditions will an unfavorable MEV be the responsibility of the Purchasing Department? Answer: "1-? pwvohaurioj Mgr, vactu’bfifl’ [ta-th fang”? VWJS wick/LL. 77459.5?! [:4 a Affilwr 927017!“er “9’1 .. f Copyright© Rowland Atiasc, October 11, 2009 Direct Labor Rate Variance (DLRV) and Efficiency Variance (DLEV) ‘ Direct Labor Rate factors are usually not subject to as much control as are Direct Labor efficiency factors. g0”. OCCM £4,qu (4.50:7? («Mag fa Wag 0P1 Matching Principle: Don't put a square peg in a round bowl. 15 Copyright© Rowiand Atiase, October 1 i, 2009 ' 16 Examples of Causes of DLRV (a) The use of a person with wrong rate for a specified job (e.g., Engineer doing a technician‘s job). (13) Use of excess individuals per machine - results in low productivity. Therefore the actual wage rate (w) greater than the marginal product of labor. In fact this scenario will result in both DLRV and ELEV. 4 are isolated on usage and are deemed to the responsibility of the production department. DLRV m Actual Hours (Actual Rate — Standard Rate) = AH (AR — SR) It addresses the question: holding actual hours constant, we pay morepg leMfiflMflmn—mmmve? DLEV = SR (AH - Standard Hours allowed) : SR (AH — SH) ' . ...,.It_mad.([email protected];h9 Question: holding standard. direct labor rate. constant-digits. use more or less direct labor hours than we should‘have. DLRV could also be the responsibility of the Sales Department if for example, the need for rush orders to satisfy (unplanned demand) results in overtime and overtime premium. Copyright© Rowland Atiase, October 1 l, 2009 37 VI. VII. Kaizen Budgeting/Continuous Improvement & Variances Kaizen Budgeting/Continuous Improvement Budgeted Costs is yet another way to control variances. The budgeted cost is successively reduced over succeeding time periods. For example, the budgeted cost used in variance analysis for subsequent periods could be based on targeted 1% reduction each period. The source of the 1% reduction in budgeted (e.g., direct materials) costs could be efficiency improvements or price reductions. Benchmarking & Variances The term benchmarking is often used to refer to the continuous process of measuring products, services, and activities against the best levels of performance. The Standard Costs and Budgeted Amounts discussed above are Benchmarks (i.e., points of reference from which comparisons are made). These best levels of performance may be found in the organization using internal benchmarking information or by using external benchmarks from competing organizations having similar processes. Many consulting firms now offer benchmarking services. ...
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This note was uploaded on 03/03/2011 for the course ACC 359 taught by Professor Atiase during the Spring '07 term at University of Texas at Austin.

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Ch 6&amp 7 - Copyright© Rowland Atiase October 1 1 2009 Chapter 6& 7 Day 1 H0 ‘ 1 Introduction K T 11,13,116”(i Responsibility

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