lesson 6.4 part 1 Sept 2024.pptx maxed char

Business presentation

1. Flexible Budgets Variances 3 rd level Analysis- direct materials and labour Lesson 6.4 Part 1 Updated June 14, 2019

2. Manchester: Flexible Budget Variances: Flexible Budget Flexible Budget   Actual Variance   Revenue $70,000,000 -$ 3,500,000 U $66,500,000         Direct materials $17,500,000 -$ 4,900,000 F $12,600,000 Direct labour $14,000,000 $ 1,400,000 U $15,400,000 Variable overhead $ 3,500,000 $ 700,000 U $4,200,000 Total Contribution Margin $35,000,000 -$ 700,000 U $34,300,000 Fixed costs $ 600,000 $ 600,000 U $1,200,000 Operating Income $34,400,000 -$ 1,300,000 U $ 33,100,000

3. 3 rd level Flexible Budget Variances

4. Direct Material Variances Price and Quantity Variances

5. Direct Material Variances Direct Material Price Variance Direct Material Quantity variance Direct Material Flexible Budget Variance $4,900,000 F

6. Direct Material Quantity Variance Quantity variance = (AQ - SQ) x SP Where: AQ = actual quantity of materials used (for actual volume of output) SQ = standard quantity of materials allowed (inputs) (for actual volume of output) SP = standard price of materials This variance indicates how efficient we were in using inputs to make our products

7. Manchester - information Budgeted Actual direct material   input amount 2.00 2.40 cost per unit of input $ 12.50 $ 7.50 Units of input we expect to use to make each unit of output Expected cost of each unit of input Units of input actually used to make each unit of output Actual cost of each unit of input

8. Manchester Materials Quantity Variance AQ = 2.4 * 700,000 = 1,680,000 SQ = 2.0 * 700,000 =1,400,000 SP =$ 12.50 Where: AQ = actual quantity of materials used (for actual volume of output) SQ = standard quantity of materials allowed (inputs)for actual volume of output SP = standard price of materials Quantity variance = (AQ - SQ) x SP = (1,680,000-1,400,000)*$12.50 So, the variance is $3,500,000 U. The variance is unfavourable as we used too many inputs for the volume of output.

9. Direct Material Price Variances Price variance = (AP - SP) x AQ Where: AP = actual price of materials SP = standard price of materials AQ = actual quantity of materials used (inputs) for actual volume of output

10. AQ = = 2.4 * 700,000 = 1,680,000 AP = $7.50 SP = $12.50 Where: AQ = actual quantity of materials used (for actual volume of output) AP = actual price of materials SP = standard price of materials Price variance = (AP - SP) x AQ = ($7.50-$ 12.50) *1,680,000 = - $8,400,000. This variance is favourable, as we spent $ 5 less than expected on each unit of input. Manchester Materials Price Variance

11. Direct Material Variances Direct Material Price Variance $ 8,400,000 F Direct Material Quantity variance $3,500,000 U Direct Material Flexible Budget Variance $4,900,000 F

12. Direct Labour Variances Rate and Efficiency Variances

13. Direct Labour Variances Direct Labour Rate Variance Direct Labour Efficiency V ariance Direct Labour Flexible Budget Variance $1,400,000 U

14. Direct Labor Efficiency Variance Efficiency variance = (AH - SH) x SR Where: AH = actual number of direct labour hours SH = standard number of direct labour hours allowed (input amount) SR = standard wage rate

15. Manchester - information Budgeted Actual Direct labour   input amount 1.00 1.25 cost per unit of input $ 20.00 $ 17.60 Hours we expect to use to make each unit of output Expected wage rate per hour Hours actually used to make each unit of output Actual wage rate paid per hour

16. MFG Labour Efficiency Variance Where: AH = actual quantity of labour used SH = standard number of direct labor hours allowed (for actual output) SR = standard wage rate AH = = 1.25 * 700,000 = 875,000 hours SH = = 1 *700,000 = 700,000 hours SR = $20.00 Labour Rate variance = (AH - SH) x SR = (875,000 -700,000) *$20 = $3,500,000 U The variance is unfavourable as we used more hours than we should to produce 700,000 units of output.

17. Direct Labor Rate Variance Rate variance = (AR - SR) x AH Where: AH = actual number of direct labor hours AR = actual wage rate SR = standard rate

18. Labour Rate Variance Where: AH = actual quantity of labour used (for actual volume of output) AR = actual wage rate SR = standard wage rate AH = 1.25 * 700,000 = 875,000 hours AR =$ 17.60 per hour SR = $20.00 per hour Rate variance = (AR - SR) x AH = (17.60-20.00) * 875,000 = - $2,100,000 So, this variance is favourable as we paid workers less than expected.

19. Direct Labour Variances Direct Labour Rate Variance $ 2,100,000 F Direct Labour Efficiency V ariance $3,500,000 U Direct Labour Flexible Budget Variance $1,400,000 U

20. Recap: 3 rd level Flexible Budget Variances highlight unexpected changes in Efficiency of using inputs Cost of inputs