tools-for-enterprise-performance-evaluation

It is using a static planning and budget is one

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Unformatted text preview: vity. It is using a static planning and budget is one chapter provided a comprehensive budget illustrationvery useful forbudget. The static budget purposes. However, you were also cautioned activity. potential useful for planning and control is one which is developed for a single level ofabout the It is very shortcomings of using static control for performance evaluation. Specifically, when the actual output varies from the using static budgets purposes. However, you were also cautioned about the potential shortcomings of anticipated budgets for performance to arise. These variances can the actual output varies genesis anticipated level, variances are likelyevaluation. Specifically, whenbe quite misleading. Thefrom theof the level, variances are likely to will These track volume. If the company produces and sells the problem is that variable costsarise. tend to variances can be quite misleading. The genesis of more problem than anticipated, one would expect to volume. variable costs (and vice and sells products is that variable costs will tend to track see more If the company producesversa). more products than is a good thing would expect to see more variable costs (and variances Presumably, itanticipated, one to produce and sell more than planned, but thevice versa).resulting Presumably, it costs can appear produce and sell more than planned, but the variances resulting from the higheris a good thing to as a bad thing! The opposite occurs when volume is less than from the higher costs can appear as a bad thing! The opposite occurs when volume is less than anticipated. anticipated. To illustrate, assume that Mooster’s Dairy produces a premium brand of ice cream. Mooster’s Dairy To illustrate, assume that on anticipated production a 100,000 brand of ice cream. Mooster’s Dairy uses a static budget based Mooster’s Dairy produces ofpremium gallons per month. Cost behavior uses a static budget based on anticipated variable a of 100,000 gallons $1 month. Cost behavior analysis revealed that direct materials areproductionnd anticipated to be perper gallon ($100,000 in analysis revealed is variable and anticipated to be $.50 per gallon ($50,000 in gallon ($100,000 in total), direct laborthat direct materials are variable and anticipated to be $1 per total), and variable total), overhead is expected and $1.50 per to be ($150,000 in total). Fixed total), overhead is factorydirect labor is variable to beanticipatedgallon$.50 per gallon ($50,000 infactory and variable factory at $205,000 per month. The monthly budget for total in total). Fixed factory overhead is plannedoverhead is expected to be $1.50 per gallon ($150,000manufacturing costs is $505,000, as planned the budget per month. The shown inat $205,000 column below. monthly budget for total manufacturing costs is $505,000, as shown in the budget column below. M OOSTER’S DAIRY - Static Budget/Expense Analysis For the Month Ending July 31, 20X9 * * Actual (105,000 units) Variable Expenses Direct materials Direct labor Variable factory overhead Budget (100,000 units) Variance $ 1 05,000 53,000 155,000 $ 1 00,000 50,000 150,000 $ ( 5,000) (3,000) (5,000) $ (13,000) Total Variable Expenses $ 313,000 $ 300,000 Fixed Factory Overhead $ 200,000 $ 205,000 $ Total Manufacturing Costs $ 513,000 $ 505,000 $ (8,000) 5 ,000 July of 20X9 was hotter than usual, and Mooster found them selves actually producing 105,000 July of Total factory costs were $513,000....
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