Copyright © 2007 Prentice-Hall. All rights reserved 1 Flexible Budgets and Standard Costs Chapter 23.

Copyright © 2007 Prentice-Hall. All rights reserved 1

Flexible Budgets andFlexible Budgets andStandard CostsStandard Costs

Flexible Budgets andFlexible Budgets andStandard CostsStandard Costs

Chapter 23


Objective 1Objective 1Objective 1Objective 1

Prepare a flexible budget for

the income statement


Static BudgetStatic BudgetStatic BudgetStatic Budget

Web Touch

Responsibility Accounting Performance Report (Amounts in thousands)

September 2009

Manager – All handheld devices

Budget Actual Variance

Operating income:

PDAs $ 125 $ 120 $(5)

Cell Phones 474 519 45

Total operating income $599 $639 $ 40

This is from Chapter 22, exercise 21. When the actual activity level is higher or lower than the budgeted activity, it is difficult to determine the

cause of the variance

This is from Chapter 22, exercise 21. When the actual activity level is higher or lower than the budgeted activity, it is difficult to determine the

cause of the variance


Flexible Budget – E23-15Flexible Budget – E23-15Flexible Budget – E23-15Flexible Budget – E23-15

ErgoNow

Monthly Flexible Budget

Per UnitOutput Units (Mouse Pads)

40,000 50,000 70,000

Sales revenue $11.00

Variable expenses $ 5.20

Fixed expenses 200,000 200,000 250,000

Total expenses

Operating income

$440,000 $550,000 $770,000

208,000 260,000 364,000

408,000 460,000 614,000

$32,000 $90,000 $156,000



Prepare an income statement performance report


Static Budget VariancesStatic Budget VariancesStatic Budget VariancesStatic Budget Variances

Sales Volume VarianceFlexible Budget Variance

Actual Results

Flexible Budgetbased on actual

number of outputs

Static Budgetbased on expectednumber of outputs

Static Budget Variance

A variance is labeled as favorable if it increases incomeA variance is labeled as unfavorable if it decreases income

A variance is labeled as favorable if it increases incomeA variance is labeled as unfavorable if it decreases income


Sales Volume VarianceSales Volume VarianceSales Volume VarianceSales Volume Variance

Static Budget(for the # units

expectedto be sold)

-Flexible Budget

(for the # units actually sold)


Flexible Budget VarianceFlexible Budget VarianceFlexible Budget VarianceFlexible Budget Variance

Flexible Budget

(for the # units actually sold)

- Actual Results


E23-17E23-17E23-17E23-17Kyler Industries

Income Statement Performance Report

Year Ended December 31, 2008

Act. Results at Act Prices

Flex Bud Variance

Flex Bud-Act # Units

Sales Volume

VarianceStatic

Budget

Output units

Sales rev.

Variable exp.

Fixed exp.

Total exp.

Op. income

14,50014,00014,000

$116,000$112,000$133,000

31,90030,80032,200

40,00040,00042,000

71,90070,80074,200

$44,100$41,200$58,800

$4,000 U$21,000 F

500 U-0-

1,100 F1,400 U

-0-2,000 U

1,100 F3,400 U

$2,900 U$17,600 F

The variance that contributed most to the year’s favorable results was the Flexible Budget Variance and that was due to the increased selling price

The variance that contributed most to the year’s favorable results was the Flexible Budget Variance and that was due to the increased selling price


E23-17E23-17E23-17E23-17Kyler Industries

Income Statement Performance Report

Year Ended December 31, 2008

Act. Results at Act Prices

Flex Bud Variance

Flex Bud-Act # Units

Sales Volume

VarianceStatic

Budget

Op. income $44,100$41,200$58,800 $2,900 U$17,600 F

Static Budget Variance$14,700 F



Identify the benefits

of standard costs and learn how to set standards


Standard CostsStandard CostsStandard CostsStandard Costs

• Budget for a single unit• Price standards• Quantity standards


Price StandardsPrice StandardsPrice StandardsPrice Standards

• Direct materials – purchase price (after early-pay discount) + freight-in + receiving costs

• Direct labor – basic pay rates + payroll taxes + fringe benefits

• Manufacturing overhead – determine resources needed for support activities and determine appropriate allocation base


Quantity StandardsQuantity StandardsQuantity StandardsQuantity Standards

• Direct materials – product specifications allowing for spoilage

• Direct labor – time requirements to produce product as well as level of experience needed to do specific tasks

• Manufacturing overhead – determine resources needed for support activities


Benefits of Standard CostsBenefits of Standard CostsBenefits of Standard CostsBenefits of Standard Costs

Helps managers

• In budget preparation

• Target levels of performance

• Identify performance standards

• Set sales prices

• Decrease accounting costs


VariancesVariancesVariancesVariances

Efficiency VariancePrice Variance

Actual Price X

Actual Quantity

Standard PriceX

Actual Quantity

Standard PriceX

Standard Quantity

Total Cost Variance


Price VariancePrice VariancePrice VariancePrice Variance

• Measures how well the business keeps unit costs within standards

(Actual Price x Actual Quantity) – (Standard Price x Actual Quantity)

or(Actual Price – Standard Price) x Actual Quantity

(AP – SP) x AQ


Efficiency VarianceEfficiency VarianceEfficiency VarianceEfficiency Variance

• Efficiency – measures how well the business uses its materials or human resources

