An unfavorable materials quantity variance indicates that

Account 2 Part Question SLEEK -WRITER

Budgets and Employee Morale ( journal assignment 1 page)

Budgets play a critical role in management activities such as planning, controlling and motivating employees. Used effectively, budgets can help a company achieve its goals and create a productive work environment. In contrast, budgets can also create a hostile work environment. Watch this video about budgets and employee morale and then reflect upon your own work experiences. Explain how budgeting was incorporated to achieve the company’s overall goals and objectives. Reflect on whether or not the budgets were effectively applied and whether your experience was positive or negative.

Chester & Wayne (Essay Question)

Complete: Case 6B (Chester & Wayne).

In this case, you have been provided financial information about the company in order to create a cash budget. Management is seeking advice or clarification on three main assumptions the company has been operating. Address Questions 1 and 2 at the end of the case. Based on the case questions, you are required to provide a two to four double-spaced written report providing the necessary advice and explanations to management. The written report should be properly formatted according to APA guidelines and demonstrate research and critical thinking skills. Conclusions and recommendations should be supported by at least 2 scholarly sources from the Ashford Library or other external sources, excluding the textbook.

Address Question 1 by using a spreadsheet to prepare the case budget for the fourth quarter. The cash budget should be included as an appendix to the written report and should be referenced in the written report.

Address Question 2 in a fully developed explanation of two to four double spaced pages to present the findings and explain or validate the assumptions stated in item (a) through (c). In addressing Question 2, be sure to use the cash budget prepared in Question 1 as support for your explanation. The written analysis should be supported by at least two scholarly sources, excluding the textbook.

Week 4 Written Assignment should:

Demonstrate graduate level work including appropriate research and critical thinking skills.
Be presented as a written analysis (not a question/answer format).
Incorporate case questions into the overall analysis.
Follow APA formatting guidelines including title page, reference page and in-text citations.
Consists of two to four double-spaced pages of content.

