Description
Module 09: Introduction
Standard Costs and Variance AnalysisLearning Outcomes
Describe the purpose of standard costs used for manufacturing costs.
Analyze the direct materials price and quantity variances and explain their significance.
Appraise the direct labor rate and efficiency variances and explain their significance.
Evaluate the variable manufacturing overhead rate and efficiency variances and explain their significance.
ReadingsRequired:
Chapter 9 in Managerial Accounting
Falat, K. (2019). Changes in the Product Costing Process Driven by Implementation of an Integrated Information System in a Production Company. EFinanse, 15(4). https://doi.org/10.2478/fiqf-2019-0025
Recommended:
Module 09 PowerPoint Presentation
Ching-Wen Kwang, & Slavin, A. (1962). The Simple Mathematics of Variance Analysis. Accounting Review, 37(3), 415.
Module 09 Discussion
Module 09 Discussion
Evaluating Variance from Standard Costs
Discuss the importance of evaluating variances from standard costs in managerial accounting. What are some reasons for variances, and how can they be addressed?
Directions:
Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and cite any other sources if appropriate.
Your initial post should address all components of the question with a 500 word limit.
Reply to at least two discussion posts with comments that further and advance the discussion topic.
Unformatted Attachment Preview
INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 9
International
Factor
Movements
and
Multinational
Enterprises
© 2019 Cengage. All rights reserved.
2
Chapter Outline (1 of 2)
The Multinational Enterprise
Motives for Foreign Direct Investment
Supplying Products to Foreign Buyers: Whether
to Produce Domestically or Abroad
Country Risk Analysis
© 2019 Cengage. All rights reserved.
3
Chapter Outline (2 of 2)
International Trade Theory and Multinational
Enterprise
Foreign Auto Assembly Plants in the U.S.
International Joint Ventures
Multinational Enterprises as a Source of Conflict
International Labor Mobility: Migration
© 2019 Cengage. All rights reserved.
4
The Multinational Enterprise
(1 of 6)
The Multinational Enterprise (MNE)
• Operate in many host countries
• Often conduct research and development
(R&D) activities, in addition to manufacturing,
mining, extraction, and business-service
operations
• Often directed from a company planning
center distant from host country
© 2019 Cengage. All rights reserved.
5
The Multinational Enterprise
(2 of 6) Table 9.1
The World’s Largest Corporations, 2016
Firm
Headquarters
Revenues ($ billions)
Walmart Stores
United States
482.1
State Grid
China
329.6
China National Petroleum
China
299.3
Sinopec Group
China
294.3
Royal Dutch Shell
Netherlands
272.1
Exxon Mobil
United States
246.2
Volkswagen
Germany
236.6
Toyota Motor
Japan
236.6
Apple
United States
233.7
BP
United Kingdom
226.0
Source: From “The 2016 Global 500,” Fortune, available at http://www.fortune.com.
© 2019 Cengage. All rights reserved.
6
The Multinational Enterprise
(3 of 6)
• The Multinational Enterprise (cont.)
• Multinational stock ownership
• Multinational company management
• High ratio of foreign sales to total sales
• Types of integration:
• Vertical integration:
• Parent MNE establishes foreign subsidiaries to
produce intermediate goods or inputs that go into the
production of a finished good
© 2019 Cengage. All rights reserved.
7
The Multinational Enterprise
(4 of 6)
• Types of Integration (cont.)
• Horizontal integration
• Parent company produces commodity in source
country
• Sets up subsidiary to produce identical product in
host country
• Conglomerate integration
• Diversify into nonrelated markets
© 2019 Cengage. All rights reserved.
8
The Multinational Enterprise
(5 of 6)
• Foreign direct investment by parent
company
• Obtains sufficient common stock in a foreign
company to assume voting control
• Constructs new plants and acquires
equipment overseas
• Shifts funds abroad to finance expansion of its
foreign subsidiaries
• Earnings of foreign subsidiaries reinvested in
plant expansion
© 2019 Cengage. All rights reserved.
9
The Multinational Enterprise
(6 of 6) Table 9.2
Direct Investment Position of the United States on a Historical Cost Basis, 2015*
U.S. DIRECT INVESTMENT ABROAD
FOREIGN DIRECT INVESTMENT IN U.S.
