201-Wk13-Variances-DM,DL-F'10 (STUD)

# 201-Wk13-Variances-D - Mgmt 201 Managerial Accounting Week 13 Standard Costs Direct Cost Variances Performance Evaluation Professor Thoman page 1

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page 1 Mgmt. 201 - Managerial Accounting – Week 13 Standard Costs Direct Cost Variances Performance Evaluation Professor Thoman page 2 Part 2 – DECISION MAKING A. Making the decision: Using the accounting information to make good choices. How does a manager make informed decisions that will increase the firm’s profits? B. Budgeting: Planning for the effect of the firm’s decisions on the firm’s operations and earnings. Given the company’s decisions, how much income can the company expect to earn? What are the company’s targets? C. Performance evaluation: Evaluating the impact of the decisions and making revisions. How well did the company do relative to its targets? Why were targets or goals not attained? What changes should the company make?

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page 3 Standard costs and Variances In these notes we will: I. Review standard costs II. Introduce variances, or the difference between our estimates or budgets for costs and revenues and what actually occurred. III. Examine in detail DIRECT PRODUCTION COST (DM AND DL) VARIANCES or the difference between what our estimates or standards say should be the direct costs should be and the actual direct costs. IV. Look in more detail at a direct material variance problem. V. Look briefly at the Balanced Scorecard—performance evaluation with a new twist. page 4 Standard costs In the last chapter we studied the budgeting process. To determine the amounts of the inputs that the company needs to purchase and to estimate the COGS, we set standards for the products. Definitions: SQ I /unit (or SQ/unit) Standard quantity per unit The standard/estimated/budgeted amount of an input that is necessary to make one unit of output: yards of materials DLH of labor MH of VOH SP I (or SP) Standard price The standard/estimated/budgeted price/cost to acquire one unit of the input price of one yard of material wage rate per labor hour VOH rate per machine hour Again, note SQ I and SP I refer to an amount of an input and the price of the input.
page 5 Standard costs for Framington Co. Framington Co. is a small manufacturer of etched tin eyeglass cases. During its budgeting process before the start of June, Framington set its target or standard costs for the manufacture of the eyeglass cases: SQ I /unit SP I Standard cost/unit DM: Tin 3 ounces/case \$2.50/oz. \$ 7.50 DL: Etching .3 DLH \$10/DLH 3.00 DIRECT COSTS \$ 10.50 VOH .2 MH \$8/MH 1.60 Total standard variable costs per unit \$ 12.10 Fixed overhead costs (per month)* \$ 1,200 *Fixed overhead is allocated on the basis of MH; it was expected that 600 eyeglass cases would be produced each month. What is the predetermined fixed overhead rate? What is the total standard cost per eyeglass case? page 6

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## This note was uploaded on 03/27/2012 for the course MGMT 201 taught by Professor Rowe during the Fall '08 term at Purdue University-West Lafayette.

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201-Wk13-Variances-D - Mgmt 201 Managerial Accounting Week 13 Standard Costs Direct Cost Variances Performance Evaluation Professor Thoman page 1

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