Analyzing Budget Variance in CPA Firm Audit Performance
School
Montana State University**We aren't endorsed by this school
Course
ACCT 307
Subject
Accounting
Date
Dec 12, 2024
Pages
2
Uploaded by KidCaribouPerson881
THE CPA FIRMYou are partner for a CPA firm who just completed an audit of a client’s financial statements.On the right of the below was the plan for the audit as follows:When planning for the audit, you budgeted 220 hours with a labor mix of 5% partner time, 20% senior accountant and 75% junior accountant. The cost per hour for the three classes of employees ranges from $30 per hour for juniors, $120 per hour for seniors and$300 per hour for partners. They projected the cost of the audit to be $13,530. Using your normal markup of 30%, you had bid $17,589.Act. Hrs.RateCostBud hrsRateCostPartner20$300$6,00011300$3,300Senior110130$14,30044120$5,280Junior7030$2,10016530$4,950200 hrs$22,400-$8,870220 hrs$13,530ACTUAL PERFORMANCEBUDGETED PERFORMANCEInitially the time records indicated that the firm came in under budget at 200 hours, completing it in 20 hours less than planned! Naturally you were excited, until you saw the actual numbers, which are shown on the left. These indicate that the actual cost of completing the job was $22,400, which was some $8,870 more than our budget! Not only that, but the actual cost of the job was so large that it actually exceeded the quotedprice for the job by almost $5,000. Wow!Turns out that three things were different. 1)the average rates were different due to some unscheduled overtime from seniors. 2)The mix of hours was different than planned. 3)The total number of hours was different.Using your variance analysis model, account for the unfavorable budget variance ($8,870) by figuring out what part of this difference was caused by the difference in rates, what part was caused by a difference in the labor mix, and how much was attributable to the difference in the quantity of hours.You can do this by hand. Hints:1)Put the actual on the left column and the budgeted on the right column.2)The actual cost reflects THREE things: The actual hours (Ah), the actual mix of workers (Am) and the actual rates (Ar). The budgeted cost reflects the same THREE things: The budgeted hours (Bh), the budgeted mix of workers (Bm) and the budgeted rates (Br)3)There will be two more columns in the middle making a total of four: First we are going to calculate the effect of the RATE difference. We will do this by creating a middle thing to the right of the actual which computes the labor rate variance by changing the rate from actual to budgeted.
4)Now we have the rate and efficiency variances for the direct labor. But the efficiency variances has 2 parts: One part measures the impact of the difference inthe mix (actual v. budgeted) and the second part shows the impact of the difference in hours. So, add another middle thing to the efficiency variance and change the mix from actual to budgeted. Keep the other 2 things the same. This will create a space where we see the difference attributable to the difference in the labor mixes, known as a mix variance.5)The right-hand variance will show the effect of the difference in the number of hours (it’s called a yield variance).6)We will be using the TOTALS (the bottom numbers only) to keep things simple. So in summary, the rate will be analyzed by comparing the left column to the 2ndcolumn. The mix will be analyzed by comparing the 2ndcolumn to the 3rdcolumn. Finally, the quantity of hours will be analyzed by comparing the 3rdcolumn to the right column.Account for the budget variance (TOTAL) of $8,870. FIGURE IT OUT!