Country
Amount
(billions of dollars)
Percentage
Amount
(billions of dollars)
Percentage
Canada
352.9
7.0
269.0
8.6
Europe
2,949.2
58.5
2,162.8
69.0
Latin America
847.6
16.8
118.8
3.8
Africa
64.0
1.3
0.7
0.0
Middle East
48.5
1.0
18.5
0.1
Asia and Pacific
778.3
15.4
564.4
18.5
5,040.5
100.0
3,134.2
100.0
*Historical cost valuation is based on the time the investment occurred, with no adjustment for price changes.
Source: From U.S. Department of Commerce, U.S. Direct Investment Position Abroad and Foreign Direct Investment Position in the
United States on a Historical-Cost Basis, available at http://www.bea.doc.gov/. See also U.S. Department of Commerce, Survey of
Current Business, Washington, DC, Government Printing Office.
© 2019 Cengage. All rights reserved.
10
Motives for Foreign Direct Investment
(1 of 3)
Foreign Direct Investment (FDI)
• Motivated by higher rates of return on
investment
• Leads to economic growth and job creation
• Generates spillovers
• Improved management and better technology
• Higher average labor productivity
• Higher wages
• Stimulates exports of capital goods
© 2019 Cengage. All rights reserved.
11
Motives for Foreign Direct Investment
(2 of 3)
• Demand Factors
• New markets and sources of demand
• Tap foreign markets that cannot be
maintained adequately by export products
(licensing rights)
• Parent company ⎯ productive capacity already
sufficient to meet domestic demand
• Market competition
• Direct exporting
© 2019 Cengage. All rights reserved.
12
Motives for Foreign Direct Investment
(3 of 3)
• Cost Factors
• Reductions in production costs
• Acquisition of essential raw materials
• Lower labor costs
• Decreased transportation costs
• Government policies
• Economies of scale
• Direct exporting – foreign demand is small
• Licensing agreement/FDI – demand is large
© 2019 Cengage. All rights reserved.
13
Supplying Products to Foreign Buyers:
Whether to Produce Domestically or Abroad
(1 of 4)
Direct Exporting versus Foreign Direct
Investment/Licensing
• Economies of Scale (See Fig 9.1)
• Small Demand/Output – Direct Exports
• Large Demand/Output – FDI/Licensing
• Low Transportation Cost – Direct Exports
• High Transportation Cost – FDI/Licensing
• Low Trade Restrictions – Direct Exports
• High Trade Restrictions – FDI/Licensing
© 2019 Cengage. All rights reserved.
14
Supplying Products to Foreign Buyers:
Whether to Produce Domestically or Abroad
(2 of 4) Figure 9.1
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15
Supplying Products to Foreign Buyers:
Whether to Produce Domestically or Abroad
(3 of 4)
• Foreign Direct Investment versus
Licensing
• Decision to establish foreign operations
through Direct Investment or Licensing
depends on (see Fig. 9.2)
• Capital used in production
• Size of foreign market
• Fixed cost of establishing overseas facility
© 2019 Cengage. All rights reserved.
16
Supplying Products to Foreign Buyers:
Whether to Produce Domestically or Abroad
(4 of 4) Figure 9.2
© 2019 Cengage. All rights reserved.
17
Country Risk Analysis (1 of 4)
Country Risk Analysis
• Political risk analysis
• Assesses political stability of country
• Government stability, corruption, domestic conflict,
religious tensions, and ethnic tensions
• Financial risk analysis
• Investigates country’s ability to finance its debt
obligations
• Foreign debt as percentage of GDP, loan default,
and exchange rate stability
© 2019 Cengage. All rights reserved.
18
Country Risk Analysis (2 of 4)
• Country Risk Analysis (cont.)
• Economic risk analysis
• Determines country’s current economic
strengths and weaknesses
• Rate of growth of GDP, per capita GDP, inflation
rate
• Composite country risk rating
• Overall assessment of risk of doing business
in country
© 2019 Cengage. All rights reserved.
19
Country Risk Analysis (3 of 4)
• Country Risk Analysis (cont.)
