ca7 8 flex budgeting

8/10/2019 CA7 8 Flex Budgeting

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Flexible Budgets, Variances,and Management Control

Chapter 7 - 8


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7 - 22003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Distinguish

a static budget

from a flexible budget.

Learning Objective 1


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Static Budget ExampleAssume that Pasadena Co. manufactures

and sells dress suits.Budgeted variable costs per suit are as follows:Direct materials cost $ 65

Direct manufacturing labor 26Variable manufacturing overhead 24Total variable costs $115


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Static Budget ExampleBudgeted selling price is $155 per suit.

Fixed manufacturing costs are expectedto be $286,000 within a relevant range

between 9,000 and 13,500 suits.Variable and fixed period costs are ignored.

The static budget for year 2004 is basedon selling 13,000 suits.

What is the static-budget operating income?


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Static Budget ExampleRevenues (13,000 $155) $2,015,000Less Expenses:

Variable (13,000 $115) 1,495,000Fixed 286,000Budgeted operating income $ 234,000

Assume that Pasadena Co. produced and sold10,000 suits at $160 each with actual variablecosts of $120 per suit and fixed manufacturing

costs of $300,000.


7/677 - 72003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Static Budget Example

Revenues (10,000 $160) $1,600,000Less Expenses:Variable (10,000 $120) 1,200,000

Fixed 300,000Actual operating income $ 100,000

What was the actual operating income?


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Static-Budget Variance ExampleWhat is the static-budget variance of

operating income?Actual operating income $100,000Budgeted operating income 234,000Static-budget variance of

operating income $134,000 U

This is a Level 0 variance analysis.


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Static-Budget Variance ExampleStatic-Budget Based Variance Analysis

(Level 1) in (000)Static Budget Actual Variance

Suits 13 10 3 URevenue $2,015 $1,600 $415 U

Variable costs 1,495 1,200 296 FContribution margin $ 520 $ 400 $120 UFixed costs 286 300 14 UOperating income $ 234 $ 100 $134 U


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Develop a flexible budgetand compute flexible-budgetvariances and sales-volume

variances.


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Steps in DevelopingFlexible Budgets

Step 2:

Determine the actual quantity of output.In the year 2004, 10,000 suits were

produced and sold.

Step 3:Determine the flexible budget for revenues.

$155 10,000 = $1,550,000


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Variances

Level 2 analysis provides information

on the two components of thestatic-budget variance.

1. Flexible-budget variance

2. Sales-volume variance


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Flexible-Budget Variance

Flexible-Budget Variance(Level 2) in (000)

FlexibleBudget Actual Variance

Suits 10 10 0Revenue $1,550 $1,600 $ 50 FVariable costs 1,150 1,200 50 UContribution margin $ 400 $ 400 $ 0Fixed costs 286 300 14 UOperating income $ 114 $ 100 $ 14 U


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Actual quantity sold: 10,000 suits

Flexible-budgetvariance

$14,000 U

Actual resultsoperating income

$100,000

Flexible-budgetoperating income

$114,000


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Total flexible-budget variance= Total actual results

Total flexible budget for actual sales level


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Actual BudgetedAmount Amount

Selling price $160 $155Variable cost 120 115

Contribution margin $ 40 $ 40


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Why is the flexible-budget variance $14,000 U?

Selling-price variance $50,000 F

Actual variable costs exceededflexible budget variable costs 50,000 U

Actual fixed costs exceededflexible budget fixed costs 14,000 UTotal flexible-budget variance $14,000 U


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Sales-Volume Variance

Actual quantity sold: 10,000 suits

Sales-volumevariance

$120,000 U

Flexible-budgetoperating income

$114,000

Static-budgetoperating income

$234,000


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Sales-Volume Variance

Total sales-volume variance $120,000 U

=

Actual sales unit Master budgeted sales units13,000 10,000 = 3,000

Budgeted contribution margin per unit $40


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Explain why standard costs areoften used in variance analysis.