Processing Math: 100% Chapter 7 Cost Control Through Standard Costs Two pharmacists examine prescription drugs in drawers. Marka/SuperStock Learning Objectives After studying Chapter 7, you will be able to: Explain the significance of profit analysis for an organization. Describe the major characteristics and conditions of a standard cost system. Compute materials price and usage variances, and identify potential causes of such variances. Compute labor rate and efficiency variances, and identify potential causes of such variances. Describe the interrelationships that exist among materials and labor variances. Explain the major considerations that are the basis of standard costs for overhead. Distinguish between a budget variance and a capacity variance for overhead. Explain why the capacity variance is related only to fixed overhead costs. Explain how standard costs can be used in a process cost system. Where Do I Start With Standard Costs? Jean-Claude Recca, President of Rue de Lorraine, a chain of fast food restaurants in central France, just returned from a reunion of his INSEAD graduating class. During the day of activities in the Riviera, he talked with several of his classmates who have become extremely successful in various businesses. One of those classmates suggested to Jean-Claude that adoption of a standard cost system eliminated most of her firm's unacceptable scrap and spoilage, caused an examination of nonvalue-added activities, and substantially reduced several inefficient operations. Jean-Claude did not know whether his restaurant chain would really benefit from a standard cost system. He wondered: If he makes the change, which costs should be put on standards? How does he set up standards? When do variances mean something? Isn't a standard cost system expensive to use? Isn't it a pain in the derriere? Wouldn't a tight budget do the same thing? These questions were more than Jean-Claude could consider. He decided to bounce the idea of standard costs off his controller. Introduction In measuring success in any undertaking, a comparison is usually made between actual performance and expected performance. Any difference is a variance. A manager is then left with the responsibility to explain the what, why, and how of the variance. In doing so, the manager must understand the influence of key variables on the actual results, focus on areas that deserve more detailed investigation, and determine changes that must be made in future planning and control. This chapter introduces the concept of profit analysis and then concentrates on variances associated with a standard cost system for direct materials, direct labor, and factory overhead. The next chapter extends these concepts to analyzing revenues and operating expenses. 7.1 Profit Analysis Profit is an overall measure of how well an organization is doing. A profit variance then is the difference between the actual net income and the planned net income for the same period. The causes of such a variance are related to the various elements that make up net income: revenues, cost of goods sold, and operating expenses. The following table shows a disaggregation of the profit variance into more detailed elements. Actual Budget Variance Revenues $385,000 $365,000 $20,000 Favorable Cost of goods sold 282,500 227,250 55,250 Unfavorable Gross margin $102,500 $137,750 $35,250 Unfavorable Operating expenses 81,250 90,000 8,750 Favorable Net income $21,250 $47,750 $26,500 Unfavorable To have a variance, a baseline with which to compare actual results is necessary. Common baselines are results of a prior month or year, a budget, a flexible budget, or a standard. The analysis of a profit variance necessarily looks at each significant area in the income statement, and each area has a baseline that management feels is appropriate for the circumstances. The analysis then looks at causes of variation from the baseline. The cost of goods sold, comprised of the cost of materials, labor, and factory overhead, is generally the most significant cost in the income statement. Consequently, companies expend great effort to manage and control these costs. Managers can easily cite examples of how small savings on a unit basis—or on a single operation or task performed—add many dollars to profit. Analysis of cost variances helps managers to find cost savings. Cost variances are often based on comparisons between actual and standard costs. Besides cost control, cost variances are also used to evaluate the performance of managers who are responsible for particular costs. For example, a plant manager might examine materials, labor, and overhead cost variances in the grinding department to evaluate the performance of the grinding department manager. 7.2 The Use of Standards Standard costs are appropriate where an organization has standard products, services, or repetitive operations, and where management controls the factors comprising a standard cost. Definition of Standard Costs A standard cost for a product is the amount that management believes one unit of product should cost and consists of a price standard (a generic term indicating price for materials, rate for labor, and rate for factory overhead) and a quantity standard (a generic term indicating quantity for materials, time for labor, and activity or volume for factory overhead). Setting standards for price and quantity involves management judgments, industrial engineering studies, work measurement studies, vendor analyses, union bargaining, as well as a number of other techniques. Standards are generally stated on a per unit basis: per unit of quantity, per unit of time, per unit of activity, or per unit of product. Once set, these standards remain unchanged as long as no changes occur in operating methods, in factors that influence quantities, or in unit prices of materials, labor, and factory overhead. Advantages of Standards A standard cost system presents many advantages to an organization. Although the primary purpose has always been cost control, properly