• International Country Risk Guide
• Political risk factors – weighting of 50%
• Financial and economic risk factors – 25% each
• Low risk: 80–100 points
• Moderate risk: 50–79 points
• High risk: 0–49 points
© 2019 Cengage. All rights reserved.
20
Country Risk Analysis (4 of 4)
Table 9.3
Selected Country Risks Ranked by Composite Ratings, 2016
Country
Composite Risk Rating
(100 Point Maximum)
Switzerland
88.0
Singapore
86.8
Germany
84.3
United States
79.3
China
71.3
Brazil
63.3
Russia
62.5
Ukraine
55.3
Zimbabwe
54.5
Sudan
48.3
Very Low Risk
Very High Risk
Source: From Political Risk Services, International Country Risk Guide, available at https://www.prsgroup.com/
FreeSamplePage.aspx/.
© 2019 Cengage. All rights reserved.
21
International Trade Theory and
Multinational Enterprise (1 of 2)
Conventional trade model
• Movement of merchandise among nations
• Goods are exchanged between independent
organizations
• On international markets
• At competitively determined prices
© 2019 Cengage. All rights reserved.
22
International Trade Theory and
Multinational Enterprise (2 of 2)
• Multinational-enterprise analysis
• International movement of factor inputs
• Aggregate welfare of both source and host
countries is enhanced
• Vertically diversified companies
• Subsidiaries manufacture intermediate and
finished goods
• Sales can be intrafirm
• Value may be determined by factors other than
competitive pricing system
© 2019 Cengage. All rights reserved.
23
Foreign Auto Assembly Plants
in the United States (1 of 3)
Transplants – direct investment in U.S.based assembly facilities
Benefits to Japan include
• Silencing critics who say autos must be built
in U.S.
• Avoiding import barriers of U.S.
• Gaining access to expanding markets
• Providing hedge against changes in exchange
rates between U.S. dollar and Japanese yen
© 2019 Cengage. All rights reserved.
24
Foreign Auto Assembly Plants
in the United States (2 of 3) Table 9.4
Selected Foreign Auto Assembly Plants in the United States
Plant Name/Parent Company
Location
Honda of America, Inc. (Honda)
Marysville, Ohio; Lincoln, Alabama; East Liberty,
Ohio; Greensburg, Indiana
Toyota Motor Manufacturing, USA, Inc. (Toyota)
Georgetown, Kentucky; Huntsville, Alabama;
Princeton, Indiana; San Antonio, Texas; Buffalo,
West Virginia; Blue Springs, Mississippi
Nissan Motor Manufacturing Corp. (Nissan)
Smyrna, Tennessee; Decherd, Tennessee;
Canton, Mississippi
Mazda Motor Manufacturing, USA, Inc. (Mazda)
Claycomo, Missouri
Volkswagen, USA, Inc. (Volkswagen)
Chattanooga, Tennessee
© 2019 Cengage. All rights reserved.
25
Foreign Auto Assembly Plants
in the United States (3 of 3)
• Expectations of Japanese Transplants in U.S.
• Would generate jobs
• Expand consumer choice
• Create demand for auto parts industry in U.S.
• Transfer technology from Japan to U.S.
• What actually happened
• Created fewer jobs than expected
• Imported parts from Japan rather than buying locally
• Contributed to U.S. automotive trade deficit
© 2019 Cengage. All rights reserved.
26
International Joint Ventures
(1 of 6)
International joint ventures
• Business organization established by two or
more companies
• Combine their skills and assets
• Limited objective (research or production)
• Short-lived
• Multinational in character
• Several domestic and foreign companies
• Creation of new business firm
© 2019 Cengage. All rights reserved.
27
International Joint Ventures
(2 of 6)
• International joint ventures (cont.)
• Types of International Joint Ventures
• Joint venture by two businesses that conduct
business in third country
• Joint venture with local private interests
• Joint venture with participation by local
government
© 2019 Cengage. All rights reserved.
28
International Joint Ventures
(3 of 6)
• International joint ventures (cont.)
• Justifications for joint ventures
• Some functions too costly for one company to
absorb by itself
• Some governments place restrictions on foreign
ownership of local businesses
• To prevent excessive political influence
• To minimize dividend transfers abroad
• Forestalling protectionism against imports
© 2019 Cengage. All rights reserved.
