Session 18 class - Accounting 102 Session 18 1...

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1Accounting 102Session 18
2Responsibility Accounting andPerformance Evaluation(Budgets and Variance Analysis)
3Variances in a Standard Costing SystemNotationStandardActualQuantity of Output (O)EOAOInput(I)per unitproducedSIAIPrice/Cost (P) per unitof inputSPAPFor the discussion of the analysis of variance to follow, we will use the notation below:
4Actual Costs and Static and Flexible Budget CostsActual Costs=Actual unitsof outputx(Actual Input perunit of output) x(Actual Priceperunit of input)= AO x AI x APStatic Budget Costs=Planned unitsof outputx (Standard Inputperunit of output) x(Standard Priceperunit of input)= EO x SI x SPFlexible Budget Costs=Actualunitsof outputx (Standard Inputperunit of output) X (Standard Priceperunit of input)=AOx SI x SP
5The Cost Accounting System and VariancesIf a firm uses the standard costs incorporated in its budget to record the operations of its responsibility centers, its accounting records for each responsibility center will include at least1two accounts for each type of input cost. The accounts and the costs recorded in each are:Actual Cost of Input UsedStandard Input Cost Applied to ProductAO x AI x APAO x SI x SPThe difference between the balances of these two accounts is the variance corresponding to the difference between the actual cost and the expected (flexible budget cost) of the input used. 1Also see the text, pp 237 – 239, for an alternative way to record variances.
6Example: Aunt Molly’s Old Fashioned Cookies bakes cookies for sale to retail stores. The company’s best selling cookie is marketed as a gourmet cookie and regularly sells for $8 per pound. The standard cost per pound, based on expected monthly production of 400,000 pounds is given below:Cost ItemQuantityStandardUnit PriceTotal Standard CostSI (units of input/lb)SP ($/unit of input)SI×SP ($/lb)Direct materialsCookie mix10oz.$0.02/oz.$0.20Milk chocolate5oz.0.15/oz.0.75Almonds1oz.0.50/oz.0.501.45Direct manufacturing laborMixing1 min.14.40/hr.$0.24Baking2 min.18.00/hr.0.600.84OverheadVariable Overhead *3 min9.00/hr0.45Fixed Overhead *3 min7.20/hr0.360.81* Overhead costs are allocated to the product on the basis of (total) direct labor time
7Before we proceed, let’s note that Aunt Molly is applyingfixed overhead costs to the product as if they were variable (analogous to the “single rate” method).What does the company expect the total fixed overhead costs for the month to be?

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