set standards have many other advantages. This section covers five major advantages of standard costs. Cost Control. Cost control is comparing actual performance with the standard performance, analyzing variances to identify controllable causes, and taking action to correct or adjust future planning and control. As discussed later in this chapter and the next chapter, costs can change for at least four reasons: (1) changes in levels of prices or rates, (2) changes in efficiency, (3) changes in activity or volume, and (4) changes in the product mix. Variance analysis must identify these changes as well as the managers responsible for these differences so that adjustments can be made to the standards or that good performance can be rewarded. Standard cost accounting follows the principle of management by exception. Actual results that correspond closely to the standards require little attention. The exceptions, however, are scrutinized. Management by exception can be desirable because it highlights only those weak areas that require management's attention. However, a behavioral effect can occur when management by exception is applied to people. If a worker is ignored when operating according to the standard and is noticed only when something is wrong, the worker may become resentful and perform less satisfactorily. While it may be argued that the worker is being paid to operate at standard, the human factor cannot be ignored. Without recognition, the worker becomes discontented; this discontentment may spread throughout the organization with a loss of both morale and productivity. Cost Management. Cost management is related to cost control, but here the emphasis is on establishing the level of costs that becomes the benchmark for measuring performance. It can be as simple as decreasing the costs of operations through improved methods and procedures, using better selection of resources (human, materials, and facilities), or eliminating unnecessary (nonvalue-added) activities. As standards are set and periodically reviewed, operations can be analyzed to identify waste and inefficiency and to eliminate their sources. These reviews can also highlight better than expected performance; appreciation will motivate employees to continue looking for better ways to operate. A standard cost system creates an environment in which people become cost conscious, always looking for continuous improvements in the process. Decision Making. If standards are set at currently attainable levels (a concept discussed later in the "Quality of Standards" section), the standard costs are useful in making many types of decisions. For example, some common decisions involve regular, special order, or transfer pricing; cash planning; whether to sell or process further; and whether to make or buy. When an analysis is used as the basis for setting the standard costs, managers need not perform a new analysis for each decision. Recordkeeping Costs. A standard cost system saves recordkeeping costs, not during the initial startup, but in the long-run operation of the system. When using actual costs, each item of materials issued from a storeroom has its cost, which came from a specific purchase order. The cost transferred to work in process inventory is calculated using an inventory flow method: specific identification, FIFO, LIFO, moving average, or weighted average. For companies with thousands of different materials categories in stock, identifying costs to move to work in process inventory can be an enormous task. When standard costs are in place, each item in the same materials classification has the same standard cost. Therefore, costs transferred to work in process inventory are the standard cost per unit times the number of units issued. This same process applies to work in process inventory transfers to finished goods. All inventories have their standard costs, and balances are always stated at standard. Inventory Valuation. A standard cost system records the same costs for physically identical units of materials and products; an actual cost system can record different costs for physically identical units. Differences between the two costs tend to be waste, inefficiency, and nonvalue-added activities. Such items, if incurred at all, are period costs and excluded from inventory amounts. They should not be capitalized and deferred in inventory values. Therefore, standards provide a more rational cost in valuing inventories. Occasionally, differences between actual and standard costs show positive efficiencies. Performance has been better than expected. If this situation will continue, the standards are revised. Otherwise, the current standards still provide a rational basis for costing products. The Quality of Standards The term "standard" has no meaning unless we know upon what the standard is based. A standard may be very strict at one extreme or very loose at the other extreme. We broadly classify standards as strict or tight standards, attainable standards, and loose or lax standards. No easy solution exists as to how standards should be set. The objective, of course, is to obtain the best possible results at the lowest possible cost. Often human behavior becomes the dominant concern in setting standards. A very rigorous standard may motivate some employees to produce exceptional results. On the other hand, a standard that is too strict and cannot be reached may discourage employees and produce only modest results. In setting a level of standards, management must consider the employees, their abilities, their aspirations, and their degree of control over the results of operations. Strict standards are set at a maximum level of efficiency, representing conditions that can seldom, if ever, be attained. They ignore normal materials spoilage and idle labor time due to such factors as machine breakdowns. These standards appear to represent perfection, something few employees will achieve. Although a standard should challenge people, a standard that is virtually unattainable will