20_OverheadsForChen1 - Objectivesfortoday Variance analysis...

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ACCY 302 (Chen) Fall 2009, Class 20 1 Objectives for today Variance analysis Overview of: variances in general product cost variances in particular Let's practice! product cost variances using the table method sales variances
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ACCY 302 (Chen) Fall 2009, Class 20 2 Overview of variances Recall that organizations use operational budgets for: planning (for the future) motivation (to work hard now) evaluation (of the past) So budgets are both: quantitative plans of action (the future) and benchmarks against which to compare current performance (an assessment of actions taken)
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ACCY 302 (Chen) Fall 2009, Class 20 3 Overview of variances  (continued) Variances are a comparison of the plan of action (i.e., the budget) to what we actually achieved In other words, how does our actual performance compare to what we thought it would be, and why is there a difference?
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ACCY 302 (Chen) Fall 2009, Class 20 4 Overview of variances  (continued) Variances (i.e., differences between actual and budget) can arise from many different things Variance analysis is a tool that takes the overall variance and breaks it down into those "different things" so we can evaluate performance
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ACCY 302 (Chen) Fall 2009, Class 20 5 Overview of variances  (continued) Because organizations typically budget the whole income statement, we can have: sales variances these are not hard to compute or interpret (see today's reading) we'll focus on only the: sales price variance price volume variance cost variances these are harder to work with so we're going to start here
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ACCY 302 (Chen) Fall 2009, Class 20 6 Product cost variances For product cost variances the plan of action/benchmark is a product's "standard" (or "budgeted") cost what we actually achieved is a product's "actual cost" We‘ll need to think in absorption costing terms from here on out
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ACCY 302 (Chen) Fall 2009, Class 20 7 Product cost variances  (continued) A product's standard cost is a measure of how much one unit of that product should cost to produce total standard cost includes standards for both direct and indirect costs (per absorption costing!) Standards can be based on: historical costs engineering studies time studies (e.g., Frederick Taylor) process analysis
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ACCY 302 (Chen) Fall 2009, Class 20 8 Product cost variances  (continued) Variances arise from differences between these standards and actual results What kinds of things can lead to these differences?
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ACCY 302 (Chen) Fall 2009, Class 20 9 Product cost variances (continued) Differences can arise from: 1) changes in the price of inputs price (a.k.a. rate) variances 1) changes in the number of inputs needed to produce one output efficiency (a.k.a. usage) variances 1) changes in output levels activity variances, production volume variance (PVV) 1) change in spending plans fixed overhead spending variances Note that errors, mistakes, less-than-ideal conditions, unexpected problems, bad standards, etc. can result in price, efficiency, activity, or spending variances!
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