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Standards

Pasadenas budgeted cost for each variable

direct cost item is computed as follows:

Standard inputallowed for

one output unit

Standard cost

per input unit


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Standards

4.00 square yards allowed per output unitat $16.25 standard cost per square yard.

Standard cost per output unit4.00 $16.25 = $65.00

2.00 manufacturing labor-hours of inputallowed per output unit at $13.00 standard

cost per hour.Standard cost per output unit

2.00 $13.00 = $26.00


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Compute price variancesand efficiency variances

for direct-cost categories.


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Actual Data

Direct materials purchased and used:

42,500 square yards at $15.95

Labor hours: 21,500 at $12.90

Cost of direct materials = $677,875

Cost of direct manufacturing labor = $277,350


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Price Variance Example

Direct-material price variance

Actual price Budgeted price

Actualquantity

($15.95 $16.25) 42,500 = $12,750 F=

=


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Direct-labor price variance

Actual price Budgeted price

Actualquantity

($12.90 $13.00) 21,500 = $2,150 F=

=


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What is the journal entry when the materials price

variance is isolated at the time of purchase?Materials Control 690,625Direct-Materials Price Variance 12,750

Accounts Payable Control 677,875To record direct materials purchased


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Efficiency Variance Example

Direct-material efficiency variance

Actual quantity Standard quantity

Standard price

(42,500 40,000) $16.25 = $40,625 U=

=


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Price and Efficiency Variance

What is the journal entry for direct manufacturing labor?

Work in Process Control 260,000Direct ManufacturingLabor Efficiency Variance 19,500

Direct-Manufacturing

Labor Price Variance 2,150Wages Payable 277,350

To record liability for direct manufacturing labor


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Flexible Budget MaterialVariance Example

ActualCost$677,875

BQ BP40,000 $16.25$650,000

AQ BP42,500 $16.25$690,625

$12,750 F $40,625 U

$27,875 U


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Flexible Budget LaborVariance Example

ActualCost$277,350

BQ BP20,000 $13.00$260,000

AQ BP21,500 $13.00$279,500

$2,150 F $ 19,500 U

$17,350 U


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Static-budget varianceMaterials $167,125 FLabor 60,650 FTotal $227,775 F

Flexible-budget varianceMaterials $27,875 ULabor 17,350 UTotal $45,225 U

Sales-volume varianceMaterials $195,000 FLabor 78,000 FTotal $273,000 F

Level 1

Level 2

Variance Analysis

Level 2


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Flexible-budget varianceMaterials $27,875 ULabor 17,350 UTotal $45,225 U

Price varianceMaterials $12,750 FLabor 2,150 FTotal $14,900 F

Efficiency varianceMaterials $40,625 ULabor 19,500 UTotal $60,125 U

Level 2

Level 3

Variance Analysis

Level 3


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Explain why purchasingperformance measures should

focus on more factors than

just price variances.


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Performance MeasurementUsing Variances

Effectiveness is the degree to which a

predetermined objective or target is met. Efficiency is the relative amount of inputs

used to achieve a given level of output.

Variances should not solely be used toevaluate performance.


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When to Investigate Variances

When should variances be investigated?

Subjective judgmentsRules of thumb as investigate all variances exceeding $10,000 or 25% of expected cost,

whichever is lower.


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Perform variance analysis inactivity-based costing systems.


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Flexible Budgeting andActivity-Based Costing

Materials costs and direct manufacturing labor

costs are examples of output-unit level costs.Batch-level costs are resources sacrificedon activities that are related to a group of

units of product(s) or service(s) rather thanto each individual unit of product or service.


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Denver Co. produces metal planters (MP).

Assume that material-handling labor costs varywith the number of batches produced rather

than the number of units in a batch.

Material-handling labor costs are direct batchlevel costs that vary with the number of batches.


