CHAPTER
15
Cost Control
CHAPTER OUTLINE:
I. Cost Classifications
A. Relationship of Cost to Volume of Activity
2. Fixed cost
1. Controllable cost
2. Noncontrollable cost
II. Performance Reporting
A. Characteristics of the Performance Report
2. Variances
3. Issues in the design of performance reports
B. The Flexible Budget
1. Required to have a meaningful performance report
III. Analysis of Standard Cost Variances
A. Components
2. Cost per unit of input variance
B. Favorable/Unfavorable Label
2. Label not necessarily synonymous with “good” or “bad”
C. Name of Variance Related to the Input
2. Direct labor—efficiency and rate
3. Variable overhead—efficiency and spending
D. General Model for Calculating Variances
E. Variance Calculations Illustrated
F. Analysis of Fixed Overhead Variance
2. Volume variance
Chapter 15 Cost Control
CHAPTER OUTLINE (continued)
G. Accounting for Variances
IV. Reporting for Segments of an Organization
A. Segments are responsibility centers
1. Cost center
3. Investment center
B. Hazards of arbitrary allocation of common costs
C. Direct and common fixed expenses
D. Segment margin
V. Analysis of Investment Centers
A. Return on Investment
1. Using the Dupont Model for ROI
a. Margin
b. Turnover
B. Residual Income
1. To eliminate dysfunctional behavior and suboptimization
C. The Balanced Scorecard
2. Customer perspective
4. Learning and growth perspective
TEACHING/LEARNING OBJECTIVES:
Primary: To have the student understand:
1. The reasons for and method of flexing a budget.
2. That for control purposes, variances from standards can be calculated and used to encourage
3. That segments of an organization must be carefully considered in order to structure effective
performance evaluation techniques.
Supporting: To have the student understand:
5. That arbitrary allocation of common fixed expenses is inappropriate when evaluating
6. That quantity variances are sometimes more useful than dollar variances.
8. How standards can be used to build up product cost.
10. That variances are analyzed to permit managers to better control the activities for which they
are responsible.
12. How ROI, residual income, and balanced scorecards are used to measure and communicate
organizational performance.
TEACHING OBSERVATIONS:
1. Emphasize that the reason for calculating variances is to communicate to the person
responsible, so that favorable variances can be captured and unfavorable variances can be
2. There may be some confusion about the use of the term “price” in connection with a cost
3. Students can identify with the desirability of prompt reporting of variances by having them
4. The basic variance analysis equations can be covered quickly with problems such as P15.19
E15.12, and E15.13. Walk them through the solution to one of these problems, and then
assign the others as in-class group work. You will find that they can explain it among
Chapter 15 Cost Control
ASSIGNMENT OVERVIEW:
NO.
DIFFICULTY &
TIME ESTIMATE
OTHER COMMENTS
M15.1
Easy, 5-8 min.
Basic introduction to the flexible budget.
M15.2
Easy, 5-10 min.
Expands M15-1 to include basic performance report.
M15.3
Med., 10-15 min.
Basic calculations for the direct material variances.
M15.4
Med., 10-15 min.
Basic calculations for the direct labor variances.
M15.5
Med., 10-15 min.
Basic calculations for the variable overhead variances.
M15.6
Med., 10-15 min.
Basic calculations for the fixed overhead variances.
E15.7
Easy, 5-8 min.
Straight-forward.
E15.8
Med., 10-12 min.
E15.9
Easy, 7-10 min.
Straight-forward way to introduce flexible budgeting.
E15.11
Med., 10-12 min.
Group learning problem. Students enjoy solving the puzzle.
Help them get started by filling in the known data on the board.
demonstration problem.
E15.13
Med., 10-15 min.
Group learning problem. Walk students through the solution
in class.
E15.14
Med., 10-15 min.
Straight-forward exercise that focuses on the calculation of
material variances.
E15.15
Easy, 7-10 min.
Emphasize the importance of understanding cost behavior
patterns when analyzing segmented income statements.
E15.16
Med., 10-12 min.
See 15.7. Never arbitrarily allocate fixed expenses!
E15.17
Med., 10-15 min.
Good in-class demonstration problem to compare ROI and RI.
E15.18
Med., 18-20 min.
Provides an opportunity to evaluate the use of ROI vs. RI as
P15.19
Med., 12-18 min.
Straight-forward calculation of variances.
P15.20
Med., 12-18 min.
Excel problem. Good in-class exercise or homework
P15.21
Med., 7-10 min.
Straight-forward non-manufacturing application of standards.
P15.22
Med., 7-10 min.
See 15.21. Straight-forward.
P15.23
Med., 10-12 min.
Straight-forward numbers-oriented problem.
C15.25
Easy, 3-5 min.
Can be used as a discussion starter when introducing the
concept of flexible budgeting.
C15.26
Easy, 5-8 min.
Straight-forward.
C15.27
Easy, 3-5 min.
Use as a discussion starter.
C15.29
Easy, 5-8 min.
Can be used as a discussion starter to introduce “behavioral
aspects” of standard costing systems.