not motivate most employees to do their best and may actually be counterproductive. An employee is more likely to put forth increased effort when feeling successful. In other words, a person's aspirations increase with success and decrease with failure. In addition, variances from strict standards have little significance for control purposes. There will never be a favorable variance, only zero or unfavorable variances. In fact, most variances will be large and unfavorable. The question is: "What does such a variance measure?" Loose standards tend to be based on past performance and represent an average of prior costs. They include all inefficiency and waste in past operations. Such standards are not likely to motivate employees to higher performance. The very nature of loose standards means less than efficient performance. As a result, variances from loose standards are almost always favorable and provide little useful information for cost control. Again, the question is: "What does such a variance measure?" Attainable standards can be achieved with reasonable effort. Perhaps the standards should be somewhat lower than what can be achieved by earnest effort. With success, the employees gain confidence and tend to be more productive. For a more experienced group of workers, an exacting standard may serve as a challenge that motivates an employee to higher levels of performance. With less experienced workers, standards may have to be set at a lower level at first. As learning takes place, the standards may be raised. Increases in standards should be made with caution and should be accepted by the employees as being fair. Managers should expect to see favorable and unfavorable variances with an attainable standard. Some employees will meet and exceed the standard with reasonable effort, while others will not meet the standard because of poor performance. Revising the Standards Standard costs should be reviewed periodically to see if revisions are necessary to maintain a selected level of quality. Although many factors may combine that determine the best time to review standard costs, they should be reviewed at least once a year. Otherwise, they may not be current. This does not mean waiting until the end of the year. Companies with thousands of items on standards will have a department dedicated to reviewing standards throughout the year. A key for reviewing standards is to identify changes taking place that outdate existing standards. Changes that typically call for a revision to one or more standard costs include: Increases or decreases in the price levels of specific materials and supplies. Changes in personnel payment plans or wage schedules. Modifications of materials type or specifications. Acquisitions of new equipment or dispositions of old equipment. Modifications of operations or procedures. Additions or deletions of product lines. Expansions or contractions of facilities. Changes in management policies that affect the amount of costs and the way costs are accumulated and identified with activities, operations, and products. Increased experience of employees. Management policies can have a significant impact on standard costs. Examples of the most common policy areas are the definition of capacity, the classification of fringe benefits, depreciation methods, and capitalization and expense policies. Capacity definitions influence the level of waste and inefficiency that management will tolerate and the amount of fixed costs applied to individual units of an operation, task, or product. A redefinition of capacity can be due to changes in the number of shifts, in hours of operation with given shift schedules, or in demand for the product or service. Fringe benefits can appear in several ways, any of which can influence a product cost significantly. Management can classify any element of fringe benefit cost as a direct cost of the product, an indirect cost through a labor-related cost pool, an indirect cost through a factory overhead cost pool, or a period cost through a general and administrative cost pool. Management determines which depreciation methods are in use. One common policy is to change from a declining balance method for existing equipment to a straight-line method at about the mid-life point of the asset life. Occasionally, management will change the method applied to new equipment purchased. The criteria for capitalization and expense decisions determine which costs are capitalized as assets and charged to operations through depreciation and amortization and which costs are charged immediately upon incurrence. Any change in the criteria alters the treatment of those costs affected. Throughout the chapter, we assume that standards are entered into the formal accounting system. As such, product costing is determined through a standard cost system. Many companies do not follow this practice. Instead, they use standards to determine cost variances for control purposes. Revision of standards is much more critical if the standards are the basis for product costing. 7.3 Standard Cost Sheet Once standards have been set for each cost component (direct materials, direct labor, and manufacturing overhead), the costs are summarized in a standard cost sheet. Here the cost of each category of direct materials used, the cost of each direct labor operation employed, and the cost of all overhead tasks, operations, processes, and support functions applied to a unit of final product are itemized. Standard cost sheets can be extremely lengthy or very simple depending on the product and manufacturing process. Suppose that Zaner Restaurants, Inc., owner of over 200 Steakout Restaurant franchises, uses a standard cost system in accounting for its daily dinner special, the "Goliath Feast." The standards currently are as follows: Component Total cost of component Unit cost Materials 3 lbs. at $4.00 per pound $12.00 Direct labor 5 hour at $7.00 per hour 3.50 Variable overhead .5 hour at $6.00 per hour 3.00 Fixed overhead .5 hour at $9.00 per hour 4.50 