29
International Joint Ventures
(4 of 6)
• Welfare Effects
• Advantages of joint ventures
• Productivity and welfare gains
• Increased productive capacity and additional
competition
• Entrance into new markets that neither parent
could have entered individually
• Cost reductions that would have been
unavailable if each parent performed same
function separately
© 2019 Cengage. All rights reserved.
30
International Joint Ventures
(5 of 6)
• Welfare Effects (cont.)
• Disadvantages of joint ventures
• Cumbersome organization
• Divided control
• Different objectives, corporate cultures, and ways of
doing things
• Deadlocks in decision making
• Negotiations involve hierarchical command
• Can lead to welfare losses (market-power effect)
© 2019 Cengage. All rights reserved.
31
International Joint Ventures
(6 of 6) Figure 9.3
© 2019 Cengage. All rights reserved.
32
Multinational Enterprises
as a Source of Conflict (1 of 5)
Employment
• Effects on employment
• Recipient country
• Employment increases
• Source country
• Employment declines in short term
• Other industries – foreign sales rise over time
Caterpillar Bulldozes Canadian Locomotive
Workers
-Lower worker pay; non-unionized
© 2019 Cengage. All rights reserved.
33
Multinational Enterprises
as a Source of Conflict (2 of 5)
• Technology Transfer
• Technology transfer facilitated through
demonstration effect and competition effect
• Increases productivity and competitiveness of
recipient nations
• Donor nations may view it negatively because it
may decrease export potential and cause job loss
• General Electric’s trade-off for entry into the
Chinese market: short-term sales for longterm competition
• Boeing Transfers Technology to China
© 2019 Cengage. All rights reserved.
34
Multinational Enterprises
as a Source of Conflict (3 of 5)
• National Sovereignty
• Many nations fear presence of MNEs results
in loss of national sovereignty
• MNEs may affect economic and other policies of
host and source governments
• May be able to shift profits overseas and evade
taxes of host country
• Political influence of MNEs problematic
• Example: Chile and MNEs’ influence on election of
president
• Foreign subsidiary of MNE may trade with nation
against which home country has embargo
© 2019 Cengage. All rights reserved.
35
Multinational Enterprises
as a Source of Conflict (4 of 5)
• Balance of payments
• Positive contribution
• MNE typically purchases capital and other
equipment from home country
• Inflow of income generated by overseas operations
• Earnings of overseas affiliates, interest and dividends,
and fees and royalties
• Negative contribution
• Short-term outflow of capital
© 2019 Cengage. All rights reserved.
36
Multinational Enterprises
as a Source of Conflict (5 of 5)
• Transfer Pricing
• Pricing of goods within MNE
• May be arbitrary and unrelated to costs incurred or
to operations carried out
• Choice of transfer prices affects division of total
profit among parts of company and thus influences
overall tax burden
© 2019 Cengage. All rights reserved.
37
International Labor Mobility:
Migration (1 of 12)
United States
• Favorite target for international migration
• Described as melting pot of the world
• Western Europe the major source of immigrants for
U.S.⎯1820–2012
• Germany, Italy, United Kingdom
• In recent years, large number of Mexican and Asian
immigrants
Migrants–motivated by
• Better economic opportunities
• Noneconomic factors: politics, war, religion
© 2019 Cengage. All rights reserved.
38
International Labor Mobility:
Migration (2 of 12) Table 9.5
U.S. Immigration 1820–2015
Period
Number (thousands)
1820–1840
743
1841–1860
4,311
1861–1880
5,127
1881–1900
8,934
1901–1920
14,531
1921–1940
4,636
1941–1960
3,551
1961–1980
7,815
1981–2000
16,433
2001–2015
15,652
Source: From U.S. Department of Homeland Security, Office of Immigration Statistics, Yearbook of Immigration Statistics, 2012,
available at http://www.uscis.gov/graphics/shared/statistics/yearbook/. See also U.S. Department of Commerce, Bureau of the
Census, Statistical Abstracts of the United States, Washington, DC, Government Printing Office, available at www.census.gov\statab\.