C15.30
Med., 7-10 min.
Students tend to make this problem too difficult—the point is
C15.31
Med., 7-10 min.
Provides an opportunity to discuss the use of standard costs in
accounting systems.
C15.32
Med., 30-45 min.
Internet case. Research case to familiarize students with the
Consortium for Advanced Manufacturing – International and
Instructor’s Manual / Solutions Manual
SOLUTIONS:
M15.1.
Original Budget
Flexed Budget
Direct materials………
Direct labor…………..
$10.00 per unit
Variable overhead……
Fixed overhead……….
$32,000 per month
32,000
Total budgeted cost…
M15.2.
Original
Budget
Flexed
Budget
Actual
Cost(1)
Budget
Cost Component
(17,500 units)
(18,000 units)
(18,000 units)
Variance
Direct materials……
$140,000
$144,000
$148,500
$4,500 U
Direct labor………..
175,000
180,000
170,100
9,900 F
Variable overhead…
14,760 U
Fixed overhead…….
Total budgeted cost
$452,000
$464,000
$474,860
Variable overhead = $6.82 * 18,000 units = $122,760
M15.3.
Original Budget
Flexed Budget
Actual
Variance
Direct materials.……
$140,000
$144,000
$148,500
$4,500 U
M15.4.
Original Budget
Flexed Budget
Actual
Variance
Direct labor…………
$175,000
$180,000
$170,100
$9,900 F
M15.5.
Original Budget
Flexed Budget
Actual
Variance
Variable overhead….
$105,000
$108,000
$122,760
$14,760 U
M15.6.
Original Budget
Flexed Budget
Actual
Variance
Fixed overhead……..
$32,000
$32,000
$33,500
$1,500 U
E15.7.
a.
Cost formula = $19,400 + $7.70 per machine hour
Budget = $19,400 + ($7.70 * 6,700 machine hours) = $70,990
b.
Original Budget
Flexed Budget
Actual
(6,700 MH)
(7,060 MH)
Cost
Variance
Total maintenance cost.
E15.8.
Original Budget
Flexed Budget
Actual
Item
(14,000 units)
(13,300 units)
Cost
Variance
Direct Materials………
$220,500
$209,475
$216,600
$7,125 U
Direct Labor …………
Fixed Overhead………
Total …………………
$545,400
$521,530
$7,570 U
E15.9.
Original Budget
Flexed Budget
Actual
Variance
a.
Direct labor …………
$1,800
$1,716 a
$1,888
$172 U
E15.10.
Flexed Budget
Actual
Variance
a.
Direct labor…………………………………
$1,380 a
$1,573
$193 U
b.
Direct labor efficiency variance:
(Standard hours – Actual hours) * Standard rate
Direct labor rate variance:
(Standard rate – Actual rate) * Actual hours
E15.11.
a.
Standard hours allowed = 3.5 hours * 24 tune-ups = 84 hours
Efficiency variance was 6 hours unfavorable, therefore actual hours
= 84 + 6 = 90 hours
Standard labor cost allowed for actual hours ($15 per hour * 90 hours) …
Actual total labor cost………………………………………………………
Actual labor rate per hour = $1,269 / 90 hours = $14.10 per hour
b.
Direct labor efficiency variance:
(84 – 90) * $15 = $90 U
c.
Less skilled, lower paid workers took longer than standard to get the work done. Net
E15.12.
a.
Favorable direct labor rate variance
$ 3,500
Divided by: Actual direct labor hours worked
2,500
Favorable direct labor rate variance per hour
$ (1.40)
Standard direct labor rate per hour
16.00
Actual direct labor rate per hour
E15.13.
a.
Purchase price variance = (Standard price – Actual price) * Actual quantity purchased
= ($8.00 per board foot – ??? actual price) * 19,000 board feet purchased = $2,850 U.
E15.14.
a.
Cost per pound = Cost of fiberglass purchased / pounds purchased
((1.75 pounds allowed * 100,000 units produced) – 180,000 pounds issued into
E15.14.
(continued)
d.
Generally, it is appropriate to isolate variances as soon as possible so that immediate
E15.15.
a.
The president’s remark ignores the misleading result of arbitrarily allocated fixed
expenses.
Add: Division B direct fixed expenses that would be eliminated:
Total Division B fixed expenses per report ………..………
Less: Allocated corporate ($21,000 / 3 divisions) …………
Never arbitrarily allocate fixed expenses!
E15.16.
a.
The exercise presentation shows allocated fixed expenses, which can cause an
erroneous conclusion because these expenses apply to the company as a whole (not to
the individual segments). The $10,000 of company fixed expenses is apparently being
b.
If the MV12 model were discontinued, total company net income would decrease by
$2,900 (the segment margin of the MV12 model). The $5,000 of fixed expenses that
were allocated to the MV12 model would not be eliminated.
d.
To achieve the greatest increase in contribution margin from an increase in the quantity
sold, the product with the greatest contribution margin per unit should be advertised,
which is the HV41 model.