Variations in production volume are accounted for by using flexible budgets in the efficiency variance calculations. Notice that the meaning of the fixed overhead spending variance is different from the meaning of the variable overhead spending variance.
For the Expando Company example, the variance is as follows: Standard fixed overhead costs are equal to budgeted fixed overhead costs only when denominator hours DH are equal to standard hours allowed SHA.
Reducing the amount of human intervention.
Although the production volume variance is referred to as uncontrollable, a large unplanned variance may need to be investigated and explained. It measures any price and quantity differences between actual and budgeted prices and actual and budgeted quantities for the various types of resources represented by the fixed overhead costs.
Behavioral aspects in standard costing the variations in the activity measure, in this case direct labor hours were perfectly correlated i. This type of standard may motivate employees since it gives them a long-term target to aim for.
The traditional interpretation is that the spending variance includes the price variance and the part of the quantity variance caused by factors other than the efficiency or inefficiency of the allocation basis, i.
The establishment of ex-post budgets is very difficult. It may simply mean that the system is poorly designed. A target price is set with close and continuous customer input. Absorption costing includes all costs, including fixed costsin figuring the cost of production, while variable costing only includes the variable costs directly related to production.
However, by looking only at the costs directly associated with production, variable costing makes it easier for a company to compare the potential profitability of manufacturing one product over another.
Deciding in retrospect that expected costs should be different from the standard should not be an arbitrary decision, aimed perhaps at shifting the blame for bad results due to poor operational management or poor cost estimation.
When performance is within the established limits, the system is said to be in control. The variable overhead rate calculation and other relevant data appear below. Although these traditional interpretations are intuitively appealing, the spending and efficiency variances are not precise measures and can be very misleading.
Theoretically, the price and quantity variances on the right-hand side of Exhibit could be calculated using a flexible budget based on the actual quantities and budgeted prices of the indirect resources B1. Behavioral Problems Associated With Labor Variances Placing too much emphasis on labor rate variances can motivate managers to use less qualified workers than needed, although the resulting unfavorable effect on the efficiency variance is a deterrent to that sort of behavior.
The problem caused by the first assumption can be eliminated by using activity based costing concepts, i. When a standard level of performance is high, e. Managers are, theoretically, more likely to accept and be motivated by the variances reported which provide a better measure of their performance.
The production volume variance measures the variance caused by the difference between the denominator output level, i. The most common capacity levels used are: Management Accounting Control System Design Well designed accounting control systems include appropriate behavioral and technical elements.
Considerations When a business chooses to use standard cost, rather than actual cost or other costing methods, it means accepting a tradeoff. Managers whose performance is reported to be poor using such a budget are unlikely to accept them as performance measures because of the subjectivity in setting such budgets.
Standard costs and behavioural issues Standard costs are set with a view to measuring actual performance against the standard, and reporting variances to the managers responsible.
In addition, the geographic location of the company, any vendor services included with a resource and random variations also affect prices. When this is done, the analyst is implicitly using the actual quantity of one type of resource, usually actual direct labor hours to estimate the quantities of the indirect resources such as kilowatt hours of electricity, hours of indirect labor, and quantities of indirect materials.
A company has to pay its office rent and utility bills every month regardless of whether it produces 1, products or no products at all. SPC is based on real time disaggregated data and is not part of the accounting control concept discussed in chapter 9.
Remember that the planned production volume variance is based on the difference between denominator hours and the standard or budgeted hours allowed for the budgeted units to be produced.
The suitability of standard costing in different organisations Standard costing is most suited to organisations with: Discuss the advantages and disadvantages of the approach. However, the standard fixed overhead cost line is up-sloping which shows that standard costs increase as production increases.
In their search for perfect quality, Japanese companies use ideal standards for pinpointing areas where close examination may result in large cost savings.Behavioural Aspects of Standards.
Budgets and Standards rely heavily on the people who have to work to meet them. Since the detailed nature of standard costing and its involvement along with foremen and production workers, communication is crucial.
The next chapter deals with the behavioral aspects. This chapter includes a discussion of several important concepts including: 1) the accounting concept of control, 2) management accounting control system design, 3) life cycle costing, 4) target costing, 5) kaizen costing, 6).
CHAPTER 9 • BEHAVIOURAL ASPECTS OF BUDGETING 1 9 Behavioural aspects of budgeting Objectives By the end of this chapter you will be able to: Page 1 Describe the purpose of budgeting systems xxx 2 Explain the role of budgeting as a means of. Q6 What are the quality and behavioral implications of spoilage need to be valued for financial statements, tax reporting, and management monitoring.
Job costing is an accounting method used to assign product costs to custom products or services. In job costing, direct costs are traced and marizes key aspects of the issues Bombardier. beyond the technical aspects of these costing systems, realizing that the information they generate may affect multiple decision contexts within the company.
Keywords: Standard costing, behavioral implications, ethics, normal costing, actual costing. describe the contingency approach to management accounting. Brownell, P. () Participation in budgeting, locus of control and organisational effectiveness, The Accounting Review, October, –Google Scholar Bruns, W.J.
and Waterhouse, J.H. () Budgetary control and .Download