© 2019 Cengage. All rights reserved.
39
International Labor Mobility:
Migration (3 of 12)
• The Effects of Migration
• Mexican immigration to U.S.
• Workers migrate from uses of lower productivity to
higher productivity
• World output expands
• U.S. as whole benefits from immigration
• Income gain is sum of losses of native U.S. workers,
gains by Mexican immigrants, and gains by U.S. capital
owners
• Mexican labor supply decreases, increasing wages
• U.S. labor supply increases, decreasing wages
© 2019 Cengage. All rights reserved.
40
International Labor Mobility:
Migration (4 of 12)
• The Effects of Migration (cont.)
• Mexican workers immigrate to the U.S. (cont.)
• Effect of Labor Mobility is to equalize wages
• Redistribute income from labor to capital in the
United States
• Redistribute income from capital to labor in Mexico
© 2019 Cengage. All rights reserved.
41
International Labor Mobility:
Migration (5 of 12) Figure 9.4
© 2019 Cengage. All rights reserved.
42
International Labor Mobility:
Migration (6 of 12)
• Immigration as an Issue
• Domestic labor groups prefer restrictions on
immigration
• Domestic manufacturers favor unrestricted
immigration as source of cheap labor
• Drain on government resources
• Long-term calculations: immigrants make a netpositive contribution to public coffers
© 2019 Cengage. All rights reserved.
43
International Labor Mobility:
Migration (7 of 12)
• Immigration as an Issue (cont.)
• Developing nations fear brain drain
• Emigration of highly educated and skilled people
from developing nations to industrial nations
• Limiting the growth potential of developing nations
• Guest workers
• Temporary migration, as workers are needed
• Illegal migration
© 2019 Cengage. All rights reserved.
44
International Labor Mobility:
Migration (8 of 12)
• Immigration as an Issue (cont.)
• Immigrants make net-positive contribution
• Diversify economy
• Contribute to economic growth
• Lower prices for consumers
• Domestically produce a wider variety of goods
• Increase supply of labor in economy
• Similar skills – lower wage
• Complementing skills – higher wage
• Human capital formation costs – native country
• Contribution to social security
© 2019 Cengage. All rights reserved.
45
International Labor Mobility:
Migration (9 of 12)
• Does Canada’s Immigration Policy Provide a
Model for the U.S.?
• Goal of Canadian immigration system to
encourage youthful, bilingual, high-skill
immigration in order to build human capital within
Canada’s aging labor force
• Canada treats foreign workers not as foes but
friends whose labor & skills are essential
• Canada currently solicits immigrants from more
than 200 countries of origin, especially China,
India, and the Philippines
© 2019 Cengage. All rights reserved.
46
International Labor Mobility:
Migration (10 of 12)
• Does Canada’s Immigration Policy Provide a
Model for the U.S.? (cont.)
• Canada needs immigrants for economic
development
• Immigration program run by provincial & federal
governments
• A province can select whomever it wants; federal
government’s role limited to security, criminal, and
health check of foreigners
• Canada – 2/3 of permanent visas granted to fill
economic needs
• In U.S., by contrast, 2/3 granted for family reunions
© 2019 Cengage. All rights reserved.
47
International Labor Mobility:
Migration (11 of 12)
• Does Canada’s Immigration Policy Provide a
Model for the U.S.? (cont.)
• Multiculturalism is key ingredient of Canadian
national identity
• Canadians see immigration as adding to social fabric
of country
• Canada has become immigrant country
• Foreign-born population of 20%
• U.S. foreign-born population is 13%
• Immigration program revised to place more emphasis
on job skills and fluency in French or English
© 2019 Cengage. All rights reserved.
48
International Labor Mobility:
Migration (12 of 12)
• Does Canada’s Immigration Policy Provide
a Model for the U.S.? (cont.)
• In 2013, Canada began overhaul of immigration
program, to address increasing economic division
between locals and immigrants
• New system considers
• whether immigrants have employment arranged in Canada
• whether they have skills in demand
• immigrants’ adaptability, e.g., time spent previously in
Canada, fluency in English or French
• Remains to be seen how revised system will play out
© 2019 Cengage. All rights reserved.