(Standard Price x Actual Quantity) – (Standard Price x Standard Quantity)

or(Actual Quantity – Standard Quantity) x Standard Price

(AQ – SQ) x SP


VariancesVariancesVariancesVariances

Sales Volume VarianceFlexible Budget Variance

Actual Results

Flexible Budgetbased on actual

number of outputs

Static Budgetbased on expectednumber of outputs

Static Budget Variance

Efficiency Variance

Price Variance



Compute standard cost variances

for direct materials and direct labor


E23-20E23-20E23-20E23-20

Materials price variance: Actual Quantity = 145,000 feet

Actual Price = $1.05

Standard Price = $1.10

(Actual Price – Standard Price) x Actual Quantity

($1.05 - $1.10) x 145,000 feet = $7,250 F


E23-20E23-20E23-20E23-20

Materials efficiency variance: Actual Quantity = 145,000’

Standard Quantity = 20,000 fenders x 7’ = 140,000’


(Actual Quantity–Standard Quantity) x Standard Price

(145,000-140,000) x $1.10 = $5,500 U

The $7250 favorable direct materials price variance combined with the $5500 unfavorable direct materials efficiency variance suggests that managers may have used cheaper, lower-quality materials that resulted in more waste. The net effect is favorable ($7250 F + $5500 U = $1750 F), so this appears to have been a wise decision if quality is maintained

The $7250 favorable direct materials price variance combined with the $5500 unfavorable direct materials efficiency variance suggests that managers may have used cheaper, lower-quality materials that resulted in more waste. The net effect is favorable ($7250 F + $5500 U = $1750 F), so this appears to have been a wise decision if quality is maintained


E23-20E23-20E23-20E23-20

Labor price variance: Actual Quantity = 450 hours

Actual Price = $14.00


(Actual Price – Standard Price) x Actual Quantity

($14 - $13) x 450 hours = $450 U


E23-20E23-20E23-20E23-20

Labor efficiency variance: Actual Quantity = 450 hrs.

Standard Quantity = 20,000 fenders x .025 = 500 hrs.


(Actual Quantity–Standard Quantity) x Standard Price

(450 - 500) x $13 = $650 F

The unfavorable direct labor price variance combined with the favorable direct labor efficiency variance suggests that managers may have used higher-paid, more skilled workers who performed more efficiently. Again the net effect is positive ($450 U + $650 F = $200 F), so this appears to have been a wise tradeoff

The unfavorable direct labor price variance combined with the favorable direct labor efficiency variance suggests that managers may have used higher-paid, more skilled workers who performed more efficiently. Again the net effect is positive ($450 U + $650 F = $200 F), so this appears to have been a wise tradeoff



Analyze manufacturing overhead

in a standard cost system


Total Overhead VarianceTotal Overhead VarianceTotal Overhead VarianceTotal Overhead Variance

Manufacturing Overhead Variance

Actual Overhead Cost

StandardOverhead Cost


Allocating Overhead in a Standard Allocating Overhead in a Standard Cost SystemCost System

Allocating Overhead in a Standard Allocating Overhead in a Standard Cost SystemCost System

Predetermined overhead rate x Standard quantity of allocation base allowed for actual outputs


E23-23E23-23E23-23E23-23

Total estimated overhead:

(30,000 gallons x $.50) + $30,000 = $45,000

Total budgeted production = 30,000

Overhead application rate = $1.50


E23-23E23-23E23-23E23-23

Total overhead variance:

Actual overhead cost $47,200

Standard overhead allocated toactual production (33,000 x $1.50) 49,500

Total overhead variance $2,300 F


Production VolumeVariance

Overhead FlexibleBudget Variance

Total Overhead VarianceTotal Overhead VarianceTotal Overhead VarianceTotal Overhead Variance

Manufacturing Overhead Variance

Actual overhead cost

Standardoverhead cost

Flexible budgetoverhead for actual

outputs


Manufacturing Overhead VariancesManufacturing Overhead VariancesManufacturing Overhead VariancesManufacturing Overhead Variances

• Overhead flexible budget variance – how well managers controlled overhead costs

• Production volume variance – when actual production differs from expected production


E23-23E23-23E23-23E23-23

Overhead flexible budget variance:

Actual overhead cost $47,200

Flexible budget overhead

($.50 x 33,000) + $30,000 46,500

Total overhead flexible budget variance $700 U


E23-23E23-23E23-23E23-23

Production volume variance:

Flexible budget overhead

($.50 x 33,000) + $30,000 $46,500

Standard overhead allocated toactual production (33,000 x $1.50) 49,500

Total production volume variance $3,000 F



Record transactions at standard cost and prepare a standard cost

income statement


Standard Cost Accounting SystemsStandard Cost Accounting SystemsStandard Cost Accounting SystemsStandard Cost Accounting Systems

• Materials Inventory and Manufacturing Wages are recorded at standard prices

• Unfavorable variances are recorded as debits favorable variances are recorded as credits

• Work in Process Inventory is recorded at standard quantities and standard prices


E23-21E23-21E23-21E23-21

GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Materials inventory (145,000 x $1.10) 159,500

Direct materials price

variance 7,250

Accounts payable

(145,000 x $1.05) 152,250


E23-21E23-21E23-21E23-21


Work in process inventory (140,000 x $1.10) 154,000

Direct materials efficiency

variance 5,500

Materials inventory

(145,000 x $1.10) 159,500


E23-21E23-21E23-21E23-21


Manufacturing wages(450 x $13) 5,850

Direct labor price variance 450

Wages payable

(450 x $14) 6,300


E23-21E23-21E23-21E23-21


Work in process inventory (500 x $13) 6,500

Direct labor efficiency

variance 650

Manufacturing Wages

(450 x $13) 5,850


End of Chapter 23End of Chapter 23End of Chapter 23End of Chapter 23

Copyright © 2007 Prentice-Hall. All rights reserved 1 Flexible Budgets and Standard Costs Chapter 23.

Documents

variance slide

income slide

f static budget variance

flexible budget e23

f slide

total operating income

flexible budgets

sales revenue