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Static Actual

Budget AmountsTotal labor-hours 500 468Cost per material-handling

labor-hour $14.00 $14.50Total material-handling

labor cost $7,000 $6,786


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How many batches should have been employed

to produce the actual output units?15,660 units 180 units per batch = 87 batches

How many material-handling hours

should have been used?87 batches 5 hours/batch = 435 hours


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What is the flexible budget for

material-handling labor-hours?435 hours $14.00/labor-hour = $6,090

Flexible-budget costs $6,090

Actual costs 6,786Flexible-budget variance $ 696 U


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Price and Efficiency Variances

Price variance = ($14.50 $14.00) 468 = $234 U

Efficiency variance = (468 435) $14.00 = $462 UTotal variance $696 U


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Explain in what ways theplanning of variable overhead

costs and fixed overhead

costs are similar and inwhat ways they differ.


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Planning of Variable andFixed Overhead Costs

Effective planning of variable overhead costsinvolves undertaking only those variable

overhead activities that add value forcustomers using the product or service.

The key challenge with planning fixed overheadis choosing the appropriate level of capacity orinvestment that will benefit the company over

an extended time period.


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Identify the features ofa standard-costing system.


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Standard Costing

Standard inputallowed for

one output unit

Standard cost per input unit

Cost ObjectDirect Cost


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Developing Budgeted VariableOverhead Allocation Rates

Step 1:

Choose the time period used to compute the budget .Pasadena Co. uses a twelve-month budget period.Step 2:

Select the cost-allocation base. Pasadena budgets26,000 labor-hours for a budgeted output of13,000 suits in year 2004.


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Step 3:Identify the variable overhead costs .

Pasadenas budgeted variable manufacturing costs for 2004 are $312,000.

Step 4:

Compute the rate per unit ofeach cost-allocation base.

$312,000 26,000 hours = $12/hour


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What is the budgeted variable overhead

cost rate per output unit (dress suit)?2.00 hours allowed per output unit $12 budgeted variable overhead cost rate per

input unit = $24 per suit (output unit)


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Compute the variable overheadefficiency variance andthe variable overhead

spending variance.


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Variable OverheadCost Variances

The following data are for 2004 when

Pasadena produced and sold 10,000 suits: Output units: 10,000

Labor-hours:

Actual results: 21,500Flexible-budget amount: 20,000


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Labor-hours per output unit:

Actual results: 21,500 10,000 = 2.15Flexible-budget amount: 20,000 10,000 = 2.00Variable manufacturing overhead costs:

Actual results: $244,775Flexible-budget amount: $240,000


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Variable manufacturing overhead

cost per labor-hour:Actual results:

$244,775 21,500 = $11.3849

Flexible-budget amount:$240,000 20,000 = $12.00

bl h d


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Variable manufacturing overhead

cost per output unit:Actual results:

$244,775 10,000 = $24.4775

Flexible-budget amount:$240,000 10,000 = $24.00


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Flexible-Budget Analysis

The variable overhead flexible-budget variance

measures the difference between the actualvariable overhead costs and the flexible-budgetvariable overhead costs.

Actual results: $244,775 Flexible-budget amount $240,000 = $4,775 U


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ActualCosts Incurred

21,500 $11.3849= $244,775

Budgeted InputsAllowed for Actual

Outputs at Budgeted Rate20,000 $12.00

= $240,000

$4,775 UFlexible-budget variance


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Actual Quantityof Inputs at

Budgeted Rate21,500 $12.00

= $258,000

Budgeted InputsAllowed for Actual

Outputs at Budgeted Rate20,000 $12.00

= $240,000

$18,000 UVariable overhead efficiency variance


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ActualCosts

Incurred21,500 $11.3849

= $244,775

Actual Quantityof Inputs at

Budgeted Rate21,500 $12.00

= $258,000

$13,225 FVariable overhead spending variance


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Variable Overhead Variances

Flexible-budget variance

$4,775 U

Efficiency variance$18,000 U Spending variance$13,225 F

Fi i l d N fi i l


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Financial and NonfinancialPerformance

Overhead variances are examples of financial performance measures.

What are examples of nonfinancial measures?

Actual labor time, relative to budgeted time

Actual indirect materials usage per labor-hour,relative to budgeted indirect materials usage

ca7 8 flex budgeting

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