CH.10 - Variance AnalysisA Tool for Cost Control and...

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1 Click to edit Master subtitle style Variance Analysis–A Tool for Cost Control and Performance Evaluation ACIS 2116 Chapter 10
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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 Only investigate significant differences between actual and planned results 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 standard costs 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 Based on actual level of production rather than expected or planned level of production.
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13 Hokie Consultants Example Hokie Consultants, Inc. has budgeted the following costs: $5,000 in fixed expenses per month. Variable costs per consulting job: $35 for supplies $100 for labor $50 for computer time. The firm expects revenue to be $20,000, based on 50 consulting jobs at an average fee of $400 each. These 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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This note was uploaded on 08/15/2011 for the course ACIS 2116 taught by Professor Cmeasterwood during the Spring '08 term at Virginia Tech.

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CH.10 - Variance AnalysisA Tool for Cost Control and...

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