Total cost per meal $23.00 This standard cost sheet gives the total unit cost of each meal produced. For each completed meal, three pounds of direct materials at a total cost of $12 is taken from materials inventory and charged to work in process. Also, $3.50 is charged for direct labor, and a total of $7.50 in overhead costs is applied. Nothing is noted here about the actual costs incurred because all production is carried only at standard cost. Thus, when completed meals are transferred from work in process to finished goods and later to cost of goods sold, the cost is $23 per meal. The standard cost sheet becomes the basis for all accounting entries related to the cost of the meal. To explain standards for materials, direct labor, and overhead, we need to know the volume of output and the materials quantities allowed for that volume in order to calculate certain variances. The standard cost sheet lists the allowed amounts. The volume of output will be expressed as units of product or equivalent units, depending on the circumstances in production. 7.4 Standards for Materials Standards are established for the cost of obtaining materials and for the quantities to be used in production. Managers then compare actual costs against these standards to ascertain variances. Basically, two types of variances exist: price and usage. Different variances may be developed for specialized purposes, but they can always be classified as variations in the price of materials or in the quantities used, or as a combination of price and usage. If the actual cost is greater than the standard cost, the variance is an unfavorable variance; if actual cost is less than the standard cost, the variance is a favorable variance. It should be noted that favorable versus unfavorable do not necessarily imply good versus bad for the overall interests of the company. Materials Price Variance A materials price variance measures the difference between the prices at which materials are acquired and the prices established in the standards. What is in the standard, how a variance is calculated, and what are potential causes of variances are now explained. Setting the Price Standard. A standard price is set for each item of materials the company expects to use. The cost elements that make up the standard are a matter of management policy. Although the purchase price is the dominant element, other costs may also be included, such as the cost of insurance for materials in transit, the cost of transporting materials, various cash and trade discounts, and costs of receiving and inspecting materials at the receiving dock. Once management decides on the elements, the next step is assessing prices. The estimation techniques are not discussed here, but common approaches to determining amounts include: Statistical forecasting. Knowledge and experience in the particular type of business. Weighted average of prices in most recent purchases. Prices agreed upon in long-term contracts or purchase commitments. Accounting for a Price Variance. A materials price variance is isolated at the time of purchase. To be able to act upon an excessive variance as soon as possible, management should determine the materials price variance when the materials are purchased rather than waiting until the time the materials are used in production. The actual quantity of materials purchased is entered in the materials inventory at standard prices. The liability to the supplier is recorded at actual quantities and actual prices. Any difference between the two amounts is recorded as a price variance. To illustrate, assume that Zaner Restaurants bought 40,000 pounds of materials for $159,200, which is $3.98 per pound. To make the example easier to follow, we will use the following symbols: AQP = Actual quantity purchased AP = Actual price SP = Standard price MPV = Materials price variance The cost flow of actual and standard costs would appear in T-account form as follows: This figure contains 3 T-accounts. The first is titled "Accounts payable" and contains the following equation within the right half of the "T": AP × AQP = $3.98 × 40,000 = $159,200. The second T-account is titled "Material inventory" and contains the following equation within the left half of the "T": SP = AQP = $4.00 × 40,000 = $160,000. The third T-account is titled "Material price variance" and contains the following equation within the right half of the "T": (AP - SP) × AQP = ($3.98 - $4.00) = $800 Favorable. An arrow points from $159,200 in accounts payable to $160,000 in materials inventory. An arrow points from $160,000 in materials inventory to $800 favorable in materials price variance. To calculate the variance without thinking in terms of accounts, the information from the T-accounts can be summarized into convenient formulas. AP × AQP = $3.98 × 40,000 = $159,200 SP × AQP = $4.00 × 40,000 = $160,000 MPV = (AP - SP) × AQP = -$0.02 × 40,000 = $800 Favorable Note that the actual quantity is used in all three calculations above. Only the prices differ. A materials price variance can be either favorable or unfavorable when actual costs are compared with standard costs. In this illustration, the materials price variance is favorable because the materials were purchased at a cost below the standard. Causes of the Price Variance. A variance occurs for any number of reasons. If the variance is significant, we must identify causes. If performance is deemed good, the responsible people should be praised, and, where appropriate, rewarded. If the investigation finds out-of-control situations, corrections can be made so variations are eliminated in the future. In some cases, outdated standards are being used and need to be adjusted. Although many causes for variances pertain to any given situation, a list of the common sources is as follows: Fluctuations in market prices. Materials substitutions. Market shortages or excesses. Purchases from vendors other than those offering the terms used in the standard. Purchases of higher or lower quality materials. Purchases