49
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Operations Management
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Discussion 25
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25 points
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Exceeds
Expectations
Meets
Expectation
Some
Expectations
Unsatisfactory
Quantity
5 to 6 points
3 to 4 points
1 to 2 points
0 to 0 points
Initial post and
two other posts
of substance.
Initial post and
one other post
of substance.
Initial post only.
Did not
participate.
5 to 6 points
3 to 4 points
1 to 2 points
0 to 0 points
Demonstrates
excellent
knowledge of
concepts, skills,
and theories
relevant to the
topic.
Demonstrates
knowledge of
concepts, skills,
and theories.
Demonstrates
satisfactory
knowledge of
concepts, skills,
and theories.
Did not
participate.
5 to 6 points
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1 to 2 points
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post(s) exceed
expectations in
terms of support
provided and
extend the
discussion.
Discussion
post(s) meet
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terms of
support
provided.
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terms of
support
provided.
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focused; no
errors.
Some significant
but not major
errors or
omissions in
writing
organization,
focus, and
clarity.
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significant
errors or
omissions in
writing
organization,
focus, and
clarity.
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Chapter 9
Evaluating
Variances from
Standard Costs
Standards
(slide 1 of 2)
• Standards are performance goals.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Standards
(slide 2 of 2)
• Accounting systems that use standards for
product costs are called standard cost systems.
o Standard cost systems enable management to
determine the following:
▪ How much a product should cost (standard cost)
▪ How much it does cost (actual cost)
• When actual costs are compared with standard
costs, the exceptions or variances are reported.
o This reporting by the principle of exceptions allows
management to focus on correcting the cost variances.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Setting Standards
Convert the results of
judgments and process
studies into dollars and
cents.
Assisted by operation managers in
identifying materials, labor, and
machine requirements.
Accountants
Engineers
Standard-setting process
Other Management Personnel
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Types of Standards
(slide 1 of 2)
• Ideal standards, or theoretical standards,
are standards that can be achieved only
under perfect operating conditions, such as
no idle time, no machine breakdowns, and
no materials spoilage.
o Such standards may have a negative impact on
performance because they may be viewed by
employees as unrealistic.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Types of Standards
(slide 2 of 2)
• Normal standards, sometimes called currently
attainable standards, are standards that can be
attained with reasonable effort.
o Such standards, which are used by most
companies, allow for normal production difficulties
and mistakes.
o When reasonable standards are used, employees
focus more on cost and are more likely to put forth
their best efforts.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Reviewing and Revising Standards
• Standard costs should be periodically reviewed
to ensure that they reflect current operating
conditions.
o Standards should not be revised just because they
differ from actual costs.
o Standards should be revised when prices, product
designs, labor rates, or manufacturing methods
change.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Criticisms of Standard Costs
• Some criticisms of using standard costs for
performance evaluation include the following:
o Standards limit operating improvements by discouraging
improvement beyond the standard.
o Standards are too difficult to maintain in a dynamic
manufacturing environment, resulting in “stale standards.”
o Standards can cause employees to lose sight of the larger
objectives of the organization by focusing only on
efficiency improvement.
o Standards can cause employees to unduly focus on their
own operations to the possible harm of other operations
that rely on them.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Budgetary Performance Evaluation
(slide 1 of 2)
• The budgetary performance evaluation
compares actual performance against its
planned budget.
• Western Rider Inc., a manufacturer of blue
jeans, uses standard costs in its budgets.
o The standards for direct materials, direct labor, and
factory overhead are separated into the following two
components:
▪ Standard price
▪ Standard quantity
o The standard cost per unit for direct materials, direct
labor, and factory overhead is computed as follows:
Budgetary Performance Evaluation = Standard Price × Standard Quantity
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Budgetary Performance Evaluation
(slide 2 of 2)
• The master budget is prepared based on planned
sales and production.
o The budgeted costs for materials purchases, direct
labor, and factory overhead are determined by
multiplying their standard costs per unit by the planned
level of production.
o Budgeted (standard) costs are then compared to
actual costs during the year for control purposes.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost Variances
(slide 1 of 2)
• The differences between actual and standard
costs are called costs variances.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost Variances
(slide 2 of 2)
• In a favorable cost variance, the actual cost is
less than the standard cost at actual volumes
• In an unfavorable cost variance, the actual cost
is greater than the standard cost at actual
volumes
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Budget Performance Report
(slide 1 of 3)
Summarizes actual costs,
standard costs, and the
differences for the units
produced
Based on actual
production rather than
planned production
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Manufacturing Cost Variances
(slide 1 of 4)
• The total manufacturing cost variance is
the difference between total standard costs
and total actual cost for the units produced.
