Discussion Topic: Flexible Budgets and Variances Read Chapter 7 Concepts in Action, “Can Chipotle Wrap Up Its Materials-Cost Variances Increases?”

• Why are standards costs used in variance analysis?
• How does a flexible budget differ from a static budget?
• What steps did Chipotle take to reduce its material and labor variances?

Just do response each posted #1 to 2 only down below

Posted 1

According to our reading, standard costs are often used, because they exclude parts of the history performance due to inefficiencies and consider the changes that will occur in the future. (Datar, 2018) You can’t really interpret why variances occur without looking at the bigger picture. A variance in one area could be the result of an inefficiency in another area. A static budget, also referred to as a master budget, is the budget that reflects what output is planned at the start of a period. It is called static because it is based off of a single output level. The flexible budget will calculate the revenues and costs into the budget that is based on what is actually produced during a period of time. A static budget is more of a planned budget and the flexible budget is more of a retroactive budget. (Datar, 2018) Chipotle would work different scenarios with their budget to make their product tasty, but for a lower cost. They found ways to save on labor by buying items that were already processed. One of the outbreaks of E. coli and norovirus had them looking into ways to keep the public safe, but also lowered the price of their ingredients. (Datar, 2018)

References:

Datar, S. M. & Rajan, M. V. (2018). Horngren’s Cost Accounting: A Managerial Emphasis, Global Edition. Pearson Education Limited: London

Posted 2

Hello Class,

Companies use a standard cost to estimate cost per unit of a product, like the direct material, direct labor, and manufacturing overhead. A standard cost is an important predetermined rate in production that helps management forecasting their future budgets, improving cost control, and for decision-making purposes. The difference between a standard cost and an actual cost is a variance. Managers use the standard cost in variance analysis to have effective planning, efficient inventory management, and monitoring costs incurred so they can take action when the variance is highly unfavorable (Datar & Rajan, 2017, p.256).

Static budget, also known as master budget, is used as a projection tool for estimating business revenue and expenses in advance within a given period. On the other hand, a flexible budget is used as an evaluation tool based on the actual costs that allow management adjusting costs in the next budget forecast. “The big difference between the static budget and the flexible budget is that the static budget is prepared for the planned output” while “the flexible budget is prepared retroactively based on the actual output” (Datar & Rajan, 2017, p.253).

The two main direct costs of Chipotle were labor and material costs. Chipotle reduced the labor costs, which includes wages and health benefits, by eliminating preparing its ingredients from scratch. Instead, the company had prepacked ingredients like pre-cut tomatoes, shredded cheese, and pre-cooked meat, etc. shipped to the stores to save time and money. With this strategy, Chipotle could also avoid material-cost variances. However, the company’s material costs raised approximately 4% due to focusing on natural ingredients. With “food with integrity” philosophy, natural grow vegetables and raised poultry and pigs, etc., Chipotle will have to manage the costs carefully (Datar & Rajan, 2017, p.265).

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