in nonstandard or uneconomical quantities. Changes in the mode of transportation. Changes in the production schedule that result in rush orders or additional materials. Unexpected price increases or decreases. Fortunate buys. Failure to take cash discounts. Responsibility for the Price Variance. The purchasing department is usually charged with the responsibility for price variances. If the purchasing function is carried out properly, the standard price should be attainable. When lower prices are paid, a favorable materials price variance is recorded, indicating that the department's purchases were below the standard cost. Higher prices are reflected in an unfavorable materials price variance. In some circumstances price variances really should be charged to a production department instead of to the purchasing department. As examples, a rush order may be caused by last minute production changes, or production people may request a specific brand name for materials rather than allowing the purchasing department to buy by specifications. Periodic reports show how actual prices compare with standard prices for the various types of materials purchased. Reports on price variances may be made as frequently as daily, but will generally be weekly and monthly. They reveal which materials, if any, are responsible for a large part of any total price variation and can help the purchasing department in its search for more economical vendors. Materials Usage Variance Materials are put into production, but the actual quantity used may be more or less than specified by the standards. The variation in the quantity of materials is called a materials usage variance. Other names for this type of variance are materials quantity variance, materials use variance, and materials efficiency variance. Setting the Quantity Factor. The quantity factor in a materials standard is based on engineering specifications, blueprints and designs, bills of materials, and routings. Combined, these items specify the quality, size, thickness, weight, and any other factors necessary for a good unit of final product. Also included in the quantity factor are any desired allowances for normal acceptable waste, scrap, shrinkage, and spoilage that may occur during the manufacturing process. Accounting for a Usage Variance. As materials are used, the work in process account is increased by the standard quantity used multiplied by the standard price. The materials inventory account is decreased by the actual quantity used multiplied by the standard price. Returning to Zaner Restaurants, assume that 31,000 pounds of materials are withdrawn from Materials Inventory for making 10,000 meals. Because the standard cost sheet indicates only three pounds should be used for each meal, the standard quantity of materials that should have been used is 30,000 pounds (3 pounds × 10,000 meals). For our example, we will use the following symbols: SP = Standard price AQU = Actual quantity used SQ = Standard quantity allowed MUV = Materials usage variance The cost flow of actual and standard costs would appear in T-account form as follows: This figure contains 3 T-accounts. The first is titled "Materials inventory" and contains "$160,000" within the left half of the "T". The right half of the "T" contains the following equation: SP × AQU = $4.00 × 31,000 = $124,000. The second T-account is titled "Work in process inventory" and contains the following equation within the left half of the "T": SP × SQ = $4.00 × 30,000 = $120,000. The third T-account is titled "Material usage variance" and contains the following equation within the left half of the "T": SP × (AQU - SQ) = $4 × 1,000 = $4,000 Unfavorable. An arrow points from $124,000 in materials inventory to $120,000 in work in process inventory. An arrow points from $120,000 in work in process inventory to $4,000 unfavorable in materials usage variance. To calculate the variance without thinking in terms of accounts, the above information can be summarized into convenient formulas. SP × AQU = $4.00 × 31,000 = $124,000 SP × SQ = $4.00 × 30,000 = $120,000 MUV = SP × (AQU - SQ) = $4.00 × 1,000 = $4,000 Unfavorable In the first two equations, the standard unit price is used, but the quantities differ. In one case, the actual quantities issued from the storeroom are used. In the other, the standard materials quantity allowed for each meal is used. Because only quantities can differ in the equations, any variation is a usage variance. The variance for Zaner Restaurants is unfavorable because the amount of materials used is greater than the amount called for by the standard. The following table illustrates the materials costs and variances: A B C D E F G AQP A - C = AQP C - E = AQU E - G = SQ × AP Direct × SP Increase or × SP Direct × SP Materials Decrease in Materials Price Inventory Usage Variance Variance 40,000 $159,200 40,000 $160,000 - 31,000 $124,000 - 30,000 × $3.98 - $160,000 × $4.00 $124,000 × $4.00 - $120,000 × $4.00 = $159,200 = $800F = $160,000 = $36,000 = $124,000 = $4,000U = $120,000 Causes of the Usage Variance. What causes a materials usage variance? To answer this question, we look at the elements that make up the quantity standard and the specific situation. Examples of common causes include: Changes in product specifications. Materials substitutions. Breakage during the handling of materials in movement and processing. Improper use of materials by workers. Machine settings operating at nonstandard levels. Waste. Pilferage. Responsibility for the Usage Variance. Ordinarily, materials usage variances are chargeable to production departments. They often arise as a result of wasteful practices in working with materials, or they arise because of products that must be scrapped through faulty production. Reports on the quantities of materials used are given to the responsible production department supervisor. A production supervisor, for example, may receive daily or weekly summaries showing how the quantities used in the department compare with the standards