Managerial Cost Accounting
Managerial Cost Accounting BADM 642
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This 7 page Class Notes was uploaded by Christina Turcotte on Saturday September 12, 2015. The Class Notes belongs to BADM 642 at West Virginia University taught by Staff in Fall. Since its upload, it has received 18 views. For similar materials see /class/202747/badm-642-west-virginia-university in Business Administration at West Virginia University.
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Date Created: 09/12/15
BADM 642 Budgets amp Variance Analysis Page 1 of 7 Operational and Financial Budgeting Budgets are planning and control tools for management Fiscal responsibility is not limited to the Accounting Department Budgets and forecasts are future oriented and make extensive use of estimates Budgets must start with a topdown strategic plan that guides and integrates the whole company and its individual budgets usinss Pla Strate ic Pla nvestmentFinanc a ash Budge Advantages of Budgets Potential Problems Forces communication Inefficient use of personnel Focus on future Wish list approach Identifies constraints early Encourages unnecessary spending Goal congruence Us versus Them Provides benchmarks for evaluation Hampers creativity BADM 642 Budgets amp Variance Analysis Page 2 of 7 Use of Budgets for Cost Control and Performance Evaluation Cost Control A significant factor in evaluating a manager s performance is hisher ability to maintain costs within budget Fiscal Responsibility Notforprofit entities in particular are very budget conscious and often promotion within the organization depends on the ability to accomplish the needs of a departinth within budgeted constraints Companies which are very budget conscious often build budget controls in to the purchase requisition system thereby preventing a nonbudgeted expenditure or an expenditure which would cause a department to exceed it s approved budget gt BADM 642 Budgets amp Variance Analysis Page 3 of 7 Bud etin Variable Manufacturin Costs Work Backwards From Sales to Operating Budgets Processing Flow Raw Materials Work In Process Finished Goods Beginning RM Beginning WIP Beginning FG Material Used Purchases Mtrl Available Ending RM Material Used Costs Incurred WIP Available Ending WIP A Goods Manufactured Goods Manufactured Goods Available Ending FG Cost of Goods Sold l Starting point is Purchase of RM ending point is Cost of Goods Sold Budgeting Flow Raw Materials Work In Process Finished Goods Beginning RM Beginning WIP Beginning FG Material Used Goods Manufactured Goods Needed Ending FG target Purchases Costs Incurred Material Needed Production Needed Ending RMta et Endin WIP tar t Cost of Goods Sold Material Used Goods Manufactured Starting point is Cost of Goods Sold From sales unit forecast From that point we can work backwards to plan manufacturing activities through the purchase of materials This is also referred to as a production budget or forecast We can budgeUforecast units andor dollars BADM 642 Budgets amp Variance Analysis Page 4 of 7 Budgeting Fixed Costs and NonManufacturing Costs ZeroBased Budgets versus last year plus Static versus Flexible Budgets Cash Flow Budgets amp Forecasts ProForma Income Statements BADM 642 Budgets amp Variance Analysis Page 5 of 7 Budget Variances Variance Actual CostExpense versus Budgeted CostExpense Favorable Variance Actual Revenue gt Budget Revenue Actual CostExpense lt Budget CostExpense Unfavorable Variance Use Brackets Actual Revenue lt Budgeted Revenue Actual CostExpense gt Budgeted CostExpense The Use of Budget Variance Reports allows Management to identify and focus corrective action on problem areas Management by Exception For Fixed Costs and most NonManufacturing areas variance analysis is comprised simply of comparing actual versus budget with the responsible manager identifying the causes of significant variances For Variable Costs and Sales use a pricevolume analysis BADM 642 Budgets amp Variance Analysis Page 6 of 7 Evaluating Variances in Contribution Margin PriceVolume Analysis Contribution Margin Sales less Variable Costs Sales QuantityQ times Sales Unit PriceP Variable Costs QuantityQ times Variable Unit Cost C ActualA Contribution Margin AQ X AP AQ X AC Or AQAPAC BudgetedB Contribution Margin BQ X BP BQ X BC Or BQBPBC Therefore The difference between actual sales and budgeted sales is comprised of Sales Price Variance AP BP X ACTUAL QUANTITY And Volume Variance AQ BQ X BUDGET UNIT PRICE The difference between actual cost and budgeted cost is comprised of Cost Variance BC AC X ACTUAL QUANTITY And Volume Variance BQ AQ X BUDGET UNIT COST The net Volume Variance is the net of the volume variance from Sales and the volume variance from Cost Accordingly the total difference between Actual and Budgeted Contribution Margin is comprised of Sales Price Variance Cost Variance And Net Volume Variance also referred to as Sales Volume Variance Other Uses of PriceVolume Analysis This period compared to last period PriceVolume for forecasting BADM 642 Budgets amp Variance Analysis Page 7 of 7 Standard Costing System In a previous chapter we discussed the use of predetermined estimates for applying overhead Standard costing system applies the same concept but to all areas of production costing as opposed to just overhead allocation Standard Cost represents a target cost for a product component or process Standards are normally established at an expected or practical level as opposed to an ideal level giving consideration for normal spoilage down time etc Generally as a product moves from stage to stage of production it is transferred at Standard Cost so that variances difference between actual and standard can be calculated at each production stage without being affected by variances which may have occurred in previous stages of production This includes transfers in and out of finished goods inventory Accordingly when product is sold the cost of goods sold will re ect the standard cost Since our financial statements must re ect actual amounts the variances will also be included as a component of cost of goods sold Since Variance the difference between Actual and Standard therefore Standard or the sum of variances Actual If all product produced during an accounting period is also sold during that same period we don t have any problems COGS Standard or Variances Same as applied overhead or overunder applied actual If not all of the product produced during a period was sold the variances related to the unsold product must be retained or absorbed into inventory Standard Costing is a very common and powerful tool for planning and for performance evaluation in the production process Standard Cost alone however is not an acceptable method for valuing inventory under GAAP