• For control purposes, each product cost
variance is separated into two additional
variances.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Manufacturing Cost Variances
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Manufacturing Cost Variances
(slide 2 of 4)
• The total direct materials variance is separated
into a price and a quantity variance.
o This is because standard and actual direct materials
costs are computed as follows:
Actual Direct Materials Cost
=
Actual Price
×
Actual Quantity
Standard Direct Materials Cost
=
Standard Price
×
Standard Quantity
Direct Materials Cost Variance
=
Price Difference
+
Quantity Difference
▪ Thus, the actual and standard direct materials costs may
differ because of a price difference (variance), a quantity
difference (variance), or both.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Manufacturing Cost Variances
(slide 3 of 4)
• The total direct labor variance is separated into
a rate variance and a time variance.
o This is because standard and actual direct labor costs
are computed as follows:
Actual Direct Labor Cost
= Actual Rate
×
Actual Time
Standard Direct Labor Cost
= Standard Rate
×
Standard Time
Direct Labor Cost Variance
= Rate Difference
+
Time Difference
▪ Therefore, the actual and standard direct labor costs may
differ because of a rate difference (variance), a time
difference (variance), or both.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Manufacturing Cost Variances
(slide 4 of 4)
• The total factory overhead variance is separated
into a controllable variance and a volume
variance.
o Because factory overhead has fixed and variable cost
elements, it uses different variances than direct
materials and direct labor, which are variable costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Direct Materials and Direct Labor Variances
• As mentioned earlier, the total direct materials
and direct labor variances are separated into the
direct materials cost and direct labor cost
variances for analysis and control purposes.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Direct Materials and Direct Labor
Cost Variances
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Direct Materials Price Variance
(slide 1 of 2)
• The direct materials price variance is
computed as follows:
Direct Materials Price Variance = (Actual Price – Standard Price) Actual Quantity
o If the actual price per unit exceeds the standard price
per unit, the variance is unfavorable.
▪ This positive amount (unfavorable variance) can be thought
of as increasing costs (a debit).
o If the actual price per unit is less than the standard
price per unit, the variance is favorable.
▪ This negative amount (favorable variance) can be thought of
as decreasing costs (a credit).
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Direct Materials Price Variance
(slide 2 of 2)
• The direct materials price variance for Western
Rider Inc. for June is computed as follows:
Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity
= ($5.50 – $5.00) × 7,300 sq. yds.
= $3,650 Unfavorable Variance
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Direct Materials Quantity Variance
• The direct materials quantity variance is
computed as follows:
Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price
o If the actual quantity for the units produced exceeds
the standard quantity, the variance is unfavorable.
▪ This positive amount (unfavorable variance) can be thought
of as increasing costs (a debit).
o If the actual quantity for the units produced is less
than the standard quantity, the variance is favorable.
▪ This negative amount (favorable variance) can be thought of
as decreasing costs (a credit).
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Reporting Direct Materials Variances
(slide 1 of 2)
• The direct materials quantity variances should
be reported to the manager responsible for the
variance.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Reporting Direct Materials Variances
(slide 2 of 2)
• Not all variances are controllable.
o For example, an unfavorable materials price variance
might be due to market-wide price increases.
▪ In this case, there is nothing the Purchasing Department
might have done to avoid the unfavorable variance.
▪ If materials of the same quality could have been purchased
from another supplier at the standard price, the variance was
controllable.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Direct Labor Rate Variance
• The direct labor rate variance is computed as
follows:
Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) Actual Hours
o If the actual rate per hour exceeds the standard rate
per hour, the variance is unfavorable.
▪ This positive amount (unfavorable variance) can be thought
of as increasing costs (a debit).
o If the actua
