20_OverheadsForWeb2 - Objectivesfortoday Varianceanalysis...

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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 do it! 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)
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