wk7_ch7n - Ch 7: Flexible Budgets, Direct-Cost Variances,...

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Ch 7: Flexible Budgets, Direct-Cost Variances, and Management Control
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Lead-in example: Variances Webb Company makes and sells jackets. Webb’s original budget (plan) for 2010 was as follows: sales revenue $1,440,000: 12,000 units (jackets) × price $120 variable costs: direct materials $720,000 : 12,000 units × 2 sq. yds per unit × $30 per sq. yd. direct labor $192,000 : 12,000 units × 0.8 hrs per unit × $20 per hr var. OH $144,000: 12,000 units × $12 per unit fixed OH costs: $276,000 operating income: $108,000 Actual performance for 2010 was different: sales revenue $1,250,000: 10,000 units × price $125 variable costs: direct materials $621,600 : 10,000 units × 2.22 sq. yds per unit × $28 per sq. yd direct labor $198,000 : 10,000 units × 0.9 hrs per unit × $22 per hr var. OH $130,500: 10,000 units × $13.05 per unit fixed OH costs: $285,000 operating income: $14,900 Question: What went well (actual vs budget), what went wrong, who is to blame, and what can we learn?
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Basic Concepts Variance = difference between actual and budgeted (expected, planned) performance favorable (F): actual performance better than budgeted (higher revenue or lower cost) unfavorable (U): actual performance worse than budgeted Management by Exception – the practice of focusing attention on areas not operating as budgeted (expected) Static (master) budget – based on the original budgeted level of sales (& budgeted everything else)
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Level 1 Analysis: Static Budget  Variances (“Where were we off?”)
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Level 1: Static budget variance for  OI static budget variance for operating income = = actual OI – static-budget OI “How much were we off in total?” other static budget (level-1) variances are not very
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This note was uploaded on 04/28/2011 for the course ACCOUNTING 2521 taught by Professor Byzalov during the Spring '11 term at Temple.

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wk7_ch7n - Ch 7: Flexible Budgets, Direct-Cost Variances,...

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